3) Data in the following table refer to the purchase of a resource by a pure mon

Question

3) Data in the following table refer to the purchase of a resource by a pure monopsonist. Let the resource be labour time L, measured in hundreds of hours per day Marginal Cost of Labour Marginal Revenue Product MRP 16 15 14 13 12 Units of Labour Input L Average Cost of Labour 10 12 10 12 13 14 15 16 17 4 16 18 20 10 24 a. Determine the profit maximizing purchase rate of labour for the monopsonist. b. If this market were not monopsonistic but competitive, what would be the purchase rate of labour time? Determine the equilibrium wage rate in both the monopsonistic and competitive market. c.

Explanation / Answer

Solution :

In case of monopsonistic market, profit maximizing wage rate occurs where Marginal cost (MC) of labor equals marginal revenue product of labor (or labor demand) (MRP). Clearly this happens where MC = MRP = 14, units of labor input is 3 hundred of hours, purchase rate/wage rate = 12 per labor hour.

In case of competitive market, equilibrium occurs where Average cost of labor (or labor supply) equals MRP. This happens for 4 hundred of hours of labor, where wage rate = Labor supply = MRP = 13 per labor hour.

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