151ps3 - Economics 151a Spring 2008 Homework 3 Solutions...

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Economics 151a Spring 2008 Homework 3 – Solutions 11-1. Suppose the firm’s labor demand curve is given by: w = 20 - 0.01 E , where w is the hourly wage and E is the level of employment. Suppose also that the union’s utility function is given by U = w × E . It is easy to show that the marginal utility of the wage for the union is E and the marginal utility of employment is w . What wage would a monopoly union demand? How many workers will be employed under the union contract? Utility maximization requires the absolute value of the slope of the indifference curve equal the absolute value of the slope of the labor demand curve. For the indifference curve, we have that . The absolute value of the slope of the labor demand function is 0.01. Thus, utility maximization requires that . Substituting for E with the labor demand function, the wage that maximizes utility must solve , which implies that the union sets a wage of $10, at which price the firm hires 1,000 workers.
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11-2. Suppose the union in problem 1 has a different utility function. In particular, its utility function is given by: U = ( w - w * ) × E where w * is the competitive wage. The marginal utility of a wage increase is still E , but the marginal utility of employment is now w w * . Suppose the competitive wage is $8 per hour. What wage would a monopoly union demand? How many workers will be employed under the union contract? Contrast your answers to those in problem 1. Can you explain why they are different? Again equate the absolute value of the slope of the indifference curve to the absolute value of the slope of the labor demand curve: .
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This note was uploaded on 10/15/2009 for the course ECON 151A taught by Professor Miller during the Spring '06 term at UC Davis.

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151ps3 - Economics 151a Spring 2008 Homework 3 Solutions...

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