Question

A monopsonist’s demand for labor can be written as VMPE = 40 - 0.004ED. Labor is supplied to the firm according to w = 5 + 0.01ES. Thus, the firm’s marginal cost of hiring workers when it hires off of this supply schedule is MCE = 5 + 0.02ES. a. How much labor does the monopsony firm hire and at what wage when there is no minimum wage? b. How much labor does the monopsony firm hire and at what wage when it must pay a minimum wage of $25?

Answer 1

Answer:

Wage rate = $34.16

E = 3,750

Explanation:

(a) As monopsonist’s demand for labor is written as VMPE = 40 - 0.004ED and the firm’s marginal cost of hiring workers when it hires off of this supply schedule is MCE = 5 + 0.02ES.

Now VMPE = MCE  is the point when monopsonist will be hiring labor.

Calculations:

40 - 0.004E = 5 + 0.02E  

40 - 5 = 0.02E + 0.004E

0.024E = 35

E = 35 / 0.024

E = 1,458 (approx)

Calculating Wage rate:

As the firm’s marginal cost of hiring workers when it hires off of this supply schedule is MCE = 5 + 0.02E(s)

therefore by putting the value of E(s) in the above formula, we get

Wage rate = 5 + (0.02 x 1,458)

Wage rate = 5 + 29.16

Wage rate = $34.16

(b) When it must pay a minimum wage of $25:

As monopsonist’s demand for labor is written as VMPE = 40 - 0.004ED

VMPE:

25 = 40 - 0.004E

0.004E  = 40 - 25

0.004E = 15

E = 15 / 0.004

E = 3,750