(a) Explain the substitution and output effect of a decrease in price of labor from the attached figure(b) Explain the substitution and output effect of a increase in price of labor from the attached figure FIGURE 13.2Substitution and Output Effects of a Decrease inPrice of LaborCapital perweekPriceMCMCLabor hoursper weekOutput perweek(a) Input choice(h) Output decisionWhen the price of labor falls, the substitution effect causes more labor to be purchasedeven if output is held constant. This is shown as a movement from point A to point 8 inpanel a. The change in w will also shift the firm's marginal cost curve. A nomal situationmight be for the MC curve to shift downward in response to a decrease in w an shown inpanel b. With this new curve (MChahigher level of output (gal will be chosen. The hiring oflabor will increase (to La) from this output effect.

A profit-maximizing firm hires labor up to a point where the marginal revenue product of the labor…

(a) Explain the substitution and output effect of a decrease in price of labor from the attached figure (b) Explain the substitution and output effect of a increase in price of labor from the attached figure

(a) Explain the substitution and output effect of a decrease in price of labor from the attached figure (b) Explain the substitution and output effect of a increase in price of labor from the attached figure

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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Question

(a) Explain the substitution and output effect of a decrease in price of labor from the attached figure

(b) Explain the substitution and output effect of a increase in price of labor from the attached figure

FIGURE 13.2
Substitution and Output Effects of a Decrease in
Price of Labor
Capital per
week
Price
MC
MC
Labor hours
per week
Output per
week
(a) Input choice
(h) Output decision
When the price of labor falls, the substitution effect causes more labor to be purchased
even if output is held constant. This is shown as a movement from point A to point 8 in
panel a. The change in w will also shift the firm's marginal cost curve. A nomal situation
might be for the MC curve to shift downward in response to a decrease in w an shown in
panel b. With this new curve (MChahigher level of output (gal will be chosen. The hiring of
labor will increase (to La) from this output effect.

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