A monopsonist faces a labor supply curve given by LS = 300 + 0.01w , where w is
ID: 2495898 • Letter: A
Question
A monopsonist faces a labor supply curve given by LS = 300 + 0.01w , where w is the annual salary.
a. What is the lowest salary the firm can pay yet still induce one worker to want to work for the firm? What is lowest salary the firm must pay to induce two workers to work for the firm?
b. What is the marginal cost to the firm of adding a second worker given that it must pay all employees the same wage? Is this greater than, less than, or equal to the wage paid to each of the two workers?
c. In general, the marginal cost of hiring additional labor for this firm is given by MW C = 29, 900 + 200L. If the firm’s labor demand curve is given by LD = 398 0.01w, what is the profit-maximizing number of workers the monopsonist should hire? What is the salary the workers will be paid?
Explanation / Answer
a. lowest salary the firm can pay yet still induce one worker to want to work for the firm :-
LS = 300 + 0.01w
1 = -300 + 0.01w = $30100
lowest salary the firm must pay to induce two workers to work for the firm :-
LS = 300 + 0.01w
2 = 300 + 0.01w = 30200.
(b) as we know from part (a), wage to first labour when only one labour is employed in the firm is $30100 and wage of both the labour when 2 labours are employed in the firm is $30200.
therefore, marginal cost to the firm of adding a second worker given that it must pay all employees the same wage is = $30200 - $30100 = $100.
(c) LD = 398 0.01w and LS = 300 + 0.01w
the salary the workers will be paid;-
LD = LS
398 0.01w = 300 + 0.01w
w = $34900.
the profit-maximizing number of workers the monopsonist should hire
LD = 398 0.01w
LD = 398 0.01( 34900)
LD= 49 workers.
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