From Schweser: The demand for labor will be less elastic: a. at lower wage rates than at higer 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. Your answer: C was correct! Demand for labor will be less elastic, other things equal, when the production process is less labor intensive. Labor demand is more elastic at low wage rates than at high wage rates, and more elastic in the long run because producers can adjust their mix of labor and capital inputs. Choice D is incorrect because labor demand is less elastic when there is less opportunity to substitute capital for labor. My question is, isn’t the upper part of the demand curve supposed to be elastic? Hence, at lower wage levels (price, in other words) the demand will be more less elastic. This is also confirmed by the fact that a monopolist always produces in the elastic portion of the demand curve - the upper portion - where price is higher. So, the lower you move on the demand curve (reducing price), you are moving towards less elasticity and more inelasticity. Any thoughts?
you shouldn’t be thinking in terms of the demand curve because that only shows the relationship between price and quantity demanded. Think about an isoquant, where you have the two factors of production on the two axes. Towards each end of the isoquant, you’re employing a lot of one factor and very little of the other, so it’s hard to switch away from the factor you’re not using much from. Not sure if that makes a lot of sense, but that’s what they’re getting at in this question.
Why cant D be the ans here
because it says substitute labor for capital. If you want labor to be inelastic, it has to be hard to substitute capital for labor, not vise versa.
So the context of D is the act of substitution itself, and not the end state of machines or people.
I think for A, if wages are lower, then it makes up a smaller percentage of a firm’s costs, so if wages rise, firms won’t fire as much workers, as opposed to if wages were high.