The shape of a competitive firm's input demand curve when all inputs are variable implies that:
A)the output effect of an input price change outweighs the substitution effect of an input price change leading to lower employment at a lower price.
B)the substitution effect of an input price change outweighs the output effect leading to a lower employment at a lower price.
C)the substitution and output effect of an input price change both lead to higher employment at a lower price.
D)the substitution and output effect of an input price change both lead to higher employment at a higher price.

Question

Quizplus · Accepted Answer

The substitution effect occurs when a firm substitutes cheaper inputs for more expensive ones, increasing employment of the cheaper input. The output effect happens when lower input prices reduce production costs, leading to increased output and higher demand for all inputs, including the now cheaper input. Both effects together imply higher employment of an input when its price decreases.

The Shape of a Competitive Firm's Input Demand Curve When