Question

If the labor demand curve is a downward-sloping straight line, explain why the wage elasticity of labor demand is negative infinity in the upper left hand corner of the curve.

(hint: use the formula for this elasticity)

Answer 1

Wage elasticity of labour demand will measure the response of labour demand to any percentage change in the wage rate. Note that in the upper left hand corner of the curve, the wage rate is very high. This indicates that a very slight reduction in the wage rate will result in a very high increase in the quantity demanded of labour. This indicates that the value of wage elasticity in this region is very high and if labour demand is horizontal in this case then wage elasticity of labour demand becomes negative infinity. For this to be true labour demand should be highly elastic implying that labour demand line should have a very flat slope.