Question

In an industry, when the price of electricity goes up, the company employs more low-skilled workers. This implies:
A the substitution effect dominated the scale effect.
B the scale effect dominated the substitution effect.
C the substitution effect worked in the same direction as the scale effect.
D the scale effect was positive.

And why

Answer 1

Option 1

A substitution effect dominated the scale effect

An increase in price increases quantity supplied and to increase that the firm was employing more worker and expanding the work.

The scale effect promotes firms to increase output, and the substitution effect encourages firms to increase worker intensive productions, and here the firm is increasing nonskilled workers, so the substitution effect is dominated than scale effect as the scale is not increased directly.