(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

Microeconomic Theory

12th Edition

ISBN:9781337517942

Author:NICHOLSON

Publisher:NICHOLSON

Chapter10: Cost Functions

Section: Chapter Questions

Problem 10.10P

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