Question

The Acme Giant Rubber Band Company has the following inverse demand and supply curves of workers. ? = 200 − 0.25? ? ? = 50 + 0.5? ? where W is the annual wage rate (in thousands), ? ? is the number of workers demanded at wage W and ? ? is the number of players willing to play at the wage W. The company is in the desert. It is isolated and far away from any cities and is the sole employer for a radius of 50 miles. Does this firm have monopsony power? Explain why. a) Find the optimal number of workers Acme will hire and the wage. Draw your result. b) What is the surplus for the company and the workers? c) Calculate the deadweight loss. Suppose the workers form a union. The workers are bound by their union contract, and the only way to work is to be a union member. d) Explain why the union is a cartel (a monopoly consisting of the workers) e) The union members decide to go for the highest wage possible. What is the wage that the Union members will try to get, and the optimal number of players? Draw your result. f) What is the surplus for the company and the workers if this wage is obtained? The union quickly learns that the company’s owners are resistant to a wage increase. The union’s president says that they should consider striking when their contract expires. He has good information about the impact of the decisions on their wages. They can do nothing and choose to accept the monopsony wage, or they can strike. If they strike, the firm can shut down, fight them in court to break up the union, or have an arbitrator have them reach a settlement for a higher wage. Here are the payoffs (Union Payoffs are first, then the firms) Do nothing (No strike): (monopsony wage, $500) if they strike the firm can: Shut Down (-10, 100), Fight the Union (109, 400), Settle (150,300) g) Set up this game in extensive form. Will the union strike? Is there a Nash equilibrium? Explain. h) Can the firm threaten to shut down? Is this a credible threat? Explain why or why not. Suppose the union president makes further calculations after assessing the political environment and determines the probability of Acme, shutting down, fighting or settling. They are 10%, 50% and 40% respectively. If workers only care about the expected payoff, i) Will they strike? Explain your answer including the expected wage and employment level if they strike or do not strike.

Answer 1

Yes this firm has monoposony power because it is the sole employer.

A) W=50+0.5L

MC=50+L

Monoposony equilibrium at , demand Equal to MC,

50+L=200-0.25L

1.25L=150

L=150/1.25=120

W=50+0.5*120=50+60=110

B) worker surplus=1/2*110*(110-50)=55*60=3300

MC at monoposony equilibrium,=50+120=170

Company surplus=1/2*120*(200-170)+(170-110)*120=60*30+60*120=8100

C) Perfect competition equilibrium at supply= demand

200-0.25L=50+0.5L

L=150/0.75=200

Deadweight loss=1/2*(200-120)*(170-110)=40*60=2400

D)when different sellers of same good come together and form a organization and cooperate to maximize their Profit, that's organization is called cartel.

Same thing apply with workers union.they act cooperatly to increase their wages and get benefit from it.

That's why unions is a form of cartel in Labour market.