Question

1. For this question, the supply and demand equations are : w = 10 + 0.2Q_S for supply and w = 40 – 0.2Q_D for demand.

1. Suppose a wealthy businessman, strategically buys all the local clown firms and becomes the only person in town hiring clowns. Bozos’ firm has a marginal cost of hiring determined by the equation: MC = 10 + 0.4Q. Assume there is no minimum wage in the market.
   1. Determine the number of clowns hired and the wage in this monopsony market.
   2. What is the value of the marginal product of the last worker hired? What is the reservation wage of the next person that is not hired. Explain why this person is not hired.
   3. Briefly discuss why we expect market outcomes to differ based on the level of competition in the labor market.

2. Draw a graph depicting the labor market situation in part a and label the areas of firm surplus and worker surplus. Solve for the values of firm surplus, worker surplus, and total surplus. Discuss how the outcomes differ in the monopsony and competitive markets. How inefficient is the market power scenario?

Answer 1

Ans (a) (i) Please refer to the pictures pasted below. (Pages 1, 2, 3)

Hence, the number of clowns hired (L) is 50 and the wage is 20 in the Monopsony Market.

Ans (a) (i) The value of the Marginal Product of the last worker hired is as follows;

If each worker (clown) gets 20,

then, VMPL (Value of Marginal Product of Labour) = w (Optimal State)

And, -VMPL = MPL (Marginal Product of Labour)*MR (Marginal Revenue of Output)

VMPL = w = 20 (Optimal State)

By putting the value of L=50, in equation of demand, MRPL, we'll get,

40-0.2(50) = 40-10 = 30

We now get wage = 30, and substituting MRP=w=30, in the equation of demand, we'll get,

30 = 40-0.2L

This implies, 30-40 = -0.2L

which implies, -10 = -(1/5)L

Therefore, L = 50.

Value of Marginal Product of Labour is equal to Marginal Revenue Product of Labour (Marginal Revenue of output multiplied by Marginal Product of Labour) which is equal to -30.

The value of Marginal Product of Labour of the last worker hired exceeds -30. And the VMPL of the last worker hired comes out to be -30.2 . And hence, the last worker isn't hired because the workers which get employed in the Monopsony Market always get paid by the wages which are less than their Marginal Revenue Product of Labour but in this case, MRPL gets increased above 30 and hence, the employer in the Monopsony Market wouldn't hire the last worker. Wages are always paid less in the monopsony markets than the competitive markets.

Ans (iii) Monopsony power only exists when one of the buyer face very little competition from the other buyers (even if for labour or products produced). So employer is able to set prices for labour and goods at a level lower than the case of a competitive markets. So the market outcomes tend to differ.