Question

Suppose a hospital only needs one input, nurses, to treat their patients. A public insurer reimburses each treatment at $10 and suppose that the hospital needs to hire L nurses to provide T = 5L − 1/20 ∗L^2 treatments. Hospitals pay their nurses a wage W and suppose that 5 + W/2 nurses are willing to work at the hospital for a wage W.

Imagine that the hospital acts as a monopsonist in the labor market (monopoly in employment). What is the profit maximizing employment level and what would be the corresponding wage? Quantify the deadweight loss.

Answer 1