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Labor and capital are substitute resources, and a firm uses both to produce its output.

If the price of labor increases, which of the following will occur?

A

Demand for labor will increase if the substitution effect exceeds the output effect.

B

Demand for labor will decrease if the substitution effect exceeds the output effect.

C

Demand for capital will increase if the substitution effect exceeds the output effect.

D

Demand for capital will decrease if the substitution effect exceeds the output effect.

E

Demand for capital will increase if the output effect exceeds the substitution effect.

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