# Perfectly Competitive Product Market and Monopsony Factor Market

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1 Perfectly Competitive Product Market and Monopsony Factor Market

2 Perfect Competition Resource Markets Monopsony Imperfect Competition: Monopsony Characteristics: One firm hiring workers The firm is large enough to manipulate the market Workers are relatively immobile Firm is wage maker To hire additional workers the firm must increase the wage National Collegiate Athletic Association regulates college athletes Examples: A small town with one large factory

3 Perfect Competition Resource Markets Monopsony Can a monopsony pay its workers \$7.25 an hour? Sure it can, it s the only firm so it can pay whatever it wants. Can it hire as many workers as it wants for \$7.25? No, not everyone will willing to give their time and effort for \$7.25 What does it have to do to attract more workers Raise its wages. 65

4 Assume that this firm CAN T wage discriminate and must pay each worker the same wage. Marginal Wage Units of Total Resource Price Labor Cost Cost \$4 \$5 \$6 \$7 \$8 \$9 \$10 \$ \$5 \$12 \$21 \$32 \$45 \$60 \$77 0 \$5 \$7 \$9 \$11 \$13 \$15 \$17 MRC doesn t equal wage MRC is the cost of the wage plus the wage increase for those workers who could have otherwise be hired at the lower wage.

5 Monopsony If the firm can t wage discriminate, where is MRC? Wage W E MRC S L MRC > Wage MRC is above the supply of labor Hires where MRC = MRP and use the supply curve to determine the wage The monopsonist is exploiting the workers by paying less than the MRP. MRP Q E Quantity of Labor

6 Identify the wage and quantity of labor that would be hired by this monopsony Wage \$15 \$12 \$10 \$9 MRC Supply of Labor Wage=\$9 Quantity= Q2 MRP Q 1 Q 2 Q 3 Quantity

7 Monopoly Product Market and Monopsony Factor Market

8 Bilateral Monopoly a monopolist seller of goods and a monopsonist buyer of labor

9 How many units will this firm produce? How much will it charge per unit? It will produce 30,000 units (MR = MC) and charge \$15 (demand curve). How many workers will this firm hire? How much will it pay its workers? This firm will hire 38,000 workers (MRP = MRC) and pay each worker \$8.50 (supply curve)

10 Combining Resources Production requires multiple inputs, and firms must decide what combination of inputs to use to produce their output.

11 What should a firm do if it wants to produce the most output possible from a given production budget or produce a given level of output at the lowest total cost? Cost-Minimizing Rule The firm should allocate its production budget between units of its resources in such a way where: MPx = MPy Px Py The firm should get the same additional output from the last dollar spent on each resource.

12 How much additional output does each \$10 resource generate per dollar spent? \$5 Q of Factor MP (Robots) MP/P R (PriceR =\$10) MP (Workers) MP/P W (PriceW =\$5)

13 \$10 Q of Factor Cost-Minimizing Rule MPx = MPy Px Py MP (Robots) MP/P R (PriceR =\$10) Firms adjust their hiring of inputs until the marginal product per dollar is equal for all factors. MP (Workers) MP/P W (PriceW =\$5) If you only have \$35, what combination of robots and workers will use? \$5

14 If the marginal product of labor per dollar is greater than the marginal product of capital per dollar, which of the following is true? The firm should a. not change its employment of capital and labor. b. hire more capital. c. hire more labor. d. hire less labor. e. hire more capital and labor.

15 A firm currently produces its desired level of output. Its marginal product of labor is 400, its marginal product of capital is 1,000, the wage rate is \$20 and the rental rate of capital is \$100. In that case, the firm should a. employ more capital and more labor. b. employ less labor and less capital. c. employ less labor and more capital. d. employ less capital and more labor. e. not change its allocation of capital and labor.

16 No change to productivity Decrease since a decrease in demand will decrease the price. 28/14 = 60/x 28x = 840 x = \$30

17 A firm produces its output using only capital and labor. Labor costs \$100 per worker per day and capital costs \$200 per unit per day. If the marginal product of the last worker employed is 500 and the marginal product of the last unit of capital employed is 1,000, is the firm employing the cost-minimizing combination of inputs? Explain.

18 Profit-Maximizing Rule for Combining Resources MRPx = MRPy = MRCx MRCy This means that the firm is hiring where MRP = MRC for each resource x and y. 1 If MRP > MRC, increase input MRP < MRC, decrease input Difference MRP not MP

19 Practice: What should the firm do hire more, hire less, or stay put? 1. MRP L = \$15; P L = \$6; MRP C = \$10; P C = \$10 MORE 2. MRP L = \$5; P L = \$10; MRP C = \$10; P C = \$15 LESS 3. MRP L = \$25; P L = \$20; MRP C = \$15; P C = \$15 MORE STAY PUT 4. MRP L = \$12; P L = \$12; MRP C = \$50; P C = \$40 STAY PUT 5. MRP L = \$20; P L = \$15; MRP C = \$100; P C =\$40 MORE LESS STAY PUT MORE MORE

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