Monopsonist and Minimum WageAnswersBefore reading these answers, work through the problem. Consider the case of a firm that acts as a monopsonist in the local labor market. As the sole employer in town, it can push down wages and increase profit by reducing the employment level. The firm's goal is to maximize profit: with respect to labor, . For simplicity, assume the production function exhibits diminishing marginal returns and is given by: assume that the quantity of labor supplied is an increasing function of the wage rate and the inverse of that relationship is given by: and assume that the firm sells its output in a perfectly competitive market (so that the market price of output is exogenous to the firm) and that the price is fixed at: ◆ ◆ ◆ NOTE: It may be helpful to write the monopsonist's profit as: ◆ ◆ ◆
◆ ◆ ◆ SUMMARY: In the absence of a minimum wage: ◆ ◆ ◆ Now, assume that the government imposes a minimum wage:
Imposing a minimum wage only affects cost, so marginal revenue remains unchanged:
After imposing a minimum wage, the marginal cost of increasing employment is the cost of hiring at the minimum wage:
Effect of the Minimum Wage
Imposing the minimum wage increased total employment from 10 to 14.79.
Imposing the minimum wage decreased the monopsonist's profit from 1264.91 to 961.54. Copyright © 2002-2022 Eryk Wdowiak |
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