Good Faith Effort 29 -- Monopsony Power 2

  1. This is a continuation of Problem 2 in GFE 28... A wage-setting firm faces the following market supply curve Ws(L) = 5+0.0025*L, where L is units of labor per time period and W is wages, measured in dollars per unit of labor. The firm's marginal product function is given by MP(L) = 5-0.001*L. Finally, the firm sells it output is a perfectly competitive product market at a price P* = $5 per unit. Assume that the firm seeks to maximize profit.

  2. What would the equilibrium wage and hiring be in a perfectly competitive labor market? Show your work.

  3. What would the social gain be if this wage-setting firm were forced to hire and pay at the perfectly competitive equilibrium? Who would gain and who would lose as a result?

  4. Use Excel and the information in question 1 to plot this firm's labor demand, labor supply, and marginal expenditure curves. Let the domain of L = 0, 200 ... 4000.

  5. Why is there a social cost associated with firms that have monopsony power? If the gains to buyers from monopsony power could be distributed to sellers, would the social cost of monopsony power be eliminated? Explain.


Due 5 December.

Note: In order to receive a "credit" grade, your written responses to the questions must be submitted by you personally (not by some other student) by the start of class on the day it is due.


Adapted from Questions for Review and Exercises, Chapter 14, Robert Pindyck and Daniel Rubinfeld, Microeconomics, 4th edition, Prentice Hall, Upper Saddle River, NJ, 1998.