Question

GIVE A THOROUGH EXPLANATION FOR WHY THIS STATEMENT IS TRUE & PROVIDE A RELEVANT GRAPH

1. The Elasticity of demand for labor is higher the higher the elasticity of supply of the substitutable input.

2. SL = MFC in a perfectly competitive input firm or for an imperfectly competitive firm that hires heterogeneous labor (or practices wage discrimination).

Answer 1

1) True

When prices of labor rises and when the elasticity of supply of subtitute input will be higher i.e the supply of subtitute input varies a lot with a change in the price of the input . Such increase of price of other inputs will increase the supply for such input , but a higher price will deter the demand of substitute inputs. The demand will shift to labor from other input. This shows that as elasticity of demand for labor will be higher when the elasticity of supply of labor is higher.

2) True

MFC is marginal factor cost which is the cost of hiring additional labor.

MRP( Marginal revenue product) is the benefit to the firm of hirin more labor, which converts it to being the demand of labor curve.  

In perfectly competitive markets , marginal factor cost (MFC )is horizontal ( as firms are wage takers , they cannot influence the wage rate and wage is given)

Supply of labor will be horizntal as well and equal to MFC or wage as firms cannot hire labor below this wage and cannot afford to pay above this wage. This will mark a workers supplying labor at a constant rate i,.e the wage rate.