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. If demand is elastic, consumers will reduce their quantity demanded significantly, causing a substantial decline in employment.

Other Things Equal, If Wage Rates Increase by 20 Percent