All of Ruritania’s domestic energy needs are met through nuclear fission. Energy production is the responsibility of a Government-owned company named Umbrella Corp. To generate energy, Umbrella Corp uses uranium. The uranium is supplied by OCP that mines it in the town of Zenda where it is the sole employer. For reasons of state OCP can only sell what it extracts to Umbrella Corp. As OCP is the only employer in Zenda it is a monopsonist in the labor market, while Umbrella Corp is a monopsony when it buys uranium from OCP. To mine one kilogram of uranium a day, OCP needs one unit of labor. The supply of labor if it pays a wage of w florins is given by S(w) = 2w.
All of Ruritania’s domestic energy needs are met through nuclear fission. Energy production is
the responsibility of a Government-owned company named Umbrella Corp.
To generate energy, Umbrella Corp uses uranium. The uranium is supplied by OCP that mines it
in the town of Zenda where it is the sole employer. For reasons of state OCP can only sell what
it extracts to Umbrella Corp.
As OCP is the only employer in Zenda it is a monopsonist in the labor market, while Umbrella
Corp is a monopsony when it buys uranium from OCP.
To mine one kilogram of uranium a day, OCP needs one unit of labor. The supply of labor
if it pays a wage of w florins is given by S(w) = 2w.
Each kilogram of uranium that Umbrella Corp. buys from OCP can be used to produce 360,000
kilowatt-hour of energy. In addition to the purchase price of uranium, Umbrella Corp incurs an
additional unit cost of 35,800 florins per kilogram of uranium used for energy production.
The energy produced is then sold by Umbrella Corp to consumers as electricity at a fixed price of
0.1 florins per kwh. Consumers will buy whatever amount of energy Umbrella Corp produces at
this price. Both Umbrella Corp and OCP operate so as to maximize their own profits.
The order of movement is as follows. Umbrella Corp. announces the price p per unit of uranium that it will pay OCP. OCP in turn sets the wage per unit of labor it will pay.
1. What is Umbrella Corp.’s profit maximizing choice of p?
2. At the price determined in part (1) how much electricity in kilowatt-hours will be sold to Ruritanian households?
3. King Rudolf V of Ruritania is advised by a troika called the Royal Council. They are concerned by recent newspaper articles published in The Republic criticizing the wages offered workers in Zenda by OCP. They have advised the King that he should impose a minimum wage in Zenda to improve conditions for its inhabitants. Lavrentiy the senior member of the troika and representative of the nobility and landed gentry wants to impose a minimum wage of 40 florins per unit of labor because he is afraid that a higher one will harm energy consumers.
Vyacheslav the junior member of the troika, who represents the rising new middle class of advertising executives and telephone sanitation engineers, wants to impose a 150 florin minimum on the wage per unit.
Finally, Georgy, the third member of the troika, is a well known tribune of the proletariat. He detests Vyacheslav who is militantly and unceasingly moderate and thwarts the ambitions of the working class. Georgy is pushing for a 250 florin floor on the wage per unit of labor.
Determine which of these three proposals is most beneficial for both the workers and consumers
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