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 refers to the decrease of product sales due to consumers switching to cheaper products as the price of a specific product rises. When a company increases the prices of its products, the consumer will move to the alternative commodities, which serve the same purpose but are far cheaper. This is strong for the products with close substitutes in a perfectly competitive market. For instance, if the price of coffee increases, the consumers will move to cheaper products such as tea or cocoa drinks.
Answer and Explanation: 1
The correct answer is a) more of the input whose price has fallen and less of other inputs producing a given product.
For a profit-seeking firm, it...
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fromChapter 3 / Lesson 17
Explore the substitution effect. Learn the definition of the substitution effect and how it differs from the income effect. See examples of the substitution effect.