Question
Consider a firm with a production function Q=LαKβ
operating in a perfectly competitive product market with price P. If the firm is a monopsonist in the labor market, its optimal hiring rule is determined by setting:Solution
Solution: A profit-maximizing firm hires labor until the marginal benefit of an additional worker equals the marginal cost of that worker: · Marginal Benefit: The extra revenue generated by one more worker, which is the Marginal Revenue Product of Labor (MRPL). (MRPL=MR×MPL). · Marginal Cost: The extra cost of hiring one more worker, which is the Marginal Factor Cost of Labor (MFCL). Since the firm is a monopsonist (a sole buyer of labor), it faces an upward-sloping labor supply curve, meaning MFCL>w. Thus, the monopsonist's optimal rule is MRPL=MFCL, which leads to a lower quantity of labor hired and a lower wage paid compared to a competitive market.
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