Question

Calculate the own-wage elasticity of demand for occupations a,b, and c below. L and W are the original labor demand and wage; L' and W' are the new labor demand and new wage. State whether demand is elastic, inelastic, or unitary elastic. a. %chgE=10,%chgW=−10 ․ b. E=30,W=10;E′=20,W′=12 c. E=40,W=8;E′=50,W′=6

Answer 1

The wage elasticity of labor demand for occupation a is unitary elastic, for occupation b is elastic, and for occupation c is unitary elastic.

Step-by-step explanation:

The wage elasticity of labor demand measures how responsive the quantity of labor demanded is to changes in wages. It can be calculated as the percentage change in employment (E) divided by the percentage change in wages (W). Depending on the value calculated, the demand can be categorized as elastic, inelastic, or unitary elastic.

For occupation a, the calculation is straightforward as the percentage changes are given: %chgE = 10 and %chgW = -10. Since the percentage change in wages is negative (a fall in wages), we take it as an absolute value for calculating elasticity. Thus, the own-wage elasticity of demand for occupation a is 10 / 10 = 1, which indicates a unitary elastic demand.

For occupation b, we first calculate the percentage changes using the initial and new values. The percentage change in employment (E) is (20 - 30) / 30 * 100 = -33.33%, and the percentage change in wages (W) is (12 - 10) / 10 * 100 = 20%. The wage elasticity of labor demand for occupation b is then -33.33% / 20% = -1.67. Since the absolute value is greater than 1, the demand is elastic.

For occupation c, the calculations follow similar steps. The percentage change in employment (E) is (50 - 40) / 40 * 100 = 25%, and the percentage change in wages (W) is (6 - 8) / 8 * 100 = -25%. The wage elasticity of labor demand for occupation c is then 25% / 25% = 1, which indicates a unitary elastic demand.