Other things equal, the relationship between the relative importance of a given type of labor in a firm's total costs and the elasticity of demand for that labor is such that the
A) demand for labor will be elastic only if labor accounts for less than 50 percent of total costs.
B) demand for labor will be elastic only if labor accounts for 50 percent or more of total costs.
C) larger the labor cost to total cost ratio, the smaller will be the elasticity of labor demand.
D) larger the labor cost to total cost ratio, the greater will be the elasticity of labor demand.

Question

Quizplus · Accepted Answer

The larger the proportion of labor costs to total costs, the greater will be the elasticity of labor demand. This implies that employers make their hiring decisions more carefully when labor costs represent a large proportion of total costs. On the other hand, when labor costs are a small proportion of total costs, employers can afford to be less sensitive to changes in wage rates because labor costs represent a small fraction of the total. Therefore, choice D is the best answer.

Other Things Equal, the Relationship Between the Relative Importance of a Given