Asked by ReAnn Myrielle Padlan on Mar 10, 2024
Verified
The substitution effect indicates that a profit-seeking firm will use
A) more of an input whose price has fallen and less of other inputs in producing a given output.
B) more of all inputs if production costs fall.
C) more of those inputs whose marginal productivity is the greatest.
D) less of an input whose price has fallen and more of other inputs in producing a given output.
Substitution Effect
The change in consumption patterns due to a change in relative prices, causing consumers to substitute one good for another more price-friendly option.
Marginal Productivity
The extra output that is produced by using one more unit of a factor, keeping all other factors constant.
- Investigate the consequences of fluctuations in input costs on how resources are allocated and how firms operate.
- Elucidate on the impact of changing input costs on the substitution and output phenomena.
Verified Answer
CM
Clela MachadoMar 10, 2024
Final Answer :
A
Explanation :
The substitution effect suggests that when the price of an input decreases, a profit-seeking firm will use more of that cheaper input and less of other more expensive inputs to produce a given level of output, as it is a cost-minimizing behavior.
Learning Objectives
- Investigate the consequences of fluctuations in input costs on how resources are allocated and how firms operate.
- Elucidate on the impact of changing input costs on the substitution and output phenomena.