ECON4006 Midterm Review

Week 2 Supply of Labour

The Theory of Decision to Work

Week 6 Monopsony

1. Wage Discrimination in Monopsony Market

1.1 The Basic Model

In this picture, the Demand Curve is $MRPL$, the Supply Curve is $w_s$

When it is in the Perfect Competition , the equilibrium would be $E_0$. However, it is the monopsony case.

1.2 The Mathematical Model of Monopsony

With perfectly competitive labor market, $w$ is given. Define the production function as $Q=F(K,L)$ , the profit function of the firm should be given by:

$$\Pi =Ma{x}_{L,K}pF(K,L)-wL-rK$$

With no Externality, social $MC$ of recruiting labor $=w$ while the social $MB$ of recruiting labor $=MRPL$ , which reflects to Pareto Optimality

• Marshallian
• Extra Job signaling 1
• Slutcky Equation