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A non-discriminating monopsonist faces a labor supply curve with a constant elasticity
A non-discriminating monopsonist faces a labor supply curve with a constant elasticity. Suppose that the marginal cost of hiring an additional worker is always equal to 100 times the wage. That is
MCL=100W
Determine if the following statement is either True or False. A one percent increase in the wage leads to a
1/99 percent increase in labor supply; that is the elasticity of labor supply equals 1/99.
Expert Solution
The monopsonist faces the upward?sloping market supply curve; it is a wage?searcher rather than a wage?taker. If the monopsonist wants to increase the number of workers that it hires, it must increase the wage that it pays to all of its workers, including those whom it currently employs. The monopsonist's marginal cost of hiring an additional worker, therefore, will not be equal to the wage paid to that worker because the monopsonist will have to increase the wage that it pays to all of its workers.
Hence the statement is false since a one percent increase in wage will not suffice for 1/99 percent increase in labour supply since the function MC=100W is the cumulative wage function of the workers.
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