Question

Think about what the "marginal benefit from labor" might mean: it's simply the marginal revenue product of labor! This means that if the price of a company's output decreases, its demand for workers will also decrease (i.e., the employer's demand curve will shift down).

Now go back to the 20 small employers from the beginning of problem 2 . Instead of Walmart putting them out of business, suppose that they face competition from Amazon, and thus have to charge less for their goods (but Amazon does not hire anyone in that location). If the price of their output decreases by 40%, their new marginal benefit curve will shift down by 40%:MB′(Q)=MB(Q)(1−40%)=15−0.3Q.

a) Find the competitive level of employment and wages in this market, and compare to the answers you found at 2a ) and 2b )
[optional] Is there a percentage drop in the price of output goods for which the competitive wage would match the monopsony wage from 2
b) ? [You are looking for x, so that when MB(Q)=(25− 0.5Q)(1−x), we find P*
= P 2b monopsony]

​b) Continuing with the scenario where MB′ (Q)=15−0.3Q, find the monopsony price and quantity. Is the federal minimum wage finally relevant?

Answer 1

A firm's demand for labor in an imperfectly competitive output market is determined by the value of the labor's marginal revenue product. The competitive level of employment and wages can be determined by finding the equilibrium point where the market wage is equal to the marginal benefit from labor. The monopsony price and quantity can also be found using the marginal benefit curve.

Step-by-step explanation:

A firm's demand for labor in an imperfectly competitive output market is determined by the value of the labor's marginal revenue product. The marginal revenue product is the marginal product of labor multiplied by the firm's marginal revenue. In this scenario, the competitive level of employment and wages can be determined by finding the equilibrium point where the market wage is equal to the marginal benefit from labor. The monopsony price and quantity can also be found using the marginal benefit curve. Whether the federal minimum wage is relevant depends on how it compares to the monopsony price.

To find the competitive level of employment and wages, we set the market wage equal to the marginal benefit from labor: 15 - 0.3Q = P*.

To find the monopsony price and quantity, we set the marginal cost of labor equal to the marginal benefit from labor: MC = 15 - 0.3Q.

If the competitive wage matches the monopsony wage from 2b, we set the marginal benefit from labor equal to the monopsony wage from 2b: 15 - 0.3Q = (25 - 0.5Q)(1 - x).