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4. Monopsony: While monopoly refers to a single seller, monopsony means there is a single buyer. In this case the buyer is not a price

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4. Monopsony: While monopoly refers to a single seller, monopsony means there is a single buyer. In this case the buyer is not a price taker but rather has market power. We explore this in the context of a company town where there is a single employer. Let us consider the historical example of Braddock, PA with Carnegie Steel. Suppose that the supply of labor (number of workers) as a function of the wage is l(w) = 1000w. = Suppose, for simplicity, that labor is the only input in production and that Carnegie Steel is a price taker for steel and can sell as much as it wants a price of $4 per ton. Suppose the production function is such that q(1) 12 1 - 4000 tons of steel are produced with l units of labor. If Carnegie were a price taker in the market for labor it's profits would be 12 TT (w,1) = 49(1) wl =4 wl. 1000 As a monopsonist setting wage determines labor, l(w), so firm's profits as a function of the wage they set is then 7(W) = 41(w) = l(w) 1000 wl(w) = 4000w 2000w2. = (a) Solve for the wage Carnegie Steel would set to maximize profits and the number of hours worked. (b) Suppose the government sets a minimum wage of $1.50? What would happen to the amount of labor hired by Carnegie Steel? What if the minimum wage was set at $3? Explain. (C) In the 2021 Nobel Prize in economics was given, in part, for a famous study on the effect of minimum wage on employment showing that (small) increases in the minimum may not decrease employment. How would you interpret this finding? 4. Monopsony: While monopoly refers to a single seller, monopsony means there is a single buyer. In this case the buyer is not a price taker but rather has market power. We explore this in the context of a company town where there is a single employer. Let us consider the historical example of Braddock, PA with Carnegie Steel. Suppose that the supply of labor (number of workers) as a function of the wage is l(w) = 1000w. = Suppose, for simplicity, that labor is the only input in production and that Carnegie Steel is a price taker for steel and can sell as much as it wants a price of $4 per ton. Suppose the production function is such that q(1) 12 1 - 4000 tons of steel are produced with l units of labor. If Carnegie were a price taker in the market for labor it's profits would be 12 TT (w,1) = 49(1) wl =4 wl. 1000 As a monopsonist setting wage determines labor, l(w), so firm's profits as a function of the wage they set is then 7(W) = 41(w) = l(w) 1000 wl(w) = 4000w 2000w2. = (a) Solve for the wage Carnegie Steel would set to maximize profits and the number of hours worked. (b) Suppose the government sets a minimum wage of $1.50? What would happen to the amount of labor hired by Carnegie Steel? What if the minimum wage was set at $3? Explain. (C) In the 2021 Nobel Prize in economics was given, in part, for a famous study on the effect of minimum wage on employment showing that (small) increases in the minimum may not decrease employment. How would you interpret this finding

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