Question

A change in an input price will alter both production costs and the profit-maximizing output. Thus a decline in the price of capital will reduce production costs, increase the profit-maximizing output, and thereby increase the demand for labor. This describes the:
A. output effect.
B. substitution effect.
C. idea of derived demand.
D. law of diminishing returns.

Answer 1

Answer: Option (A)

Explanation:

Output effect is referred to as the circumstance under which the increase in  price of an input will further increase the organizations production costs and thus reduce the level of the output of the commodity, this will further reduces the demand for the other commodity; vice-versa for the decrease. This effect is thus compatible to a manufacturing organization since encouraging production might not be sustainable by further supply of the input at the available pricing levels, therefore causing the production costs to rise further.