Question

A monopsonist has a labor supply curve of =10+L and marginal product of labor curve of 20-L. If the price is set to 8, what is the wage the monopsonist has to pay?

Answer 1

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Answer - A monopsonist has a labor supply curve of =10+L and marginal product of labor curve of 20-L. The price is set to 8.

The monopsonist has a labor supply curve of W = 10+L, where W = the wage rate of labor.

The total cost borne by the monopsonist to hire L workers is:

Total Factor Cost (TFC) = (10+L) * L = 10L + L2.

The Marginal Factor Cost(MFCL) is d(TFC)/dL = d(10L + L2)/dL = 10 + 2L.

On the other hand, marginal product of labor (MPL) is 20 – L.

The Marginal Revenue Product of Labor (MRPL) = MPL * Price = (20 – L) * 8 = 160 – 8L.

The monopsonist would hire till those number of workers where MRPL = MFCL.

Therefore, equating MRPL = MFCL, we get 160 – 8L = 10 + 2L;

Or, 10L = 150;

Or, L* = 15.

So, the monopsonist would hire 15 units of workers.

The wage rate to be paid to them is determined from the labor supply curve.

Therefore, the wage the monopsonist has to pay to 15 workers = (10 + 15) = 25.

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