Temple University
Department of Economics

Labor Makets and Efficiency

Name Key

The Corvallis Corporation produces currants for the world market.  There are many firms in many locations that produce currants and many consumers.  However, Corvallis is the only employer of unskilled labor in their local job market.  The market for unskilled labor in the town of Corvallis is described by the following pair of equations:

VMP = 20 - .001 L  Demand

W = .0005 L  Supply

There is an unlabelled graph at the bottom of the page that may help you work through the following questions.

1. In the boxes to the right of the equations indicate which is the supply curve and which is the demand curve.

2. If Corvallis Corporation offers a wage of \$10 how many laborers will show up for work?   20,000What will be the firm's total wage bill? \$200,000

3. If Corvallis Corporation offers a wage of \$20 how may laborers will show up for work?  40,000What will be the firm's total wage bill? \$800,000

4. What is the algebraic equation for Corvallis Corporation's total wage bill? Fill in the boxes that follow:

 Intercept 'Slope' Variable exponent Wage bill = 0   + .0005 L 2

5. What is the equation for marginal labor cost for the Corvallis Corporation? Fill in the boxes that follow:

 Intercept + 'Slope' Variable exponent MLC = 0 .001 L 1

6. What amount of labor will be hired by the Corvallis Corporation?

.001L = 20 - .001L

10,000

7. What wage will be paid by the Corvallis Corporation?

W = .0005(10,000) = 5

8. What is the marginal cost of the last unit of labor hired by the Corvallis Corporation?

MLC = .001(10,000) = 10

9. At the amount of labor hired by Corvallis Corporation what is the surplus that accrues to the corporation as a result of its position as a monopsonist?

1/2 (20-10)(10,000) + (10-5)(10,000) = 100,000

10. At the amount of labor hired by Corvallis Corporation what is the surplus that accrues to the workers?

1/2 (5)(10,000) = 25,000

11. What is total economic surplus when Corvallis is a monopsonist in the labor market?

125,000

12. Candace Capricio, an economist at Cornwallis City College in Corvallis, has studied the local labor market for unskilled workers. In her studies she has identified the supply curve and demand curve for labor referred to at the beginning of the exercise.  She knows that economic efficiency dictates that prices and quantities should be determined in competitive markets, including labor markets.  She convinces Corvallis City Council of the importance of her idea and the council legislates a wage rate consistent with the competitive outcome.  In effect Corvallis Corporation is being compelled to behave as though it is just one firm in a competitive labor market.  What wage rate did City Council legislate and what amount of labor will be hired at that rate?

Wage =       Employment  =

.0005L = 20 - .001L

L = 13,333.33

W = 6.67

13. At the competitive equilibrium referred to in question 12 what is the surplus that accrues to labor?

1/2 (6.667)(13,333.33) = 44,446

14. At the competitive equilibrium referred to in question 12 what is the surplus that accrues to Corvallis Corporation?

1/2(20-6.667)(13,333.33) = 88,866

15. What is the amount of total economic surplus at the competitive equilibrium you have been working with in questions 12, 13 and 14?

133,333

16. What is the gain in economic surplus that results from compelling Corvallis Corporation to behave like a firm in a competitive labor market rather than as a monopsonist?

8,333

17. Compelling Corvallis Corporation to behave as though it is hiring unskilled workers in a competitive labor market involves many complex calculations difficult for City Council to understand.  Instead they opt for a minimum wage of \$8.00 per hour.  At the minimum wage what quantity of labor will be employed by Corvallis Corporation?

8 = 20-.001L

12 = .001L

L = 12,000

18. At the minimum wage of \$8 how much labor will be supplied to the market?

8 = .0005L

L = 16,000

19. At the minimum wage how much labor is offered to Corvallis Corporation but does not find employment?

4,000

20.  At the minimum wage and corresponding level of employment, how much surplus accrues to Corvallis Corporation?

1/2 (20-8)(12,000) = 72,000

21. At the minimum wage and corresponding level of employment, how much surplus accrues to unskilled workers?

1/2(6)(12,000)+(8-6)(12,000) = 60,000

22. Under the minimum wage law what is the total amount of economic surplus?

132,000

23. Measured against the competitive outcome, what is the cost of relying on a minimum wage instead of compelling Corvallis Corporation to behave in a competitive fashion?

133,333-132,000 = 1,333