Question

Assume that in the market for labor for college football, you have the following demand, supply and marginal cost curves:

WD= 190 - 8Q

WS = 9Q - 70

MC = 18Q - 70

Assume that the NCAA can act as a monopsonist when negotiating labor contracts. What is the value of welfare transferred from athletes to the NCAA? Deadweight loss value?

Answer 1

Competitive equilibrium is when labor demand = labor supply

190 - 8Q = 9Q - 70

Q = 15.29 and wage Wc = 9*15.29 - 70 = 67.61

Monopsony equilibrium is when labor demand = MC

190 - 8Q = 18Q - 70

260 = 26Q

Q = 10 and monoposony wage is Wm = 9*10 - 70 = $20.

See that monopsony wage Wm < Competitive wage

Welfare  transferred from athletes to the NCAA = loss in labor surplus = 0.5*(67.61 - 20)*(10 + 15.29) = $602

DWL = 0.5*(wage difference)*(quantity of labor reduced) = 0.5*(67.61 - 20)*(15.29 - 10) = 125.92