The output effect of a change in the wage rate on a firm's demand for labor input will be greater
A)the larger the share of labor costs in total costs and the greater the price elasticity of demand for output.
B)the larger the share of labor costs in total costs and the smaller the price elasticity of demand for output.
C)the larger the share of labor costs in total costs and the higher the quantity demanded.
D)the smaller the possibilities of substituting capital for labor.

Question

Quizplus · Accepted Answer

A larger share of labor costs in total costs means that a change in the wage rate will have a larger impact on total production costs. If the price elasticity of demand for output is also high, the firm will not be able to pass on the higher costs to consumers as easily, thus further increasing the impact on the demand for labor input. This implies that the output effect will be greater.

The Output Effect of a Change in the Wage Rate