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

Quizplus · Accepted Answer

For firm X, a 20% increase in wages (which are 85% of production costs) results in a 0.20 * 0.85 = 0.17 or 17% increase in production costs. For firm Y, a 20% increase in wages (which are 40% of production costs) results in a 0.20 * 0.40 = 0.08 or 8% increase in production costs.

In Firm X Labor Costs Are 85 Percent of Production