Assume a firm is a monopsonist that can hire its first worker for $6 but must in
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Assume a firm is a monopsonist that can hire its first worker for $6 but must increase the wage rate by $3 to attract each successive worker (so that the second worker must be paid $9, the third $12, and so on). The marginal revenue product of labor is given in the table below. Units of Labor Marginal Revenue Product 0 1 $34 2 $28 3 $24 4 $20 5 $14 6 $10 Instructions: 1. Use the line tool to draw labor supply (LS, 6 points plotted), marginal revenue product (MRP, 6 points plotted), and marginal resource cost (MRC, 6 points plotted). 2. To earn full credit for this graph, you must plot all required points for each curve. 3. Are the labor supply and MRC curves the same or different? If they are different, which one is higher? 4. What will be the competitive equilibrium wage rate and the level of employment? 5. What will be the wage rate and the level of employment under monopsonistic conditions? 6. By how much does the monoposonist reduce wages below the competitive wage? 7. By how much does the monopsonist reduce employment below the competitive level? _____ workers.Explanation / Answer
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Assume a firm is a monopsonist that can hire its first worker for $6 but must increase the wage rate by $3 to attract each successive worker. Draw the firm’s labor supply and marginal resource cost curves and explain their relationships to one another. On the same graph, plot the labor demand data of question. What are the equilibrium wage rate and level of employment? What will be the equilibrium wage rate and the level of employment? Why do these differ from your answer to question 9?
The monopsonist faces the market labor supply curve S—it is the only firm hiring this labor. MRC lies above S and rises more rapidly than S because all workers get the higher wage rate that is needed to attract each added worker. Equilibrium wage/rate = $12; equilibrium employment = 3 (where MRP = MRC). The monopsonist can pay a below-competitive wage rate by restricting its employment.
Contrast the methods used by inclusive unions and exclusive unions to raise union wage rates.
Inclusive unions, also known as industrial unions, try to organize all workers so as to gain monopoly power in the selling of labor. A successful inclusive union would be able to secure a wage rate for its members higher than the equilibrium wage (and similar to a minimum wage – see Figure 10.5).
Exclusive (or craft) unions attempt to restrict membership and reduce the supply of labor. Successfully restricting labor supply will result in higher wages for union members (see Figure 10.4). Exclusive unions restrict supply by limiting (through numbers, fees, or credentials) the number of workers available for hire in a particular profession. They also tend to support immigration restrictions, reduced child labor, mandatory retirements, and a shorter workweek.
10-12 What is meant by investment in human capital and compensating wage differentials? Use these concepts to explain wage differentials.
Investment in human capital is any action that improves a worker’s skills and abilities, i.e., increases the productivity of workers. Workers with more human capital will have higher MRPs, meaning the demand for these workers will also be greater than for those with less human capital. Greater demand will, ceteris paribus, result in higher wages for more skilled (and productive) workers.
Compensating wage differentials refer to the variety of nonmonetary factors that explain why otherwise identical workers would be willing to accept different wages. Jobs that are more unpleasant (trash collection) or dangerous (high-rise construction worker) will tend to pay a higher wage than jobs that are more enjoyable and/or less risky. Similarly working all day in the hot sun or working the graveyard shift will tend to draw a higher wage than working in an air conditioned facility during a regular 9 to 5 workday.
10-13 Why might an increase in the minimum wage in the United States simply send some jobs abroad? Relate your answer to elasticity of labor demand.
An increase in the minimum wage will decrease the quantity hired in the domestic labor market; how much quantity falls depends on the elasticity of labor demand. If labor demand is relatively elastic, this may be because firms can easily substitute foreign labor for domestic workers. Under these circumstances, an increase in the minimum wage would send jobs abroad.
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