Question

Suppose the price of the product that labor is producing increases and simultaneously the price of capital, which is substitutable for labor, decreases. Assuming that the substitution effect is greater than the output effect, the demand for labor: Group of answer choices will increase. may either increase or decrease. will not change. will decrease.

Answer 1

Answer: may either increase or decrease.

Explanation:

The substitution effect refers to the reduction in the sales for a product which is as a result of the consumers switching to a cheaper alternative whenw there is an increase in the price of the good.

Based on the question, if the substitution effect is greater than the output effect, then the demand for labor may either increase or decrease.