Question

A monopsonist’ s demand for labor can be written as MRP = 40-0.005E. The firm’s labor supply is given by w = 5+ 0.01E. Therefore, the firm’s marginal expense of hiring workers when it hires off of this supply schedule is ME = 5 + 0.02E. (E is for employment, number of workers).

a. Draw a graph that represents the labor market for the firm. Label all axes and relevant curves.

b. How many units of labor does the monopsony firm hire and at what wage? Is this the efficient level of employment? Why or why not?

c. Suppose a minimum wage of $16 is introduced and the firm is legally bound to follow the minimum wage laws. How much labor and what wage will the firm now hire?

Answer 1

(a)

From MRP (Labor demand) function,

When E = 0, MRP (wage rate) = 40 (Vertical intercept) and when MRP = 0, E = 40/0.005 = 8,000 (Horizontal intercept).

From Labor supply function,

When E = 0, ME (wage rate) = 5 (Vertical intercept).

In following graph, MRP and ME curves are drawn which intersect at point A with equilibrium wage w0 and employment E0.

(b)

In equilibrium, MRP = ME.

40 - 0.005E = 5 + 0.02E

0.025E = 35

E = 1400

w = 5 + (0.02 x 1400) = 5 + 28 = $33

(c)

When minimum wage is $16, market has to hire labor at w = $16. Since wage rate is lower than equilibrium wage rate of $33, this minimum wage is not binding, so it will not affect labor market equilibrium. Employment will remain the same at 1400 and wage rate in market will remain the same at $33.