Question

*provide an explanation/reasoning for each answer

3. The own-wage elasticity of labor demand is higher when
   1. no other inputs can easily be substituted for labor.
   2. the demand for the output good is less elastic.
   3. the supply of other inputs is more elastic
   4. the costs of labor are a smaller share of total production costs.
   5. none of the above
4. Another input is more likely to be a substitute for labor if
   1. the demand for the output good is less elastic.
   2. the supply of other inputs is more elastic.
   3. the costs of the other input are a smaller share of total production costs.
   4. none of the above.
   5. all of the above
5. Suppose the marginal product of labor is 6 and the marginal product of capital is 3. If the wage rate is $4 and the price of capital is $2, then in order to minimize costs the firm should use
   1. more capital and less labor.
   2. more labor and less capital.
   3. more capital and labor.
   4. none of the statements associated with this question are correct.

Answer 1

1.

The own wage elasticity of demand measures the responsiveness of employment to the change in wage rate. It is higher when employment or labor demand falls with rise in wage rate. It would occur when there is no other substitute for labor.

the correct option is a

2.

Another input is more likely to be a substitute for labor when cost of other inputs are a smaller share of the total production cost then firm would choose the cheaper input.

the correct option is c

3.

Cost minimization condition implies MPL/MPK = (w/r). Substituting for the values will satisfy the condition means in order to minimize cost one good is substituted for another; it is either more capital and less labor or vice versa.

the correct option is d