# ps3answerkey - UC Davis Department of Economics Fall 2006...

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1 UC Davis, Department of Economics Economics 151A Fall 2006 Professor Doug Miller Problem Set #3 --Answer Key Question 1 1. A. In a competitive market, minimum wages reduce unemployment True. In the model of labor demand with perfect competition, minimum wages lead to a decrease in employment and an increase in unemployment. (But note that if there is uncovered sector, then it’s possible that all the workers who are displaced by the MW in the covered sector would flow to the uncovered sector and be fully absorbed. Under this situation, then there won’t be an increase in unemployment. ) Ls MW W* L D L L MW L* B. In a regression analysis of labor supply on wages, if the coefficient on wages is statistically significant, then we know that wages have a large impact on labor supply. Uncertain. In a regression analysis, if the coefficient on wages is statistically significant, then it means the effect of wages on labor supply is not zero. So wages have impact on labor supply, but we can’t tell if the impact is large or not. Question 2 The competitive firm (employer B) will be more responsive to the price change. We can look at this two ways – mathematically and graphically. Mathematically Recall that all firms choose labor such that MRP L = MC L . For the competitive firm, MC L = w regardless of how many employees they hire, since a competitive firm takes the wage as given, For a monopsonist, the more people they hire, the higher the wage they have to pay. Both firms take price as given, since they are competitive in the output market. That means that the competitive firm sets MP L * P = w , while the monopsonist sets MP L * P = MC L , where

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2 dMC L dL > 0. Say price increases. The competitive firm will then hire more labor so that MP L decreases until the optimizaion condition again holds true. The monopsonist will follow similar logic, but as they hire more people, their MP L goes down and their MC L goes up. Thus the monopsonist has to hire fewer people to make the optimization condition hold again. Graphically Remember the labor choice for firms can be graphically represented by Here the marginal cost of hiring another worker for the competitive firm (MC C L ) is equal to the market wage, while the monopsonist faces an upward sloping marginal cost of labor curve (MC M L ). First off, we note that the monopsonist hires less labor than the competitive firm, which is exactly what we would expect. Now imagine the price of the output good increases.
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ps3answerkey - UC Davis Department of Economics Fall 2006...

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