Please answer ALL questions, draw a graph when/if it is related to the nature of the problem, and provide detailed explanations supporting your answers.

How Wages Are Determined in Labor Markets Part A: Perfect Competition & Monopsony The graph below illustrates a perfectly competitive labor market. Labor is measured in thousands of labor hours. Answer the following questions based on this graph. A Perfectly Competitive Labor Market 1. What are the equilibrium wage and number of labor hours in this labor market? $13.00 $12.00 $11.00 - S $10.00 $9.00 2. Why is the demand for labor downward sloping? What $8.00 explains this relationship? Explain. $7.00 WAGE RATE $6.00 $5.00 $4.00 $3.0 $2.00 3. Why is the supply of labor upward sloping? What explains $1.00 D this relationship? Explain. 2 3 5 6 LABOR UNITS (1,000s) 4. Suppose the government sets a minimum wage of $10.00 in the labor market shown in graph. Draw a line on your graph indicating a price floor for labor. a) Will there be a shortage or surplus of labor? b) How large is this shortage or surplus? c) Shade in the area of the labor shortage/ surplus on the graph above. 5. Are some workers in the market made better off because of the minimum wage? Explain. 6. Are some workers made worse off because of the minimum wage? Explain. 7. Would skilled or unskilled workers be more likely to lose their jobs because of a minimum wage law? Explain. Google "unskilled v. skilled labor" if you are unfamiliar with these terms. 8. If the demand for labor were more inelastic, would more or fewer workers lose their jobs because of the minimum wage? Explain. (*hint* draw a more inelastic demand curve and then analyze the visual change in the equilibrium quantity/surplus/shortage Part B: A Monopsonistic Labor Market Assume the Ross Textile Company is a monopsony in a small town. Because it faces the upward sloping market supply of labor, Ross must raise its wage if it wants to increase the quantity supplied of workers. The company pays the same wage to all its employees, so if it increases the wage to attract another worker, the marginal resource cost of that worker is greater than the wage paid to the worker: MRC > Wage. A Monopsonistic Labor Market The table below shows the supply of labor to Ross. Complete the $10.00 table and then plot/draw/label the Ross Co.'s labor supply (S) curve $9.50 and MRC curve. $9.00 $8.50 $8.00 Labor Supply Schedule $7.50 $7.00 Workers Wage Total labor cost Marginal resource cost $6.50 $5.00 $5.00 $6.00 $5.50 2 $5.50 $11.00 $6.0 $5.00 $4.50 MAP 3 $6.00 $4.00 4 $6.50 $3.50 $3.00 $7.00 $9.00 $2.50 6 $7.50 $45.00 $2.00 $1.50 $1.00 9. Explain why the MRC curve is above the S curve? (*hint* what is $0.50 fundamentally different about an imperfect market for labor that LABOR UNITS ( 1,000s ) explains this trend on the graph?) 10. What is more important to Ross as it considers hiring another worker-the wage paid to the worker or the worker's MRC? Explain why. 11. How many workers will Ross hire? What wage will it pay to each of these workers? 12. Is the MRP curve the firm's D curve for labor? 13. What would be the equilibrium wage and employment if this were a perfectly competitive market? 14. How do these values (from question 13) compare with those of the monopsonist? 15. If any firm hires the amount of labor at which MRP = MRC, is it also true that the firm is producing the output level at which MR = MC? a) Does the answer depend on whether the firm is perfectly competitive or monopolistic in the goods market, or whether it is perfectly competitive or monopsonistic in the labor market? Explain