If a large increase in the wage rate leads to a net increase in the use of capital by a firm,then

Question

Quizplus · Accepted Answer

The substitution effect occurs when a firm substitutes labor for capital due to an increase in the wage rate, making capital relatively cheaper. If this leads to a net increase in the use of capital, it means the substitution effect (firms substituting away from more expensive labor towards capital) outweighed any output effect (changes in the level of production that might also affect the mix of capital and labor used).

If a Large Increase in the Wage Rate Leads to a Net