Intermediate Microeconomics and Its Application 12th Edition by Walter Nicholson,Christopher Snyder

Exercise 14

Carl the clothier owns a large garment factory on a remote island. Carl's factory is the only source of employment for most of the islanders, and thus Carl acts as a monopsonist. The supply of garment workers is given by
where L is the number of workers hired and w is their hourly wage. Assume also that Carl's labor demand (marginal value product) is given by
MVP L = 10 - 0:025L
a. How many workers will Carl hire in order to maximize his profits, and what wage will he pay?
b. Assume now that the government implements a minimum-wage law covering all garment workers. How many workers will Carl now hire, and how much unemployment will there be if the minimum wage is set at $3 per hour? $3.33 per hour? $4.00 per hour?
c. Graph your results.
d. How does the imposition of a minimum wage under monopsony differ in results from a minimum wage imposed under perfect competition (assuming the minimum wage is above the market-determined wage)?