Dominick Salvatore Schaums Outline of Microeconomics, 4th edition Schaums Outline Series 2006

CHAP. 13] INPUT PRICING AND EMPLOYMENT 289
13.13 PRICING AND EMPLOYMENT FOR ONE VARIABLE INPUT
When input A is the only variable input, in order to maximize total profits, the monopsonist will hire more
units of input or resource A as long as the MRP a . MRC a and until the MRP a ¼ MRC a . The price of input A
that the monopsonist pays is then given by the corresponding point on the S a curve.
EXAMPLE 8. In Fig. 13-6, the monopsonistic firm maximizes total profits when it hires three units of input or resource A
(given by point E, where the MRP a curve intersects the MRC a curve that the firm faces). Thus, P a ¼ $3 (given by point G on
the S a curve). Note that the second unit of input A adds more to the monopsonist’s TR (point F) than to the TC (point H),
and so the monopsonist’s total profits increase by hiring this second unit of input A. The monopsonist does not hire more
than three units of input A because the MRP a , MRC a and total profits would fall. The excess by which the MRP a . P a
when the monopsonist is in equilibrium (EG or $3 in Fig. 13-6) is called monopsonistic exploitation. (For ways to counteract
monopsonistic exploitation, see Problems 13.23 and 13.24.)
13.14 PRICING AND EMPLOYMENT OF SEVERAL VARIABLE INPUTS
The least-cost input combination to produce any level of output for the monopsonist using more than one
variable input is that combination at which the MP per dollar’s worth of an input is equal to the MP per dollar’s
worth of every other variable inputs. That is,
MP a
¼ MP b
¼¼ MP n
MRC a MRC b MRC n
where A, B, ..., N, refer to the monopsonist’s variable inputs.
However, in order for the monopsonist to maximize total profits, the firm must not only use the best or
least-cost input combination, but it must also use the correct absolute amount of each variable input to
produce the best level of output of commodity X. This occurs when
MP a
¼ MP b
¼¼ 1 ¼ 1
MRC a MRC b MC x MR x
(See Problem 13.22.)
It should be noted that this is the general condition for profit maximization under any form of market organization
in the input and product markets. When we have perfect competition in the input market, MRC a ¼ P a ,
MRC b ¼ P b , ..., MRC n ¼ P n (see Sections 13.1 and 13.8). When we have perfect competition in the product
market, MR x ¼ P x (see Section 13.1).
In the market situation where the monopsonistic buyer of a factor faces the monopolistic seller of the input
(bilateral monopoly), the equilibrium price and quantity of the input are theoretically indeterminate (see
Problems 13.26 and 13.27).
Problems 13.28 to 13.31 provide some important extensions and applications of input pricing and employment.
Problem 13.28 deals with economic profit, 13.29 with investment in human capital, 13.30 with wage
differences, and 13.31 with the effect of unions and minimum wage legislation on the level of wages and
employment.
Glossary
Bilateral monopoly The market situation where the monopsonistic buyer of an input faces the monopolistic seller of the input.
Marginal resource cost (MRC) The extra cost in hiring one extra unit of the input. MRC exceeds input price when the
supply curve of the input is positively sloped.
Marginal revenue product of an input (MRP) The marginal product of the input times the marginal revenue resulting
from the sale of the marginal product. For input A and commodity X, MRP a ¼ MP a
. MR x .
Monopsony The case where there is a single buyer of an input.
Quasi-rent A payment which need not be made in the short run in order to bring forth the supply of an input.