Question

The marginal value and average expenditure curves for a market are given by: MV = 90 - 1.5Q AE = .75Q a) Find the equilibrium price and quantity if the market is perfectly competitive. b) Find the equilibrium price and quantity if the market has a Monopsony. c) Find the difference in total surplus between the perfect competition case and the Monopsony case. d) Suppose that the monopsony was publically owned and returns all profits to the public, is the market still inefficient?

Answer 1

Input market equilibrium,if market is perfect competition.

MV=AE

90-1.5Q=0.75Q

90=2.25Q

Q=90/2.25=40

Price of input=0.75*40=30

Buyer surplus=1/2*40*(90-30)=20*60=1200

Seller surplus=1/2*40*30=20*30=600

TOtal surplus=1200+600=1800

B) monopsony input market equilibrium at

MV=ME/MC

AE=0.75Q

ME/MC=1.5Q

Equilibrium,

MV=ME

90-1.5Q=1.5Q

Q=90/3=30

Equilibrium price of input=0.75*30=22.5

ME=1.5*30=45

Buyer surplus=(45-22.5)*30+1/2*30*(90-45)=22.5*30+15*45=1350

Seller surplus=1/2*30*22.5=15*22.5=337.5

Total surplus=1350+337.5=1687.5

C) difference between total surplus of perfect competition and monopsony=1800-1687.5=112.5

D)Yes, because even the surplus goes to goverment and they use this for society welfare but still the total market welfare is lower than perfect competition equilibrium total welfare.

It doesn't matter who gets the surplus,to be an efficient market,the total surplus needs to be Maximized.