Concept:The price elasticity of demand for labour shows how much the quantity of labour demanded changes when the wage rate changes.
Explanation:If wages rise, a firm decides whether it can reduce its workers without hurting production much.
When labour costs form only a small fraction of the firm's total costs, an increase in wages causes only a tiny rise in overall production costs.
Because the cost impact is small, the firm will not cut jobs quickly, so the demand for labour is inelastic.
In contrast, if labour and capital are close substitutes, firms can easily replace workers with machines, making labour demand elastic.
If the demand for the final product is elastic, a rise in wage costs forces the firm to pass costs to consumers, reducing sales and employment, so labour demand becomes more elastic.
The availability of unemployed labour affects the supply of labour, not the elasticity of the firm's demand for labour.
Answer: Option B — Labour costs are only a small proportion of total costs.