A high elasticity of substitution between capital and labor implies that labor demand will be:
A)price elastic.
B)unitary price elastic.
C)price inelastic.
D)more inelastic than capital demand.

Question

Quizplus · Accepted Answer

High elasticity of substitution between capital and labor means that firms can easily substitute one factor of production for another in response to changes in relative prices. This means that firms can respond quickly to changes in wages or the price of capital, resulting in a more elastic demand for labor. Therefore, labor demand will be price elastic. A high elasticity of substitution between capital and labor means that firms can easily substitute capital for labor or vice versa depending on the relative prices. Therefore, a small change in the wage rate will lead to a relatively larger change in the demand for labor, making labor demand price elastic.

A High Elasticity of Substitution Between Capital and Labor Implies