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.
In a scenario where a firm is both a monopoly (having control over the market supply of a product) and a monopsony (being the sole buyer of a particular input, such as labor), the firm would determine the quantity of labor to employ and the wage it would pay based on the principle of maximizing profit at the margin.
To do this, the firm would need to calculate the marginal product cost (MPC), which represents the additional cost of producing one more unit of output by hiring additional labor. The firm can obtain this by comparing the cost of the previous level of output to the cost of the current level of output. The MPC curve would show the relationship between marginal costs and output, and it should be upward sloping due to the rising supply curve for labor in a monopsony.
Additionally, the firm must consider the concept of the value of the marginal product (VMP) or marginal revenue product, which represents the additional revenue generated from selling one more unit of output. The firm should calculate the VMP at different levels of output, and this curve should be downward sloping since the monopoly market power decreases the value of each additional unit sold.
To determine the profit-maximizing point, the firm can overlay the MPC and VMP curves on a graph. The point at which the MPC equals the VMP is the optimal level of labor to hire and the corresponding wage rate to pay. By producing at this level, the firm can maximize its profit.
It's important to note that in a monopsony, the firm may need to offer a higher wage rate to attract more workers, and this increased wage rate would also factor into the MPC calculation. The elasticity of the labor supply would determine how much the wage rate needs to increase.
In summary, the firm would choose the quantity of labor to employ by finding where the MPC equals the VMP on the graph and pay the corresponding wage rate that attracts the desired amount of labor. This approach ensures the firm maximizes its profit and balances the costs and benefits of hiring labor in both its monopoly and monopsony positions.