Question

How do you do this question?

Answer 1

Answer: B) Demand will most likely be elastic

Place yourself in the shoes of the employer. To them, demand is them needing/wanting workers. Specifically we call this "labor demand". The supply is the potential or current worker providing the service and/or making the product.

If the price goes up, then this means the worker earns higher wages. This in turn causes labor demand to fall. So the employer will be less likely to hire more workers if the wages increase. It's similar to how if the price of an item goes up in a store, then less people are probably going to buy it.

Demand is elastic because a small change in price causes a large change in demand. The company is going to be sensitive to wage changes. The company sees that it is approaching the diminishing returns, so it is likely to scale back on labor to save costs. It's all about trying to minimize costs and maximize revenue. Often, revenues can't be changed very much since customers are themselves sensitive to price changes (assuming there are substitutes in the market), so the company will turn to trying to reduce costs as much as possible leading to maximum profit.