Consider the following supply and demand equations for labor in a given industry
ID: 1199076 • Letter: C
Question
Consider the following supply and demand equations for labor in a given industry:
Supply of Labor: W = .25L
Demand for Labor: W = 12 - .25L
a. If a minimum wage of $8 is applied to this market, how many people will lose their jobs because of minimum wage? How many will be added to the unemployment rolls?
b. If the labor market given above is for a community in which monopsonistic labor market conditions apply, what will be the wage rate paid by the monopsonistic profit-maximizing firm before the minimum wage is applied? (Assume part-time employment is possible.) How many workers will be employed?
c.If a $5 minimum wage is now applied to the monopsonistic market described above, how many laborers will the firm employ? As a policy maker, would you support a minimum wage law?
Explanation / Answer
To find the wage level and units of labor drived through market forces lets equate supply and demand function:
.25L = 12 - .25L
L = 24 labors
and w = .25 * 24 = $6
thus wage rate is $6 and 24 labors are employed.
a) If minimum wage is $8, then lets put w = 8 into demand function,
8 = 12 - .25L
L = 16
only 16 labors will be employed then thus 24 - 16 = 8 labors will loose their jobs because of minimum wage.
Now lets put 8 as wage rate in suppy function:
8 = .25L
L = 32
thus 32-16 = 16 will be added to the unemployment rolls.
b) A profit-maximizing monopsonist equates marginal factor cost with either the value of the marginal product, or the marginal revenue product, to determine the amount of labor to employ. Hence the wage rate would be equal to the firm's marginal revenue product.