23.5 Business and Policy Application: Labor Unions Exercising Market Power: Federal antitrust laws prohibit many forms of collusion in price setting between firms. Labor unions, however, are exempt from antitrust laws and are allowed to use market power to raise wages for their members.

A. Consider a competitive industry in which workers have organized into a union that is now renegotiating the wages of its members with all the firms in the industry.

a. To keep the exercise reasonably simple, suppose that each firm produces output by relying solely on labor input. How does each firm’s labor demand curve emerge from its desire to maximize profit? Illustrate a single firm’s labor demand curve (with the number of workers on the horizontal axis). (Note: Since these are competitive firms, this part has nothing to do with market power.)

b. On a graph next to the one you just drew, illustrate the labor demand and supply curves for the industry as a whole prior to unionization.

c. Label the competitive wage w* and use it to indicate in your first graph how many workers an individual firm hired before unionization.