Suppose that the labor cost to total cost ratio in industry A is 82 percent, while in industry B it is 21 percent. Other things equal, labor demand will be
A)more elastic in industry A than in B.
B)relatively inelastic in both industries A and B.
C)more elastic in industry B than in A.
D)relatively elastic in both industries A and B.

Question

Quizplus · Accepted Answer

Labor demand elasticity is higher in industries where labor costs constitute a larger portion of total costs. Since industry A has a higher labor cost to total cost ratio (82%) compared to industry B (21%), labor demand in industry A will be more elastic. This is because changes in wages will have a more significant impact on total costs and, consequently, on the quantity of labor demanded in industry A.

Suppose That the Labor Cost to Total Cost Ratio in Industry