Topic 4: Employment of Factors under imperfect markets

Why is MR lower than P under a monopoly?

Because to sell additional output, the firm must lower the price of all outputs sold. This price reduction makes the firm lose revenue, which is subtracted from the additional revenue gained from selling the additional unit, making the overall marginal revenue lower than the lowered price.

What is the demand elasticity of Q in an imperfect market?

positive

What is a monopsony?

an industry with only one buyer of input

What are the two main cases for a product market?

PCM: P = MR

Monopoly: P > MR

What are the two main cases for a factor market?

PCM: MFC = Price of that input (wage or rent)

Monopsony: MFC > Price of that input

What are the two types of market and their profit maximizing conditions?

Product: MR=MC

Factor: MRP = MFC

What is the profit maximizing condition of a firm that is a monopoly (imperfect in product market), but is a price taker of inputs (perfectly competitive in factor market)?

MRPL = w or MRPK = r

What is the profit maximizing condition of a firm that is a price taker in both input and output markets?

MVPL = w or MVPK = r

What is the profit maximizing condition of a firm that is both a monopoly and a monopsony?

MRP = MFC

What is the profit maximizing condition of a firm that is a monopsony but is a price taker in the output market?

MVP = MFC

Q in PCM is ___ than Q in monopoly

greater

L in PCM is ___ than L in monopoly

greater

What is reservation wage?

the lowest pay someone is willing to take for a job

Under monopsony, w and L are ___-related

positively

Under monopsony, MFCL is greater than w, meaning?

the value of the additional output produced by an individual is greater than the amount paid for the factor

Why is MFCL > w in monopsony?

The firm has to offer higher wage rates to be able to hire more labor and at the same time give higher wages to the old workers.

What is employment restriction?

L*M < L*PCM

What is wage repression?

wM < wPCM

Step by step of solving monopsony

get MPL, get MVPL, get TFC, GET MFC, use profit max MVP = MFC, solve for L*, solve for w, solve for MVP and MFC, solve for wage rate depreciation

Step by step of solving profit max of firm that is pcm in both product and factor markets

get MPL, get MVPL, get TFC, GET MFC, use profit max MVPL = w, solve for L, solve for w, solve for MVP (must be equal to w)