Monopsony and the Minimum Wage. A monopsonist firm operates according to the production function: Y = L where L is labor. Workers supply labor to the firm according to the following labor supply function: L = (alpha)(w)
1. Write down the full the profit function for the firm. Remember that the firm takes into account the labor supply on the wage (or alternatively the wage on labor supply).
2. Solve for the firm’s choice of employment and the resulting wage.
3. Solve for firm profits.
4. Now the government sets a minimum wage of w = (3p/4) where p is the price of firm output. Set up the Lagrangian for profit maximization.
5. What is employment at the minimum wage. Compare your results to employment without the minimum wage? Explain your results.