Suppose that the labor cost to total cost ratio in industry A is 14 percent, while in industry B it is 68 percent. Other things equal, labor demand will be
A)more elastic in industry B than in A.
B)relatively inelastic in both industries A and B.
C)more elastic in industry A than in B.
D)relatively elastic in both industries A and B.

Question

Quizplus · Accepted Answer

Labor demand tends to be more elastic in industries where labor costs constitute a higher proportion of total costs. Since industry B has a higher labor cost to total cost ratio (68%) compared to industry A (14%), labor demand in industry B would be more elastic than in industry A. This is because changes in wages would have a larger impact on total costs and potentially on the quantity of labor demanded in industry B.

Suppose That the Labor Cost to Total Cost Ratio in Industry