The demand for labor will be less elastic: A) At lower wage rates than higher wage rates. B) In the long run than in the short run. C) The less labor intensive the production process. D) The less the opportunities to substitute labor for capital in the production process. Trying to make sense of the answer…
I would say C as well.
Answer is C. I had guessed it would be A because I remember than on the supply and demand graph that as you move down the demand curve, the elasticity of demand becomes lower. Thus, if wages decrease, shouldn’t the elasticity of demand be lower due to this rule?
C The example I remember Schweser using is pilots. Their labor is much more inelastic than a warehouse full of workers because its represents a smaller portion of their costs. So they’re less sensitive to it. The warehouse can automate more than the airlines can.
A looks good. The way I think of it is like this: If wage rate is $2/hr and it rises by 10% to $2.20/hr, employers won’t change much of their demand. But if wage rate is $10/hr and it rises by 10% to $11/hr, employers ’ cost will be higher by a full dollar…that might cause them to demand less labor. I haven’t looked at the other choices.
If we know the demand curve is a straight line, then A is correct. As SirViper said, lower labor intensive --> smaller portion of cost --> less sensitive
Is there any situations where you should assume that the demand or supply curves are not straight lines and when you should assume that they are?
The way I remember this: a 1% increase in the price of labor, as component of the price of the final good produced, has a lower effect for a less labor intensive production process than for one that is highly labor intensive.
Yes, I think C is good as well, but I’m having trouble seeing why A is not correct! Could it be because even if the wage rate is very low, as long as it makes up a large portion of the overall cost, then any increase in wage rate would hurt the producers, causing them to cut demand, thus more elastic demand curve?
One of the factors affecting the demand elasticity of labor that I don’t believe is mentioned in the text, is the price elasticity of the demand for the product. This starts to build an argument for why answer A isn’t necessarily correct I think. If the price elasticity of demand for the product is relatively inelastic, the company will pass the cost of the higher wages onto the consumer and quantity won’t be affected much. And thus labor won’t be affected much either. Although I think “most” of the time, higher wage rates will be more elastic than lower wages.
True, that will work against A as well.
Why isn’t it D? D) The less the opportunities to substitute labor for capital in the production process. If you cannot substitute labor, then deltaQ is 0 (no change in demand) when price goes up. Since there is no substitute there will be no change in the amount demanded. Then elasticity is 0, which is the lowest it can get.
My take: the less opportunities you have to substitute labor to capital, the more labor you use. The more labor you use, the higher your sensitivity to increases in cost of labor, because if your process is labor intensive, the final asset produced is going to take the hit from the increase in labor cost.
It’s like gas prices, since we don’t have a substitute for it, we just keep paying what they are asking. Thus its perfectly inelastic. Where am I going wrong?
tsttse Wrote: ------------------------------------------------------- > It’s like gas prices, since we don’t have a > substitute for it, we just keep paying what they > are asking. Thus its perfectly inelastic. Where > am I going wrong? As the level of technology increases, there will be substitution for gas in the future. Short term demand for gas is quite inelastic Long term demand for gas is more elastic than short term demand
A and B are about supply of labor. the question is about demand D look right but if the labor is 80% of total production cost and margins are low then even if we cant replace labor with capital, demand will be elastic. C is right as explained by SirViper