Question

Becky is a college student who lives in Detroit and does some consulting work for extra cash. At a wage of $25 per hour, she is willing to work 4 hours per week. At $30 per hour, she is willing to work 9 hours per week.

Using the midpoint method, the elasticity of Becky’s labor supply between the wages of $25 and $30 per hour is approximately_____, which means that Becky’s supply of labor over this wage range is inelastic/elastic   .

Answer 1

Answer : For mid-point method :

Changes in price = 30 - 25 = 5

Average of price = (25 + 30) / 2 = 27.5

% changes in price = (Changes in price / Average of price) * 100

=> % changes in price = (5 / 27.5) * 100

Changes in quantity supplied = 9 - 4 = 5

Average of quantity supplied = (4 + 9) / 2 = 6.5

% changes in quantity supplied = (Changes in quantity supplied / Average of quantity supplied) * 100

=> % changes in quantity supplied = (5 / 6.5) * 100

Elasticity of supply = % changes in quantity supplied / % changes in price level

=> Elasticity of supply (Es) = [(5 / 6.5) * 100] / [(5 / 27.5) * 100]

=> Es = (5 / 6.5) * (27.5 / 5)

=> Es = 4.2 (Approximately)

Therefore, here Becky's elasticity of labor supply is 4.2 (approximately).

When elasticity of supply is higher than 1 then the supply is elastic. Here Es is 4.2 which is higher than 1. So, here Becky's labor supply is elastic.