Question

Consider the computer software industry. Assume [i] labor is responsible for 80 percent of production costs, [ii] software is produced with fi xed factor proportions (no capital-labor substitution), [iii] there are no agglomeration economies, [iv] any change in production cost is passed on to consumers in a higher price, and [v] the price elasticity of demand for software is −1.50. Suppose the wage of software workers increases by 20 percent.

The price of software will increase by _____________ percent, and the quantity of software demanded will ________ by _______ percent.

Answer 1

In the computer software industry, a 20 percent increase in the wage of software workers will result in a 20 percent increase in the price of software. The quantity of software demanded will decrease by 30 percent.

Step-by-step explanation:

In the computer software industry, labor is responsible for 80 percent of production costs. In the computer software industry, a 20 percent increase in the wage of software workers will result in a 20 percent increase in the price of software. The quantity of software demanded will decrease by 30 percent.

Since software is produced with fixed factor proportions, there is no capital-labor substitution. In this scenario, if the wage of software workers increases by 20 percent, the price of software will increase by 20 percent as well. However, the quantity of software demanded will decrease by 30 percent, as determined by the price elasticity of demand, which is -1.50.