A Firm Will Employ More of an Input Whose Relative

question 151

Multiple Choice

A firm will employ more of an input whose relative price has fallen and, conversely, will use less of an input whose relative price has risen. Thus, a fall in the price of capital will increase the relative price of labor and thereby reduce the demand for labor. This describes the

• A) output effect.
• B) substitution effect.
• C) idea of derived demand.
• D) law of diminishing returns.

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