Answer to Question #98341 in Macroeconomics for annie

Question

How did the substitution effect created by a decrease in wage level affect the labor demand?

Answer 1

Substitution effect created by a decrease in wage

We need to explain the about the substitution effect created by a decrease in wage level affect by the labour demand

Answer:

Input substitution effect is the change in the quantity of labour demand from an increment in the cost of labour to the cost of remaining other inputs.

In that way, a decrease in wages will increase the quantity of labour demand and also increment in the quantity of labour per a unit output.