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Explain how a monopsony market structure us affected by a price floor and what is the...

Explain how a monopsony market structure us affected by a price floor and what is the effect of the monopsony on the local economy?

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Answer #1

Initially the firm maximizes profit by employing Lm units of labour and pays a wage of w which is below the MRP. At the minimum wage rate L1 units of labour is supplied. To obtain any smaller quantity of labor, the firm must pay the minimum wage. That means that the section of the supply curve showing quantities of labor supplied at wages Wm becomes irrelevant. Now the MFC curve has two segments: a horizontal segment at the minimum wage for quantities up to L1 and the solid portion of the MFC curve for quantities beyond that. The firm employs labor up to the point that MFC equals MRP. So the employment increases to L2.

Hence a minimum wage could increase employment in a monopsony labor market at the same time it increases wages.

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