Skilled labor will benefit from an increase in the wage rate paid to unskilled labor if:
A)the substitution effect outweighs the output effect
B)the output effect outweighs the substitution effect
C)the output effect and substitution effect work in opposite directions
D)skilled labor and unskilled labor are gross complements

Question

Quizplus · Accepted Answer

The substitution effect refers to the tendency for employers to substitute unskilled labor for skilled labor when the wage rate for unskilled labor increases. The output effect refers to the tendency for employers to increase production when the wage rate for unskilled labor increases. If the substitution effect outweighs the output effect, then skilled labor will benefit from an increase in the wage rate paid to unskilled labor.

Skilled Labor Will Benefit from an Increase in the Wage