Labor demand is more elastic the greater the elasticity of demand for the firm's output because
A) the firm would see its quantity demanded fall substantially if the firm tried to pass increased labor costs through to the consumer by increasing the price of the output good.
B) the firm's output price falls when the firm produces less output.
C) a firm that operates in a competitive output market cannot lower its price.
D) capital is usually price elastic.
E) the firm will want to hire fewer workers when the wage rate increases.

Question

Quizplus · Accepted Answer

The greater the elasticity of demand for a firm's output, the more sensitive consumers are to price changes. If a firm tries to pass increased labor costs onto consumers by raising prices, and the demand for its product is highly elastic, it will see a significant decrease in the quantity demanded. This makes the firm's demand for labor more elastic, as it cannot easily cover higher labor costs through price increases without losing a substantial portion of its sales.

Labor Demand Is More Elastic the Greater the Elasticity of Demand