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5. Explain the relationship between the elasticity of supply of capital and the elasticity of demand for labour. 6. Diagrammatically show the case of an individual who completely stops labour supply due to an increase in the level of non-labour income.
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ANSWER-5) The demand for labor is more elastic the greater is the elasticity of substitution between labor and capital because the firm will be less willing to pay higher cost of labor if it is easy for the firm to substitute capital for labor. Labour demand is more elastic when a firm can substitute cheaply and easily among labour and capital inputs. However when specialised labour or capital is required, then the demand for labour will be more inelastic with respect to the rate of wages.

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