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
