Department of Economics
Labor Makets and Efficiency
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
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?
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:
5. What is the equation for marginal labor cost for the Corvallis
Corporation? Fill in the boxes that follow:
6. What amount of labor will be hired by the Corvallis Corporation?
.001L = 20 - .001L
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
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
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
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?
.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?
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?
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
8 = .0005L
L = 16,000
19. At the minimum wage how much labor is offered to Corvallis Corporation
but does not find employment?
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
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
133,333-132,000 = 1,333