Question

Draw a picture that shows the following: the imposition of a binding minimum wage in a monopsony results in an increase in employment. In addition, give a brief intuitive explanation for why you might expect this to occur.

Answer 1

The following diagram shows a Monopsony Scenario where,

• The Labor Demand curve is represented as MRP or Marginal Revenue Product.

• The Labor Supply curve is denoted as Ls.

• The Marginal Factor Cost is denoted as MFC.

The equilibrum in a Monopsony Market occurs at that point where the MFC or Marginal Factor Cost curve intersects the MRP or Marginal Revenue Product curve. The wage rate is given according to the Labor Supply curve. The following diagram shows the equilibrium of Monopsony Market at point Em.

From the above diagram we can see, the Monopsonist hires Lm labors and give wage rate Wm.

Now, there is an imposition of 'binding minimum wage' at . This is the minimum wage that would be provided to the labors.

From the diagram we can see, the labor hired at wage is . It is clear that,

Hence, the Labor Employment has increased due to the binding minimum wage.

Now, we will explain why might this occur in the market.

Hence, the Marginal Factor Cost or MFC will be

MFC = .......(1)

Now, the MFC intersects the MRP curve at point E°. Hence, this is the new monopsonistic equilibrum under binding minimum wage.

At E°, wage rate is fixed at . Hence, at higher wage ​​​​​​, the monopsonist determines its labor employment according to MRP curve, not according to the MFC curve. As a result of itz we can see the firm hires labors which is higher than Lm. The employment increases.

Hope the explanation is clear to you my friend.