Use a hypothetical example to illustrate whether you agree or disagree with the

Question

Use a hypothetical example to illustrate whether you agree or disagree with the following statement, "Unemployment will go up more if the demand for labor is elastic, because the demand for labor will decrease more when you have elastic demand than if demand were inelastic". Explain why, using hypothetical numbers to illustrate your case

Explanation / Answer

Let the demand curve for labor is given by the following information: at wage rates of $100, 150, 200 and250 , the demand for labor is 100, 40, 25 and 10. You can check the demand for labour is highly elstic in this example. For with an increase in wage rate, the demand for labor increases more than proportionately: as wage rates rise from 100 to 150 by 50% demand for labor declines by 60% from 100 to 40 and again when wage rate rises from 150 to 200 by 33.3 % the demand for labor falls by 37.5% On the other hand if demand for labor was inelastic: say demand is 100 at wage rarw of $100, 80 at $150, 60 at $200 and 50 at $ 250, demand for labour falls at a percentage lower than the percentage increase in wage rates. ( you can calculate the elsticities iof demand with the formula: percentage in demand for labour / percentage change in the wage rates - you will see that in the first case elasticity in absolut value is > 1 and in the latter example elasticity is < 1. Elaticity greater than 1 is elstic demand and elasticity < 1 is inelastic demand. Thus, we can see as wage rates icrease demand for labour falls more when demand for labor is elastic than when it is inelastic.

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