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Demand and Supply Curves of a Company and Elasticity of Labour Demand

Question

Suppose you observe the following wages and employment in a particular industry:

 

Wage ($ per hour)

Employment (workers)

2013

$10

100

2014

$15

150       

a) Draw the demand and supply curves that might explain (and are consistent with) this data. Label your diagrams and all points on the diagrams carefully.

b) Your boss has asked you to try to estimate the elasticity of demand for labor in this industry from this data.  Describe how you would go about doing this and what information you would need.  (I am not asking you to come up with a number but to describe the process you would use and examples of the type of data this would require.)

c) Suppose you estimate the elasticity of demand for labor = |-2|. (That, is you can ignore the negative sign by taking the absolute value.)  Is labor demand elastic or inelastic and why? If wages fall by 8%, what do you predict would happen to the quantity of labor demanded?

d) Suppose in a separate study you discover that the elasticity of supply of labor is -0.25.  If wages rise by 5%, what do you predict would happen to the quantity of labor supplied?  What would you conclude from the negative sign (-0.25) about the substitution and the income effect?

Summary

This question belongs to economics and discusses about demand and supply curves of a company and elasticity of demand for labor.

Total word count: 200

 

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