4. Monopsony labor market (10pts): Suppose Guillen Co., a company producing base
ID: 1099091 • Letter: 4
Question
4. Monopsony labor market (10pts): Suppose Guillen Co., a company producing baseballs, has monopsony power. Assume you are given the following information for Guillen Co.
Units of Labor (L)
Wage Rate (w)
Total Labor Costs (TLC)
Marginal Resource (Labor) Cost (MRC)
Marginal Revenue Product (MRP)
0
$0
$0
--
--
1
$6
6
6
$39
2
$8
16
10
$38
3
$10
30
14
$35
4
$12
48
18
$32
5
$14
70
22
$29
6
$16
96
26
$26
7
$18
126
30
$23
8
$20
160
34
$20
9
$22
198
38
$17
a. (2pt) Based on the data above and using the MRP = MRC Rule, find the profit maximizing units of labor the monopsony would hire (L*) and the wage rate (w*) the monopsony would pay. How do you know?
(MRP = MRC at 6L. ) I know that is that the answer?
b. (2pt) If instead, this were a perfectly competitive labor market, how many workers would be hired, and what would the perfectly competitive market wage rate be? How do you know?
Units of Labor (L)
Wage Rate (w)
Total Labor Costs (TLC)
Marginal Resource (Labor) Cost (MRC)
Marginal Revenue Product (MRP)
0
$0
$0
--
--
1
$6
6
6
$39
2
$8
16
10
$38
3
$10
30
14
$35
4
$12
48
18
$32
5
$14
70
22
$29
6
$16
96
26
$26
7
$18
126
30
$23
8
$20
160
34
$20
9
$22
198
38
$17
Explanation / Answer
a. At 6 units of labor, MRP = MRC = $26. The wage rate at 6 units of labor is $16. This is profit maximizing because:
At lower level of labor (for example 5), the MRP > MRC, hence it makes sense for the monopsonist to hire labor as his profit would go up by MRP - MRC
At higher level of labor (for example 7), the MRP < MRC, hence the monopsonist could make more if it hired one unit less. This would take less from his revenue (MRP) and more from his costs (MRC). Hence, his profits would be higher.
b. In a perfecttly competitive setting, wage rate = MRP at equilibrium
At 8 units of output, wage rate = MRP = $20
At a lower wage rate than $20, MRP > wages, and more and more firms would demand labor and wages would go up.
At a higher wage rate than $20, MRP < wages, and there would be excess supply of labor and wages would go down.
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