Question 1: (25 Total Marks) Consider the following two equations of supply and demand that characterize the labour market: W=2007QL

d W=50+3QL s

W is measured in dollars per unit of labour. QL is the quantity of labour. Initially, assume perfect competition in both the product and labour market.

a) Illustrate this labour market in the diagram below. (2 marks)

b) If labour is not organized and there is no labour monopsonist, what is the competitive wage and the number of units of labour hired? Identify these on your diagram. (2 marks)

c) Suppose labour organizes in order to exercise monopoly power over the wage with the goal of maximizing economic rent to its workers. What will be the wage the union will bargain for, and what will be the quantity of labour hired at that wage? Identify these on your diagram. (4 marks)

d) What is the magnitude of the dis-employment effect that results? (1 mark)

e) How much unemployment is there at the union wage? (1 mark) 3

f) How much economic rent is received by the union members? (Recall when we are talking about a resource such as labour, economic rent is the same as the producer surplus.) (2 marks)

g) What are the total wage payments (WxQL) to the union members? (2 marks)

h) Alternatively, the union may wish to maximize total wage payments to its members, rather than economic rent. If this is the case, what is the union wage and quantity of labour hired? Identify these on your diagram. (4 marks)

i) In this alternative case, how much economic rent is received by the union members? (2marks)

j) In this alternative case, what are the total wage payments to the union members? (2 marks)

k) Under what circumstance might the union take the second approach? (3 marks)