Assume the price of capital falls relative to the price of labor and, as a result, the demand for labor increases. Therefore,

A) capital is very highly substitutable for labor.
B) the output effect is greater than the substitution effect.
C) the income effect is greater than the output effect.
D) the substitution effect is greater than the output effect.

Substitution Effect

This effect describes the change in consumption patterns due to a change in the relative prices of goods, leading consumers to substitute more expensive items with cheaper ones.

Output Effect

The impact on total output or production resulting from changes in the price level or other economic factors.

Price of Capital

The cost of using capital goods, represented by interest rates, lease payments, or other measures of the cost of borrowing or using capital.