Question

9. Show graphically the labor input decisions of the following situations:

1. Competitive labor market and competitive goods (commodity) market
2. Competitive labor market and monopoly in the goods market
3. Monopsony in the labor market and competition in goods market
4. Monopsony in the labor market and monopoly in the goods market
5. Effect of unions on wages (union being a monopolistic seller in labor market).

Answer 1

Answer a :-

In in a perfectly competitive factor market the firm will be in equilibrium when MRP is greater than or equal to MFC which means either MRP will be equal to MFC or the MRP curve will cut the MFC curve from above at the equilibrium point.

In the above curve VMP equals to MRP which is the demand curve while a AC is equals to MFC which is the supply curve of labour the equilibrium point for the firm is when it employees OQ unit of factor services.

Answer b :-

In the above figure the supply curve or the cost curve is horizontal to the x axis which is AFC = MFC but because there is Monopoly in the product market, the MRP curve lies below the vmp curve so MRP will be less than VMP. The firm will be at equilibrium MRP equals to MFC the price of factor under perfect competition and the firm will be employing OQ units of labour.

Answer c :-

In the above figure the supply curve AFC is positively sloped from left to right meaning that firm can apply more and more unit of factor service by offering a higher price per unit . Assuming perfect competition in the product market, the value of marginal product will be equal to the marginal revenue product which is vmp equals to MRP . The firm will be at equilibrium at point P where the MRP cuts the MFC curve from above . The firm employs OQ units of factor service by paying OP price for them and the area between point A and point E represents monopolistic exploitation because the factor services being paid less than its marginal revenue product

Answer d :-

in the above figure the firm is right equilibrium at point E where the MRP curve cut the MFC curve from above .the firm employees OQ unit of the factor service at QP price which is less than QE ,the marginal revenue product of the factor. Thus in this case the the factor used in production by the firm is doubly exploited. First due to Excess of MRP over the price of the factor. Secondly due the vmp ove marginal revenue product of the factor

Answer e :-

If the firm buyers have no Monoposonistic power , labour unions can attain an increase in the wage rate at the expense of lower employment.

If the firm buyers have monoposonistic power the union's actions can eliminate one part of the monopolistic exploitation. However the other portion of the exploitation which is due to the Monopoly power of firms in the product market cannot be eliminated by trade union action.

If the firm buyers have Monoposonistic power, trade unions can increase the total wage bill in cases by either increasing employment or the wage rate or both .only if the demand for labour is inelastic and the union harm its members if it sets the way that above the maximum level for the initial level of employment.