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

Question

Quizplus · Accepted Answer

The substitution effect of a wage decrease means that it is now relatively cheaper for the firm to use labor as compared to other factors of production, such as technology or capital. This leads to the firm substituting labor for the other factors of production, resulting in the use of relatively more labor. Therefore, the best choice is B. Options A, C, and D do not accurately describe the substitution effect of a wage decrease.

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