Running head: Holmen Final

1. Assume a monopsonistic labor market. Discuss the impact of the imposition of a binding mininmum wage.

According to McKenzie and Lee (2010) minimum wages imposed at the state and federal level are examples of price floors; a price (or wage) below which a specified good (labor) cannot be sold. If congress imposes a binding minimum wage that is above the equilibrium it creates a surplus of workers. A minimum wage above the equilibrium (Ec) shifts the demand curve (demand for employment) to the left represented by Em. The effects of a binding minimum wage can be both positive and negative. Workers that already employed will receive the benefits of a hirer rate of pay. On the other hand, this creates a surplus of workers who have entered the market because of the higher opportunity cost. There is a chance that those workers in the market at the present time could be replaced by those with a higher opportunity cost (Em2). The impact of mandating minimum wages depends on the firms ability to adjust nonmoney conditions at work, or fringe benefits. Typically, the firm will reduce fringe benefits or increase work demands to offset the effects of a binding minimum wage. Workers may choose to leave the market if the value of the loss of fringe benefits and greater work demands exceeds the higher rate in pay. That being said, the impact of a binding minimum wage can make both the workers and the employers worse off.

Monopsony and Minimum Wages.
Em2
Em2
Surplus of workers
Surplus of workers

2. Can ‘twisiting’ the pay structure at a firm (paying wages below the productivity of workers early in their tenure, then paying wages above the productivity of workers later in their tenure) be a rational compensation strategy?

It depends. Some workers see value in less compensatation if they receive less in pay they may receive more in other forms of compenstation such as flexible schedules or training. Overpayment InE
InE

In2
In2

In1
In1

Underpayment
Income

0 1 2 15 20 30 Years of employment
A ‘twisting’ payscale: * Does this strategy benefit firms? How?
The presumption is that the red line represents the productivity of the worker over the course of time. The gains for the firm is that the worker would have incentives to work hard and increase productivity for all workers. Companies need to maintain the credibility that they will follow through with overpayment later on. * Does it benefit workers? How?

Some workers are willing to take a lower payment if the underpayment is more than compensated by an overpayment later on. If they continue up the path they would reach the firms equilibrium price. For workers that accept the underpayment method they need some sort of insurance that they will continue to receive these incremental increases in their salary over the course of their career. Workers may also conclude that everone in the firm will have a gre that everyone in the firm will have a greater incentive to work harder. * Mandated retirement ages for workers are now illegal. Does this law promote the interests of workers? Why or why not?

The mandatory retirement will help those that are close to retirement hang on to their overpayment or prevent them from having their jobs cut, fired or demoted. For younger workers, it can mean that they will get a higher wage early in their careers but can expect minimal overpayments later on. However, there are good reasons for a mandatory retirement policy. It allows the firm to overpay and underpay workers for a short period of time and it also increases the profibility and interests of the firm.

3. Why are monopolies less efficient than purely competitive (or less monopolistic markets)? Explain: MC ATC Pm
Pm

Pc
Pc

MC=MR
MC=MR

ATC
ATC

D QC
QC
MR
MR
QM
QM

In a perfectly competitive market, the price will be at the equilibrium price. Under monopoly conditions the price will be higher and the quantity demanded will be lower. The monopoly will charge a price of PM to sell a quantity of QM. Monopolies are inefficient because the marginal value of each of these units (QM to QC) is greater than the marginal cost of producing those units. If the monopoly would increase its production to QC the consumer would be better off. The green arrow points to market inefficiency or consumer dead weight lost.
The monopoly will not produce QC because it recognizes that the cost is more than the revenue. The lack of competition forces consumers to buy the product at the set price by the monopoly. Since there is no competition for monopolistic firms, there is little need for innovation, which over time, limits their efficiencies. Monopolies are not motivated to find improved business or production models. The agency problem occurs as markets become less competitive. 4. How can MSAs (medical savings accounts) or HSA’s (Health Savings Accounts) reduce a firm’s health insurance cost? Traditional insurance plans are costly to employers and are often over-used by employees. People tend to ignore the cost of healthcare because of a moral dilemma. When healthcare is subsidized by employers or the government, employees ignore the cost when determining how much and how often they should consume because they feel little to no consequence of their action. People will behave more carelessly then they would if they did not have insurance.
As an employer, the benefit to contributing to a HSA is that it provides health care at a substantially lower rate, and allows the employee to ‘save’ every month pre-tax. Since the employees learn the direct cost of health care by making payments from their HSA, it is presumed that employees will become better health care consumers and take better care of themselves, further reducing the cost of insurance costs for the firm.

References
McKenzie R.B. & Lee, D.R. (2006). Microeconomics for MBAs: The economic way of thinking for managers (1st ed.). New York: Cambridge. McKenzie R.B. & Lee, D.R. (2010). Reading 7.3: Cutting health insurance costs through medical savings accounts. In Microeconomics for MBAs: The economic way of thinking for managers (2nd ed.). New York: Cambridge