Question

Please show all work.

Problem #5: Cross-price elasticity Consider teenage labor and adult labor as separate inputs in production for fast-food restau- rants. Suppose the wage of teenage workers increases (but the adult wage remains the same). Analyze the effect of the teenage wag labor, given that: e increase on fast-food restaurants' employment of adult 1.Teenage labor costs are a large share of total costs at fast-food restaurants. 2.Adults dislike the tasks teenagers do at fast-food restaurants (i.e. cleaning bathrooms), so it takes big increases in their wages to get them to do this kind of work. Given these 2 facts, are teenage workers and adult workers more likely to be gross substitutes or gross complements in fas-food production, holding all other factors constant? Explain your answer.

Answer 1

They are more likely to be gross compliments.

We will go about this question by looking at the two information given in the question:

1. Teenage labors share a large share in total cost of fast food production.

2. Adult don't like the tasks that teenagers do eg, to clean bathroom and such works.

The first information says that its not the case that only adult labors are used in the production process of fast food restaurants.

And what we can deduce from the second information is that in order to get bathroom cleaned ( and such works) either fast food restaurants have to increase the wages to adult labors or they can hire teenage labors at lower costs. Hence, they can substitute teenage labors for adult labors. But If they want to use adult labor only then they have to pay a large amount to them as wages in order to get bathrooms cleaned. Hence, overall on we can say that both are gross compliments as fast food restaurants can always use a mix of both type of labors to get more efficiency in the production process.It will be economizing for them to use a mix of teenage labor and adult labor.