Question

1- Suppose a perfectly competitive labour market has a demand curve of LD= 120 – 2w and a supply curve of LS= 8w, where W is the wage rate is dollars and L is the quantity of labour in person-hours
A. What are the equilibrium values of the wage and employment?
B. Suppose the government imposed a minimum wage of $14 per hour, now what are the equilibrium values of the wage and employment?
C. Repeat part (a) assuming now that the market is a monopsony?
D. Repeat part (b) assuming now that the market is a monopsony?

Answer 1

A)

$$120-2w=8w$$

$$10w=120$$

$$w=12$$

$$L=8\times12=96$$

B)

$$L_S>L_D$$

$$L=120-2\times14=92$$

C)

$$MRP=MC_L$$

$$MC_L=w(1+\frac{1}{E_s})$$

$$\frac {9}{8}w=120-2w$$

$$w=38.4$$

$$L=43.2$$

D)

$l_{MIN}=14$

$L=8 \times14=112$