Which of the following best describes the substitution effect of a wage increase?
A)The firm's marginal cost increases,the firm desires to produce less output,and therefore less labor is required
B)The cost of labor is relatively higher,causing the firm to use relatively less labor
C)The firm's labor demand curve becomes less elastic,causing it to employ less labor
D)The firm's labor demand curve becomes more elastic,causing it to employ less labor

Question

Quizplus · Accepted Answer

The substitution effect of a wage increase refers to the tendency of firms to substitute labor with other inputs as the cost of labor becomes relatively higher. Option B describes this effect accurately, as the firm would use relatively less labor due to a higher cost of labor. Options A, C, and D describe other effects related to changes in labor demand but do not specifically address the substitution effect.

Which of the Following Best Describes the Substitution Effect of a Wage