When the elasticity of substitution between capital and labor is low,:
A)labor demand will be price elastic.
B)labor demand will be price inelastic.
C)the capital-labor ratio will be low.
D)the labor demand curve will be a flat line.

Question

Quizplus · Accepted Answer

When the elasticity of substitution between capital and labor is low, it means that the two factors of production are not easily substitutable, and therefore, a change in the price of one factor (labor) will not result in a significant change in the demand for the other factor (capital). Hence, the demand for labor will be price inelastic. When the elasticity of substitution between capital and labor is low, it means that capital and labor are complementary inputs and cannot easily be substituted for each other. In this case, if the price of labor increases, firms cannot easily switch to capital, and as a result, the demand for labor will be price inelastic. Option A is incorrect because low elasticity of substitution does not necessarily mean that labor demand will be price elastic. Option C is incorrect because the capital-labor ratio is determined by the technology and not the elasticity of substitution. Option D is incorrect because the labor demand curve will still slope downward; it is just that the slope will be flatter than in the case of high elasticity of substitution.

When the Elasticity of Substitution Between Capital and Labor Is