If Sara's elasticity of labor supply is 1.5 and she increases her supply of labor by 5 percent, then the wage rate must have
A) Increased by 3.3 percent.
B) Increased by 3.0 percent.
C) Increased by 7.5 percent.
D) Decreased by 7.5 percent.

Question

Quizplus · Accepted Answer

The elasticity of labor supply measures the percentage change in the quantity of labor supplied in response to a percentage change in the wage rate. In this case, Sara's elasticity of labor supply is 1.5, which means that a 1% increase in the wage rate will lead to a 1.5% increase in the quantity of labor supplied. Since Sara has increased her supply of labor by 5%, the wage rate must have increased by 5% / 1.5 = 3.3%.

If Sara's Elasticity of Labor Supply Is 1