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Is this correct?

  1. Oct 26, 2005 #1
    I was asked this question..

    If the income effect of an increase in the wage rate that a firm pays for labor outweighs the substitution effect, then the firm's labor demand curve could be upward sloping.

    I claimed this to be true and I think the firm is viewing labor as giffen and so its demand curve slopes upward. But my friend said this is false as there's no such a thing like income/substitution effect on the producer side, I am not totally convinced about that tho'...

    anyone has any suggestion to the question?
     
  2. jcsd
  3. Oct 27, 2005 #2
    Your friend is right. There is no income/substitution effect for the producer. Wages are determined by the marginal product of labor, which is how labor demand is derived. The income/substitution effect will effect labor supply though.
     
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