Question

Apple Mountain Pie Company makes apple pie filling for the consumer market. They are the only firm in the town of Walnut Hills and they, therefore, face an upward sloping labor supply curve: Es = 20w − 120, where E is the number of workers hired each hour and w is the hourly wage rate. Thus, Apple Mountain faces an upward sloped marginal cost of labor curve of MCe = 6 + 0.1E. For simplicity, assume a perfectly elastic labor demand curve. Each hour of labor produces 10 cans of pie filling that can be sold at $5 per can. There are no other costs of production for Apple Mountain. a. How many workers should Apple Mountain hire each hour to maximize profits and at what wage? b. Now assume that a wizard moves to Walnut Hills who can determine, just by looking at \them, what each person’s reservation wage is in the town. If he decides to help out the Apple Mountain Pie Company so that they can perfectly discriminate, what would be the number of workers and the wage offered by the pie company now? c. Compare the wages and levels of employment. Is this what we would expect from a non-discriminating monopsonist vs. a perfectly discriminating monopsonist?

Answer 1

a) A monoponist will hire labor upto the point where marginal resource cost equals the labor demand. Labor demand here is MRP curve which is flat at a wage rate of 10*5 = $50. At this wage rate, it will hire

50 = 6 + 0.1E

E = 440.

The wage rate is determined by supply function.

440 = 20w - 120

W = 28.

A total of 440 workers Apple Mountain is hiring each hour to maximize profits and at a wage rate of $28

b) Company will now hire a number of workers at which labor demand equals labor supply and will pay each worker his resevation. The number of workers will be E = 20*50 - 120 = 880 and wage rate is fixed at $50.

c) When we compare the two results we see that the labor demand is perfectly elastic. For a non discriminatory monopsonist, the wage rate and the employment both are lower. Ideally wage should be lower for a non-discriminating monopsonist and labor units should be more.