Refer to the above graph.What will shift D₁ to D₂? A) An increase in the price of a substitute input (if the output effect is greater than the substitution effect) B) An increase in the price of a substitute input (if the substitution effect is greater than the output effect) C) A decrease in the price of a substitute input (if the substitution effect is greater than the output effect) D) An increase in the price of a complementary resource

Question

Quizplus · Accepted Answer

D₁ represents the labor leisure choice of workers. An increase in the price of a substitute input such as automation or technology will decrease the marginal product of labor and increase the marginal product of the substitute input. This will lead to a substitution effect where workers will try to work less and spend more time on leisure. At the same time, the increase in the wage rate will increase the opportunity cost of leisure, leading to an output effect. If the substitution effect is greater than the output effect, the labor supply curve will shift upwards, leading to a new equilibrium point D₂. Hence, option B is correct.

Refer to the Above Graph