COST-BASED PRICING AND LABOR ELASTICITY,
RAND CORP SANTA MONICA CALIF
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Examines the labor elasticity of the aircraft industry, that is, the variation in labor inputs associated with sales variations. The hypothesis is that the aircraft industry adjusts its labor supply more sluggishly than other manufacturing industries because much of their sales are to the government through contracts that call for prices based on incurred costs. Such a hypothesis is not particularly novel a common observation is that defense project cancelation leads to an overall employee reduction significantly less than the numbers involved in the project. Section II of this paper uses a simple profit maximization model to demonstrate why this occurs. Section III quantifies and tests the model. Section IV considers the implications of results.
- Economics and Cost Analysis