Question 2: Monopsony (20 Points)
Courtesy of Brian Albrecht in the blog ”Economic Forces” on February 16th.
James Buchanan, Nobel Prize winner in economics in 1986, reacted to the Card and Krueger findings that a minimum wage increase might have increased em- ployment as follows:
The inverse relationship between quantity demanded and price is the core propo- sition in economic science, which embodies the presupposition that human choice behavior is sufficiently rational to allow predictions to be made. Just as no physicist would claim that “water runs uphill,” no self-respecting economist would claim that increases in the minimum wage increase employment.
Discuss this claim using the tools on monopsony developed in class. Do you agree with Buchanan’s claim that no self-respecting economists would claim that increases in the minimum wage increase employment?

A small province has a minimum wage of $12 per hour and the quantity demanded of minimum wage work or employment is 20 million hours. It proposes to increase the minimum wage by 25% to $15 per hour and you have estimated that the price elasticity of demand for minimum wage workers is -1.10. (For all the questions below show your caculations.)

a.What are the total wages paid to minimum wage workers before the increase? (Total wages paid = wage rate x number of hours worked) (or essentially: Revenue = P x Q)

b.What will be the percent change in the quantity demanded of minimum wage work if the minimum wage is increased by 25%?

c.What will be the number of hours of employment for minimum wage workers if the minimum wage is increased?

d.What will be the total wages paid to minimum wage workers after the increase in the minimum wage rate? (Total wages = wage rate x number of hours worked)

e.Would the proposal’s expected negative outcome for minimum wage workers (reduced earnings) be a concern if the price elasticity of demand were 0.65? Explain in a few words.

18. Which of the following is an example of a normative statement? a. If the price of a product decreases, quantity demanded increases. b. Reducing tax rates on the wealthy would be good for the country. C. If the national saving rate were to increase, so would the rate of economic growth. d. An increase in minimum wages will increase unemployment.

Raising the minimum wage increases the rate of unemployment. Positive or Normative statement