When a firm substitutes away from a factor whose price has risen and toward a factor whose price has fallen, it is an example of the
A) output effect of a factor price decrease.
B) factor substitution effect.
C) factor complementary effect.
D) output substitution effect.

Question

Quizplus · Accepted Answer

The firm substituting away from a factor whose price has risen and toward a factor whose price has fallen is an example of the factor substitution effect. This is because the firm is substituting one factor for another due to the change in relative prices, which is the essence of the factor substitution effect. The other options are not applicable in this scenario.

When a Firm Substitutes Away from a Factor Whose Price