Solved:
Answered by AI, Verified by Human Experts
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.
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.
Final answer:Thesubstitutioneffect 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. Hence option A is correct.Explanation:The substitution effect ineconomicsrefers to the firm's response to changes in input prices while keeping the level of output constant. In this context, option (a) is the correct choice. When the price of a specific input falls, the firm will increase its usage of that input while reducing the use of other inputs to maintain the same level of output. This is a rational decision as it allows the firm to minimize production costs and maximize profit.To illustrate this, consider a simple example where a firm produces widgets using labor and raw materials. If the price of raw materials decreases, the firm will likely use more raw materials (input whose price has fallen) and potentially reduce the amount of labor required to produce the same number of widgets. This adjustment optimizes cost efficiency and aligns with profit-seeking behavior.In summary, the substitutioneffectleads a profit-seeking firm to utilize more of an input that has become cheaper (in this case, the input whose price has fallen) and less of other inputs to maintain a consistent level of output, ultimately contributing to cost savings and increased profitability.Learn more aboutSubstitution:brainly.com/question/34747598#SPJ11...