Other things equal, if wage rates increase by 20 percent, the greatest decline in employment will occur when labor costs are a
A)large proportion of total costs and product demand is elastic.
B)small proportion of total costs and product demand is elastic.
C)large proportion of total costs and product demand is inelastic.
D)small proportion of total costs and product demand is inelastic.

Question

Quizplus · Accepted Answer

When labor costs are a large proportion of total costs and product demand is elastic, an increase in wage rates will significantly raise production costs, leading to higher prices. Given the elastic demand, consumers will significantly reduce their quantity demanded in response to the price increase, causing the greatest decline in employment as firms cut back on production.

Other Things Equal, If Wage Rates Increase by 20 Percent