Question

13. 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

a. Under competitive labor market , a firm can employ as many number of labor as it wishes at prevailing wage rate. Supply curve of labor for a single firm is perfectly elastic at existing wage rate . Average expenditure of firm is equal to marginal expenditure of firm. Firm will maximise its profit when ME= MRP. ME is the additional expenditure incurred by firm to purchase addition labor input. MRP shows how much the firm should be willing to pay to hire additional unit of output. If ME=MRP , them MRP=w Under competitive commodity market ,demand curve is perfectly elastic. Average revenue (price) =Marginal revenue= demand curve . Firm will maximise profit where Marginal revenue ( of firm )= Marginal cost. Under perfect competition ,Price is equal to marginal cost ( P=MC) b. Under competitive labor market , a firm can employ as many number of labor as it wishes at prevailing wage rate. Supply curve of labor for a single firm is perfectly elastic at existing wage rate . Average expenditure of firm is equal to marginal expenditure of firm. Firm will maximise its profit when ME= MRP. ME is the additional expenditure incurred by firm to purchase addition labor input. MRP shows how much the firm should be willing to pay to hire additional unit of output. If ME=MRP , them MRP=w Under monopoly in the goods market, demand curve of firm is downward sloping. Firm will maximise profit at a point f where MR=MC. Firm 's price will always be greater than its marginal cost. It always try to raise its price by reducing the supply of output .At this point Price is determined at Q level of output c. When there is monpsony in labor market , marginal revenue curve will below under value of marginal product ( VMP)curve. Both are downward sloping curve. Supply curve of labor and Marginal fixed cost curve is upward sloping. The equilibrium of monopsonist will be at point E where marginal revenue product curve ( MRP) is equal to marginal fixed cost ( MFC) curve.At this point OW wage is determined at L level of labor employment Under monopoly in the goods market, demand curve of firm is downward sloping. Firm will maximise profit at a point f where MR=MC. Firm 's price will always be greater than its marginal cost. It always try to raise its price by reducing the supply of output .At this point Price is determined at Q level of output d. When there is monpsony in labor market , marginal revenue curve will below under value of marginal product ( VMP)curve. Both are downward sloping curve. Supply curve of labor and Marginal fixed cost curve is upward sloping. The equilibrium of monopsonist will be at point E where marginal revenue product curve ( MRP) is equal to marginal fixed cost ( MFC) curve.At this point OW wage is determined at L level of labor employment Under monopoly in the goods market, demand curve of firm is downward sloping. Firm will maximise profit at a point f where MR=MC. Firm 's price will always be greater than its marginal cost. It always try to raise its price by reducing the supply of output .At this point Price is determined at Q level of output e Under monopoly labor market, union is a monopoly who sells labor to firms. Union always fix higher price for labor. It fixes higher wages where MFC curve and MRP curve intersects. At higher wages Wu , firms will hire less labor than competitive market