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3240Sol to Assigned Questions (Ch7-9, Chs13, Ch15).pdf

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ECON 3240
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Solutions to Assigned Questions Ch79 Chs13 Ch15Ch7 1 This statement is true if the prevailing market wage is above the wage that would prevail in a competitive equilibrium In a competitive equilibrium there is no monopsonistic power in the labour market and the equilibrium wage is determined by the intersection of total labour demand and total labour supplyOn the other hand if the prevailing market wage is below above the wage that would prevail in a competitive equilibrium due to the exercising of monopsony power then the statement is falseThis is explained thoroughly in the subsection entitled Expected ImpactMonopsony in the Labour MarketThere is an intuitive explanation a formal exposition with graphical analysis and an example with figuresNote that this somewhat tricky resultthat the implementation of a minimum wage can actually raise the level of employment given a monopsonyapplies to a particular range of wages This range is between the monopsony wage and the competitive equilibrium wageSince one would never observe a wage lower than a monopsony wage except for the case of perfect wage differentiation the case of a minimum wage bellow the monopsony wage is irrelevant 2 We are told that stars are in short supply so the supply curve for them is probably steep and inelasticIf the supply of grinders is unlimited then the supply curve is highly elastic and in the extreme is perfectly inelastic2a This situation is a monopsonyIn the case of the stars for which the supply curve is upward sloping the team can exploit some monopsony power and thus pay wages to the stars that are below competitive levelsThe marginal labour cost curve lies above the supply curve of labour The intersection of the marginal labour cost curve and the demand curve for labour gives the equilibrium level of employment and the wage is determined from the labour supply curve point that is consistent with that level of employmentIn the case of the nonstars if the supply is perfectly elastic the monopsony equilibrium is no different from the competitive one as the marginal labour cost curve coincides with the supply curve of labourIn this case the wage differential between the stars and the nonstars is lower than it would be in the absence of monopsony power2b Given the institution of free agency the signing team no longer has monopsony powerWhen the contracts expire the labour market becomes competitiveFor both the stars and the nonstars the equilibrium wage is determined by the intersection of labour demand and labour supplyIt is under these conditions that we would expect for the differential between the two grades of players to be the widest2c This case is the intermediate case between cases a and bBecause there is free agency there is no monopsony powerThis means that the wages will be determined by the intersection of labour demand and labour supplyThe fact that revenue is shared however is likely to reduce the demand for stars to a level that
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