A. Consider what affects the size of the scale effect (assume that the two types of labor are union and non-union labor.) As the scale effect increases, ceteris paribus, union and non- union labor are more likely to be gross complements (what does the union want?).
1. The union share of total costs. As this increases, the scale effect is larger (why?)
2. The price elasticity of demand for the good that is being produced. As this increases, the scale effect is larger (why?).
B. Consider what affects the size of the substitution effect. As the substitution effect increase, ceteris paribus, union and non-union labor are less likely to be gross complements (what does the union want?).
1. How easy is it to substitute non-union for union labor? As it becomes easier, the substitution effect is larger. How might unions affect this?
2. How price elastic is the supply of non-union labor? As it becomes more elastic the substitution effect is larger (why?) Can unions affect this?