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Unformatted text preview: BUAD 351 - Economic Analysis for Business Decisions Homework 5 PART (i): multiple choice question 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 answer a d b b a c d c a a c d b d c b d b b c PART (ii): SHORT ANSWERS 1. You are a monopsonist employer in a small rural town (say, you operate a large steel mill that employs 80% of the local workers). Your total bene&t from hiring L workers (measured in hundreds) is TB ( L ) = 20 L & L 2 ; so that your marginal bene&t (your demand curve) is MB ( L ) = 20 & 2 L: The supply of labor is competitive and given by L S = W & 2 ; where W is the wage rate (measured in thousands of dollars per year). (i) given your market power, how many workers would you employ? The net value of hiring L workers is TB ( L ) & TE ( L ) = & 20 L & L 2 & W ( L ) L: Since W = L S + 2 from the labor supply, we have TB ( L ) & TE ( L ) = & 20 L & L 2 & ( L + 2) L; giving MB ( L ) = ME ( L ) ! 20 & 2 L = 2 + 2 L ! L = 4 1 2 (ii) what would be the socially optimal level of employment (and the associated wage)? The socially optimal level of employment solves demand equals supply, so that 20 & 2 L = L + 2 ! L = 6 ;W = 8 (iii) Could the government restore e ciency by establishing a price ceiling or a price oor? If so, what would be the socially optimal ceiling or oor? Yes, with a price oor. The reason why the monopsonist is choosing an ine ciently low level of employment is because he is able to suppress the wage he needs to pay to his employees that way. As a result, the perceived marginal cost of hiring an extra worker is higher than the wage paid (because wage on the inframarginal workers needs to increase as well). By setting a price oor, the &rm is not allowed to o/er a lower wage than the oor, which eliminates this temptation. Setting W floor = 8 would restore e ciency. 2. Discuss the di/erences between perfect and imperfect price discrimination and the bene&ts of each to a monopolist. Perfect price discrimination is possible when a monopolist knows the consumers willingness to pay for every unit he sells and can charge a di/erent price for each unit. Perfect price discrimination maximizes aggregate surplus, although consumers receive no surplus at all. Perfect price discrimina- tion is often not possible because a monopolist does not know the consumers willingness to pay for...
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- Spring '07