economics question!!

posted by .

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 don't 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.

Respond to this Question

First Name
School Subject
Your Answer

Similar Questions

  1. economics - monopoly/monopsony

    just a quick qusetion....if a firm is both a monopoly and a monopsony. How would the profit maximizing wage and lvl of labour in the short run be determined for this firm Use the profit maximizing principals. Regardless of the existing …
  2. Economics

    For the following characteristic say whether it describes a perfectly competitive firm, a monopolistically competitive firm, monopoly firm, or neither. a. Has marginal revenue less than price. I would think this would be neither. b. …
  3. econ question

    2 questions that im stuck on!!! 1. Suppose a firm has a production function Q = 3(squareroot)N, where N is labour. Suppose the wage is 3, and the price of the output 4. (a) Write the Firm profits (b) Calculate the firm optimal labour …
  4. Economics

    A firm is a natural monopoly if: a) its average cost curve falls throughout its relevant output range. b) the firm owns an essential natural resource used in making the product. c) the government has granted the firm the right to a …
  5. managerial economics

    Consider the one-shot, simultaneous move game below, and answer the accompanying questions: Player & Strategy Firm B Left Right Firm A Up 4,4 0,0 Down 0,0 2,2 (a)List the strategies for Firm A and Firm B (b)State the set of strategy …
  6. microeconomics

    TRUE OR FALSE: 9. Assume that the Minimum Wage has increased to $14 from $10. If the total labour-income at the wage of $14 is higher than the total labour-income at the wage of $10, it means that the labour-demand with respect to …
  7. economics

    Suppose that for the firm below, the goods market is perfectly competitive. The market price of the product the firm produces is $4 at each quantity supplied by the firm. What is the amount of labor that this profit-maximizing firm …
  8. econ

    P=15-Q/1000. Suppose there are two firms in this market. Compute equilibrium quantities and profits for each firm, and the equilibrium market price. Hint: Start with thinking about the number of loaves a firm will sell in a month — …
  9. Micro economics

    Consider a firm with the following production function: q = (ak+bl)^(1/2) The firm's total costs can be written as C = F + rk + wl 1. Calculate the firm's contingent factor demand. Illustrate it in a graph including the firm's isoquant …
  10. Economics

    Assume the total cost of production in a particular firm is #50000.00 while the fixed cost is #30000.00. The wages paid to each unit of labour is #2000.00. Calculate the unit of labour employed in this firm please what is the formula

More Similar Questions