According to the output effect of a factor price change, if supply of labor decreases, then once the firm fully adjusts to the labor supply change, it
A) increases output and thus demand for all inputs increases.
B) decreases output and thus demand for all inputs decreases.
C) decreases demand for labor alone and there is no change in its output level.
D) decreases output and decreases demand for labor.

Question

Quizplus · Accepted Answer

When the supply of labor decreases, the firm faces higher labor costs, leading to a reduction in output. Consequently, the demand for all inputs, including labor, decreases as the firm adjusts to the new labor supply level.

According to the Output Effect of a Factor Price Change