For each of the following cases, determine whether the economy’s labour demand for unskilled workers will...

For each of the following cases, determine whether the economy’s labour demand for unskilled workers will decrease or increase:

a) The cross-elasticity of factor demand between unskilled and skilled workers is –0.3, and government implements a policy that results in an increase in demand for skilled workers.

b) The cross-elasticity of factor demand between unskilled workers and capital is 1, and government implements a policy that results in an increase in the demand for capital.

c) The cross-elasticity of factor demand between unskilled and immigrant workers is –1, and government implements a policy that results in an increase in demand for immigrant workers.

Expert Solution

Cross elasticity of a factor demand refers how responsive demand for a factor is with respect to change in the demand for another factor,

a)

The cross-elasticity of factor demand between unskilled and skilled workers is –0.3, and government implements a policy that results in an increase in demand for skilled workers

- Since cross elasticity is negative, this means as demand for skilled workers increase, economy’s labor demand for unskilled workers will decrease.

b)

The cross-elasticity of factor demand between unskilled workers and capital is 1, and government implements a policy that results in an increase in the demand for capital.

- Since cross elasticity is unitary (+1), this means as demand for capital will increase, economy’s labor demand for unskilled workers will increase too.

c)

The cross-elasticity of factor demand between unskilled and immigrant workers is –1, and government implements a policy that results in an increase in demand for immigrant workers.

- Since cross elasticity is negative, this means as demand for immigrant workers increase, economy’s labor demand for unskilled workers will decrease in the same proportion.

Rahul Sunny answered 1 year ago

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