Question

6. Pete’s Pottery is a perfectly competitive firm with a labor demand elasticity of -0.3.

   1. If the wage Pete’s Pottery must pay rises by 10 percent, what will happen to the amount

      of employment used by the firm?

   2. What will happen to the marginal productivity of the last unit of employment Pete’s

      Pottery hires?

   3. Pete’s Pottery only sells pottery that is created by hand. Their competitor, Pottery Mart,

      creates some of its pottery by hand, but also has the machinery capable of mass- producing the same products. Which firm would you expect to have a more elastic labor demand curve? Why?

Answer 1

Labor demand Elasticity equals % ∆ in Labor demand divided by %∆ in wages provided

So if wages rise by 10% , then Labor demand falls by 3%,

thus firm employment falls by 3%.

now since in perfect competition, wages = MP of Labor

thus as wages have increased , so MP of last unit of employment also rises.

pete pottery will face more elastic demand curve, bcoz the competitor is involved in diversification, pottery of two types are created, if demand gets affected for one type, then still he can manage with other type.

So responsiveness of demand to changes in prices is relatively less as compared to when only one type of product has been produced