Assume that labor productivity is rising by 6 percent in the economy as a whole but by only 1 percent in industry X. Also assume that nominal wages for all industries rise in accordance with the economy’s overall rate of productivity increase. Labor costs are 90 percent of total costs in industry X.
The demand for industry X’s product is highly elastic with respect to price and inelastic with respect to income. Assuming no shifts in demand curves for products in the economy other than those associated with changes in income, forecast the future growth or decline of industry X, specifying all of the steps in your reasoning.