Are the following two statements about the elasticity of labor demand correct? Statement 1: Labor demand is more elastic in the short run than in the long run because other factors of production are fixed in the short run. Statement 2: The more labor-intensive a firm’s production processes, the more elastic the firm’s demand for labor will be. Statement 1 Statement 2 A) Correct Correct B) Correct Incorrect C) Incorrect Correct D) Incorrect Incorrect Answer is c. Can someone explain why the 2nd part is correct?
I believe this is due to the fact that because wages are going to be a large portion of total cost to the firm (a labor intensive firm), they will be much more sensitive to changes in their wages. For example, if labor wages increase by, say 15%, their total cost will jump by a large amount. Thus, they will decrease their quantity of labor by a relatively large amount when wages rise. Compare that to a firm where labor costs are only a very small portion of total costs, and you see that even if wages do rise, because labor is a small portion of total cost, the total cost does not rise by that much. That make sense?
Thanks, makes sense. But the other side of it is that the company is more dependent on labor, and thus has less options for replacing labor
That’s was I was thinking Isura. Questions like this scare me because you’re thinking one way and they want to you think a totally difference way to answer the question, but then you’ll get a question that wants you to think the way we are thinking and so it’s like either word your questions different or make up your mind on how you want me to think! lol
just checked the text, JMUC85 is right. The more labor intensive a firm is, the more elastic the demand is because of the sensitivity to the wage rate.
Answer E) Need more info.