Question

The demand for labor is given by V MPE = 40 − 0.004E. The supply of labor is given by w = 5 + 0.01E.

(a) If the demand and supply curves are for a perfectly competitive labor market, what would be equilibrium wage and employment? What would be the producer and worker surplus?

(b) If the demand and supply curves are for a perfectly discriminating monopsonist, what would be the equilibrium employment? What would be the equilibrium wage, if any? What would be the producer and worker surplus?

(c) If the demand and supply curves are for non-discriminating monopsonists, what would be the equilibrium employment and equilibrium wage? What would be the producer and worker surplus?

(d) Now suppose that the government introduces a minimum wage of $25. How would it change the equilibrium wage and employment in parts (a)-(c)?

Answer 1

Answer :

Given That :

The demand for labour is

The supply function for labour is

(a.)

In a perfectly competitive labour market, where one firm hires all the lobour they are willing to at the present market wage rate.hence, we have a horizontal supply curve of labour. The hire upto which interesects with the present market wage rate at .

Figure 1

The equilibrium wage rate and number of labour employed is show in the above diagram. The horizintal shaded portion is know as the producers surplus as show in the diagram, and the vertical shaded portion is known as the workers surplus as shown in the diagram.

(b.)

In a perfectly discriminating monopsonist market, the firms can hire various labours at different wage rates and paid according to their reservation wages. They hire upto, where VMP_E = MC_L. It means where the demand of labour meets the marginal cost of hiring the labour at the equilibrium. Here, we get the equilibrium wage rate and number of labours being hired, but only the equilibrium wage rate cannot be called asthe competitve wage rate, because of the wages being paid to the last worker hired. Here, the supply curve of the labour is known as the marginal cost of labour. We get a positively upward slope of supply curve where the firms can hire labour according to their reservation wages. The monopsonist hires the labours just like in the perfectly competitve market, but note that the workers only get paid according to their reservation wages.

Figure 2

The equilibrium is at E₁. For not having a demand curve a monopsonist find its optimal number of workers at . It uses the VMP_E and MC curves to determine the number of workers, then uses the labor supply curve to find the wage. The producers surplus and workers surplus is stated in the above diagram.

(c.)

For non-discriminating monopsony market, the monopsonist pays the sames wages to all the labours being hired. From the diagram below, we can say that the marginal cost curve of lanour lies above the supply curve and it exceeds the wage at the E. Monopsonists earn the maximum profit at E₁. The monopsonist hires workers and pays them a wage of . The producers surplus and workers surplus is stated in the diagram given below.

Figure 3

(d.)

When a minimum wage rate is introduced in a perfectly competitive firms, where an increase in the minimum wage reduces employment and increases unemployment.

For non-discriminating monopsonist, it increases the employment level and the wages given to the labours is reduced.

In a dicsrimnating monopsony market, a minimum wage can increase employment and also, at the same time it can increases wages.