Question

Suppose a perfectly competitive labor market has a demand curve of LD = 120 − 2w and a supply curve of LS = 8w, where w is the wage rate is dollars per hour and L is the quantity of labor in person-hours. (a) (2 points) What are the equilibrium values of the wage and employment? (b) (4 points) Suppose the government imposed a minimum wage of $14 per hour. Now what are the equilibrium values of the wage and employment? (c) (8 points) Repeat part (a), assuming now that the market is a monopsony. Derive the MC curve as follows. Given that the supply, Ls = 8w, you can get the total expenditure (w*Ls) by first writing w in terms of L and then getting the expression for total expenditure. You can then differentiate with respect to L to get the Marginal cost of labor. Next get an expression of the Marginal value product (MVP) from the labor demand curve by expressing w in terms of L. Equate the MVP and the MC to get equilibrium labor demand. Also find the equilibrium wage. (d) (8 points) Repeat part (b), assuming now that the market is a monopsony. (e) (6 points) Does the imposition of the minimum wage decrease employment here under perfect competition? What about under monopsony? Give a brief intuitive explanation for your answer and why it may be different under the two different market structures.

Answer 1