There exist two types of workers in the market, distinguished by some characteristic that has no relationship to labor market productivity. There are 100 types of 1 worker and 100 types of 2 workers. The productivity per hour worked of each type is equal to 2. The product price is fixed at p = 2. Each type of worker has the same labor supply function as in the previous problem, that is hi =1 + wi.
(a) Assume that the labor market is inhabited by a monopsonist. The monopsonist's production function is q = H1+ H2. The objective of the monopsonist is to maximize his utility, which is given by u = p(H1 + H2) - H2 - w1H1 - w2H2, where Hi= 100(1 + wi).
The term -H2 in the utility function of the monopsonist reflects a distaste for having employees of type 2. What are the monopsonist's utility-maximizing choices of w1 and w2?
(b) Say that the labor market becomes competitive in the following sense. Other firms enter the market that is simply profit-maximizers, that is, they have no distaste for hiring type 2 workers. What happens to the wage of type 1 and type 2 workers? What happens to the welfare of the (former) discriminatory monopsonist if he is obligated to offer employment to any individual willing to supply hours to the firm (that is, whether they are type 1 or type 2) at the competitive wage rates prevailing in the labor market?
There exist two types of workers in the market, distinguished by some characteristic that has no relationship to labor market productivity. There are 100 types of 1 worker and 100 types of 2 workers. The productivity per hour worked of each type is equal to 2. The product price is fixed at p = 2. Each type of worker has the same labor supply function as in the previous problem, that is hi =1 + wi.
(a) Assume that the labor market is inhabited by a monopsonist. The monopsonist's production function is q = H1+ H2. The objective of the monopsonist is to maximize his utility, which is given by u = p(H1 + H2) - H2 - w1H1 - w2H2, where Hi= 100(1 + wi).
The term -H2 in the utility function of the monopsonist reflects a distaste for having employees of type 2. What are the monopsonist's utility-maximizing choices of w1 and w2?
(b) Say that the labor market becomes competitive in the following sense. Other firms enter the market that is simply profit-maximizers, that is, they have no distaste for hiring type 2 workers. What happens to the wage of type 1 and type 2 workers? What happens to the welfare of the (former) discriminatory monopsonist if he is obligated to offer employment to any individual willing to supply hours to the firm (that is, whether they are type 1 or type 2) at the competitive wage rates prevailing in the labor market?
