L23 - Imperfect Labour Markets

Question 1

What is a Monopsony?

Answer 1

When there is one large buyer of a good or service

Question 2

When are Employees wage makers?

Answer 2

-When they have a unique talent
OR
- When they create a union and threaten industrial action if demands not met

Question 3

What are the assumptions behind a Monopsony?

Answer 3

1) The firm operates in a perfectly competitive output market
2) The firms and workers (sellers of labour) have complete info
3) Workers are wage takers
4) Entry is free
5) The firm is a wage maker in the labour market (wage maker can influence wage at which it employs labour)

Question 4

What is the market structure for Monopsony?

Answer 4

Implied that workers equally productive and buyers and sellers fully informed

1) Many small sellers of labour
2) One large buyer

Question 5

When is the equilibrium under Monopsony?

Answer 5

It’s determined by the marginal input rule (MRPL= MCL)

One buyer, its supply curve is the market’s supply curve
So, its supply curve slopes upwards

This is also the average cost (ACL) curve: S = ACL = w (wage)

Question 6

What are the effects on Total Cost (TC) under a monopsony equilibrium?

Answer 6

1. another unit is employed at wage w, so TCL
   increases w
2. all other units are employed at a slightly higher wage, so TCL
   increases by sL where L represents the units employer at the lower wage, and s represents how much the wage increased (i.e. the slope of the supply
   curve)

So, MCL is higher than ACL because:
MCL = w + sL > ACL = w for any L > 0

Question 7

What is a discriminating monopsonist?

Answer 7

Where a monopsony can pay workers differing wages depending on their willingness to accept (WTA)

Under extreme circumstances:

1) The monopsonist knows each worker’s WTA
2) Can offer each worker an individual contract

Question 8

What is the effect of a discriminating monopsony on MCL?

Answer 8

To employ another unit of labour- the wage must rise- but only for the extra unit

Question 9

What is the effect of a discriminating monopsonist upon total cost (TCl)?

Answer 9

1. another unit is employed at the higher wage, so TCL
   increases

(2. all other units are employed at same wage, so no effect on TCL)

So, MCL is equal to ACL
(since TCL increases by the wage rate for the unit w = ACL)

Question 10

What are the assumptions for a Monopoly union?

Answer 10

1) Firm operates in a perfectly competitive output market
2) Firm and workers (sellers of labour) have complete info
3) Firms are wage takers
4) Entry for workers is free
5) Workers are wage makers (since each member part of a union)

Question 11

What are the assumptions behind the union itself (part of assumption 5)

Answer 11

Union sets minimum wage
interested in either:
1) Maximising wages for their members (insiders)
2) Maximising employment

Question 12

What is the market structure of a Monopoly Union?

Answer 12

Implies workers are undifferentiated and buyers and sellers fully informed.

a) One large seller (Union)
b) One large buyer (Firm)