Tuesday
May 3, 2016

Homework Help: economics question!!

Posted by HELP on Wednesday, October 4, 2006 at 8:34am.

Suppose a firm is both a monopoly and a monopsony. How would this firm choose the quantity of labour of labour to employ? what wage would this firm pay?

can someone explain this question to me!! im stuck!

I gave this question a brief answer earlier. Let me elaborate.

Always maximize at the margin. The firm will produce where marginal costs = marginal revenue. And dont let the terms monopoly and monopsony drag you away from this basic principal.

Your monopsony faces a rising supply curve for labor. By hiring additional labor (at the margin), the firm gets additional output. So, the firm should be able to calculate the marginal cost of producing an additional unit of output. Call this number marginal product cost (MPC). (sometimes called the marginal factor cost). Going further, at any given level of output, the firm could calculate the MPC. So, in a graph, the firm gets a MPC curve. On the y axis is marginal costs (of producing 1 more unit), on the y axis is output. The curve should be rising.

What is a bit confusing, but doesnt really change anything, is that in order to hire additional workers, the firm must offer an increasing wage rate. In the general monopsony model, the firm must pay this higher rate to all of its workers. Depending on the elasticity of supply of labor, this can make the MPC quite high. So the MPC doesnt just reflect the wage rate paid to the last worker. It also counts the increased wage it must pay to its existing workers.

So far so good?

Now then, the monopoly can do the same thing on the sales or revenue side. It should be able to calculate the marginal revenue of selling 1 additional unit. This is referred to as the marginal revenue product or the value of the marginal product (VMP). In fact, it should be able to calculate this amount on all levels of output. Because it is a monopoly, this amount should be declining at all levels of sales. Again, on a graph, the y-axis has marginal benefits, the x-axis has sales or output.

Layer the two graphs on top of each other. Where the MPC=VMP is the profit maximizing point. Once this is determined, the firm will know how much to produce, so it will know how much labor to hire, so it will pay that wage rate such that it gets the desired amount of labor.

I hope this helps.