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We write the percentage markdown of wages below marginal revenue
product as (MRP - W)/W. For a profit-maximizing wage setter,
how does the size of this markdown depend on price elasticity
of supply? Why can this markdown be viewed as a measure of monopsony
power?
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Use Excel to help you answer this question (or do the math
if you are able). A wage-setting firm faces the following market
supply curve:
Ws(L) = 5+0.0025*L,
where L is units of labor per time period and W is wages, measured
in dollars per unit of labor. The firm's marginal product function
is given by MP(L) = 5-0.001*L. Finally, the firm sells it output
is a perfectly competitive product market at a price P* = $5
per unit. Assume that the firm seeks to maximize profit.
What is the firm's level of hiring and what wage rate will it
pay? Show your work.
Due 3 December.
Note: In order to receive a "credit" grade, your written
responses to the questions must be submitted by you personally (not
by some other student) by the start of class on the day it is due.
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