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Other things equal, if wage rates increase by 20 percent, the greatest decline in employment will...

Other things equal, if wage rates increase by 20 percent, the greatest decline in employment will occur when labor costs are a:

  • large proportion of total costs and product demand is elastic.

  • small proportion of total costs and product demand is elastic.

  • large proportion of total costs and product demand is inelastic.

  • small proportion of total costs and product demand is inelastic.

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Answer #1

Answer : The answer is option A.

When increasing wage rate decrease the employment level more then this means that the increasing wage rate takes a large portion of total production cost. And the demand for the product is elastic. Because in case of elastic demand if price rise then demand decrease which decrease the profit level. So, in case of elastic demand if wage rate increase then the firm cannot increase the price level to cover the labor employment cost which lead to decrease the employment level. Therefore, option A is correct.

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