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3. Let's consider the two other firms and their response to the pandemic. Again, they produce similar products. Let's consider a different shock this time.
3. Let's consider the two other firms and their response to the pandemic. Again, they produce similar products. Let's consider a different shock this time. In this case, both firms rely equally on labor and capital. As the recovery from the pandemic has gone forward, wages have rebounded somewhat. The new challenge comes from the global capital market where the war in Ukraine has disrupted capital markets and depressed markets. From these two firms, one (call it Firm A) has been relying on capital from Eastern Europe, especially former Soviet Union countries. The cost of capital has gone up since it has been more difficult to borrow money from these sources. The other (Firm B) has been relying on capital from East Asia. The cost of capital has not changed by much as lenders from East Asia continue to make loans. Which of these firms is likely to have a greater elasticity of demand for labor? Why
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