Problem 18 Automation will raise the level ... [FREE SOLUTION]

Chapter 26: Problem 18

Automation will raise the level of employment if the (LO5) a) output effect is equal to the substitution effect b) output effect is greater than the substitution effect c) substitution effect is greater than the output effect

Short Answer

Expert verified

Option (b) output effect is greater than the substitution effect is the correct choice. Under this condition, automation will raise the level of employment.

Step by step solution

Define the Output Effect and the Substitution Effect

The output effect is the change in employment generated by the increased demand for goods and services due to a decrease in production costs as a result of automation. The substitution effect is the change in employment caused by firms replacing human labor with automation in their production processes. In other words, substitution effect means jobs lost due to automation, whereas output effect means jobs gained as a result of increased demand or production. Now, let's explore each option and evaluate whether or not it leads to an increase in employment.

Option a: Output effect is equal to the substitution effect

If the output effect is equal to the substitution effect, it means that the number of jobs gained due to increased demand (output effect) is the same as the number of jobs lost due to automation (substitution effect). In this case, the level of employment will remain unchanged, which is not an increase.

Option b: Output effect is greater than the substitution effect

When the output effect is greater than the substitution effect, it means that the number of jobs gained due to increased demand (output effect) is higher than the number of jobs lost due to automation (substitution effect). This difference between the two effects leads to a net increase in the level of employment.

Option c: Substitution effect is greater than the output effect

This option suggests that the jobs lost due to automation (substitution effect) are more than the jobs gained due to increased demand (output effect). Therefore, there would be a net decrease in the level of employment. In conclusion,

Correct Answer:

Option (b) output effect is greater than the substitution effect is the correct choice. Under this condition, automation will raise the level of employment.