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Unformatted text preview: BUAD 351 - Economic Analysis for Business Decisions Homework 5 due: Tue 04/14/2009 PART (i): multiple choice please provide the answers in the following box: question 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 answer a b d a a c b a a a a,b b c b a PART (ii): Longer Questions 1. You are a monopsonist employer in a small rural town (say, you operate a large steel mill). 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? Your total wage bill (total expenditure) is L ¡ W ( L ) : From the supply, we get that W ( L ) = L + 2 so TE ( L ) = L (2 + L ) : The marginal expenditure is thus 2 + 2 L: The surplus-maximizing choice satis&es 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)? Socially e¢ cient level equates marginal cost with marginal bene&t, or supply equals demand: 20 & 2 L = L + 2 ! L efficient = 6 ; with 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, the government could set a price ¡oor (wage is not allowed to fall below a certain level) at W floor = 8 ; which would eliminate the ability of the monopsonist to suppress the wages by strate- gically withholding the demand for labor....
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