Question

1. Darth Vader has taken over the hiring of workers at the construction of the Death Star. When the hourly wage of a worker is 30 Republic Credits (RC 30), he’s willing to hire 100 workers. When the wage increases to 35 Republic Credits, he decides to hire 60 workers.

1. What is the own-wage elasticity of demand for workers? Is it elastic or inelastic?

2. What are two reasons that the elasticity you found might be elastic or inelastic? Reference 2 Hicks-Marshall laws of derived demand.

Answer 1

Part a) Hourly wage has increased from 30 (W₁) to 35 (W₂). As a result, the quantity of workers demanded decreased from 100 (Q₁) workers to 60 workers (Q₂).

Percent change in quantity of workers = [(Q₂ – Q₁)/((Q₂ + Q₁)÷2)] × 100

Percent change in hourly wage = [(W₂ – W₁)/((W₂ + W₁)÷2)] × 100

Percent change in quantity of workers = [(60 – 100)/((60 + 100)÷2)] × 100

Percent change in quantity of workers = [– 40/(160÷2)] × 100

Percent change in quantity of workers = – 50

Percent change in hourly wage = [(35 – 30)/((35 + 30)÷2)] × 100

Percent change in hourly wage = [5/(65÷2)] × 100

Percent change in hourly wage = 15.38

Own wage elasticity of demand for workers = (Percent change in quantity of workers)/(Percent change in hourly wage)

Own wage elasticity of demand for workers = (– 50)/(15.38)

Own wage elasticity of demand for workers = – 3.25

So, the own wage elasticity of demand for workers is elastic.

Part b) According to the Hicks Marshall law of derived demand the own wage elasticity of demand for workers is high (elastic) under the following conditions.

1. The price elasticity of demand for the product being produced by the workers is high.

2. When there exists close substitute of workers who can replace the workers easily.

3. When the supply of other factors of production is highly elastic, meaning a small change in the price of other factors of production leads to a large change in the supply of these factors of production.

4. Share of workers in total cost of production is very large.