Kalamma, a cloth trader owns a large garment factory on an isolated island. Kalamma's factory is the only source of employment for most of the islanders, and thus she acts as a monopsonist. The supply curve for garment workers is given by: L =90w, where L is the number of workers hired and w is their hourly wage. Assume also that Kalamma's labor demand (marginal revenue product) curve is given by: L = 500 - 50MRPL
a) How many workers will Kalamma hire to maximize her profits, and what wage will she pay?
b) Assume now that the government implements a minimum wage law covering all garment workers. How many workers will Kalamma now hire, and how much unemployment will there be if the minimum wage is set at $5 per hour?
c) Graph your results.
d) How does a minimum wage imposed under monopsony differ in results as compared with a minimum wage imposed under perfect competition? (Assume the minimum wage is above the market-determined wage.)