What is an example of the substitution effect?
A) Workers choose to provide more hours of labor when the wage rate decreases.
B) More labor is hired as long as the marginal product of labor is positive.
C) The firm expands output when production costs fall.
D) The firm expands output when production costs increase.
E) The firm hires more labor when the wage falls because labor has become relatively cheaper compared to the price of other factors of production.

Question

Quizplus · Accepted Answer

The substitution effect occurs when consumers or firms replace more expensive items with less expensive alternatives. In this case, a firm hiring more labor because the wage has fallen (making labor relatively cheaper compared to other factors of production) is an example of the substitution effect.

What Is an Example of the Substitution Effect