In firm X labor costs are 85 percent of production costs, while in firm Y labor costs are 40 percent of production costs. A 20 percent increase in wages would increase production costs by

Question

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Let's assume that the total production cost for firm X is $100, with labor costs being 85% of $100, which is $85.

Therefore, if there is a 20% increase in wages, the new labor cost will be 1.2*$85=$102.

This will result in a new production cost of $100+$102=$202.

Hence, the percentage increase in production cost is (202-100)*100/100=102%.

Similarly, for firm Y, let's assume the total production cost is $100, with labor costs being 40% of $100, which is $40.

Therefore, if there is a 20% increase in wages, the new labor cost will be 1.2*$40=$48.

This will result in a new production cost of $100+$48=$148.

Hence, the percentage increase in production cost is (148-100)*100/100=48%.

Therefore, 20% increase in wages would increase production costs by 17% in firm X and 8% in firm Y (Option D).

In Firm X Labor Costs Are 85 Percent of Production