5. Page 2 of 2 Elasticity A. Blue Chair Press publishes art books. The demand for art books published by
Blue Chair Press is highly elastic. Labor is a significant input in the production
of art books. Show on a demand and supply graph for Blue Chair Press art
books the effect of an increase in the wage rate. What can you conclude about
the elasticity of demand for labor? (4 points)
B. Blue Chair Press uses a lot of labor when it edits and publishes texts. Its labor
costs are 80% of its total costs. Compare the elasticity of demand for labor in
this situation with the elasticity of labor demand if labor accounted for only
20% of Blue Chair Press’s total costs. (4 points)
C. Since Blue Chair Press requires very specific artistic skills from the labor it
hires, there are few substitutes for the type of labor the firm requires. How
does this affect the elasticity of demand for labor? (2 points)
D. True or False: The higher the elasticity of demand for the product, art books,
the more inelastic is the demand for the resource, labor, that produces the art
books. Explain your answer. (2 points)
E. True or False: If the ratio of labor costs to total costs is low, then the elasticity
of demand for labor is low and a given wage increase results in fewer laborers
losing jobs than if the elasticity of demand is higher. Explain your answer.
6. Marginal Analysis
A. Explain how marginal analysis is used to determine the least-cost combination
of labor and capital used to produce a given level of output. (2 points)
B. Explain how marginal analysis is used to determine the profit-maximizing
combination of labor (L) and capital (K) used to produce a given level of
output. Give your answers in words and in an equation. (2 points)
C. Is the least-cost combination or resources also the profit-maximizing level of
resources? Explain your answer. (3 points) ____________
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