The Governor of Arkansas has asked you (her crack economic advisor) to analyze h

Question

The Governor of Arkansas has asked you (her crack economic advisor) to analyze how employment in trucking and poultry processing will be affected if the legislature passes a proposed law that will increase labor cost in both industries by ten percent.

A) How would you answer if you knew that the elasticity of labor demand was -.75 in trucking and - 1.25 in poultry processing?

B) How would you answer if you did not know the elasticity information above but knew the following:

i. It is easier to substitute machinery for labor in poultry processing than it is in trucking, and

ii. The product demand for poultry is more sensitive to price increases than is the product demand in trucking.

Explanation / Answer

a) Elasticity of labour demand is change in labor demand due to change in the price of the labour.

Elasticity for labor demand in trucking is -0.75 which is relatively elastic i.e percentage change in demand is greater than percentage change in price.

Elasticity of labor demand in poultry processing is - 1.25 which is relatively elastic i.e. percentage change in demand is greater than the percentage change in price.

Therefore, if the labor cost increases by 10 % , then the demand for labor in trucking and poultry would decrease more.

b) i. It is easier to substitute machinery for labor in poultry processing than it is in trucking.

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