Suppose that a monopoly firm finds that its MR is $50 for the first unit sold ea

Question

Suppose that a monopoly firm finds that its MR is $50 for the first unit sold each day, $49 for the second unit sold each day, $48 for the third unit sold each day, and so on. Further suppose that the first worker hired produces 5 units per day, the second 4 units per day, the third 3 units per day, and so on.

a. What is the firm’s MRP for each of the first five workers?

b. Suppose that the monopolist is subjected to rate regulation and the regulator stipulates that it must charge exactly $40 per unit for all units sold. At that price, what is the firm’s MRP for each of the first five workers?

c. If the daily wage paid to workers is $170 per day, how many workers will the unregulated monopoly demand? If the daily wage paid to workers is $170 per day, how many workers will the regulated monopoly demand?

d. If the daily wage paid to workers falls to $77 per day, how many workers will the unregulated monopoly demand? If the daily wage paid to workers falls to $77 per day, how many workers will the regulated monopoly demand?

Explanation / Answer

a. MRP = (Change in revenue)/(Change in Labour) For first worker = 50 + 49 + 48 + 47 + 46 = 240/1 = $240 (Since he produces 5 units) Second Worker = 45 + 44 + 43 + 42 = 174/1 = $174 (Since he produces 4) Similarly, Third worker = 41 + 40 + 39 = $120 Fourth worker = 38 + 37 = $75 Fifth worker = $36 b. Now all units are charged at $40 First worker = 5*40 = $200 Second = 4*40 = 160 third = 3*40 = 120 and so on.... c. If the wage is $170 it will demand workers until the MRP decreases below 170... and that happens for worker 2 here (since he can produce only $160 for $170 wage, he should not be hired) hence only one worker will be hired here d. If the wage falls to $77 the demand of workers will increase.... again for worker 4 MRP is $80 which is above $77 and for worker 5 goes below $77 Hence 4 workers will be hired for maximum profit....

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