Product Elasticities and the Wage Job Trade-Off. Consider two unions, one in an industry where the price elasticity of demand for the product is3.0 (industry E), and one where the price elasticity of demand is 2.0 (industry I). In both industries, the initial wage is $30 and labor is responsible for half the cost of production, so the percentage change in the product price is half the percentage change in the wage. In each industry, the initial employment is 100 workers. Suppose each union increases its wage by 10 percent.
a. Compute the output effect of the wage increase for each industry: Total employment in industry E drops from 100 to__________ ; total employment in industry I drops from 100 to_________ .
b. Assume that there is no substitution effect from changes in wages. Use two graphs to show the effects of the increase in the wage on the quantity of labor demanded.