Question

Ms.Becky Cottonowns a large garment [clothes]factory on an isolated island in the Pacific Ocean. Ms. Cotton’sfactory is the only source of employment for most of the several thousand islanders.

The supply curve for garment workers is given by L = 80W, where W = wage rate;and the marginal resource cost of labor (MRCL) is given by MRCL= L,where L = number of workers hired [or employed].60

Assume thatMs.Cotton’slabor demand curve (DL =MRPL) is given byL = 400 –40 MRPL.

a.How many workers will Ms.Cottonhirein orderto maximizeprofits?

b.What wage rate will be paid to the workers?Is this the wage rate what each worker is “worth” or deserves? Explain.

c. If there were twentyother garment factories on the island,would the wage rate paid and the number ofworkershired have beendifferent? Whyor why not?Explainfully.

Answer 1

Monopsony eqm

A) at eqm, MRPL = MRCL

40MRPL= 400-L

MRPL = (400/40) - L/40

= 10-L/40

10 -L/40 = L/60

10= L( 1/40 + 1/60)

L*= 240

B) w = from supply curve

= L/80

= 240/80

= 3

the wage rate is not worth,  

Monopsonist always pay the worker , that wage which is not worth , bcoz this wage paid to last worker is lower than value of MRCL

c) as the number of firms employing labor rises, then wage will rise & number of workers employed will also increase