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

CHAP. 13] INPUT PRICING AND EMPLOYMENT 291
8. When input A is the only variable input for an imperfect competitor in the product market, the firm’s demand for
input A is given by its (a) VMP a curve, (b) MRP a curve, (c) MFC a curve, or (d ) none of the above.
Ans. (b) See Fig. 13-4 and Example 5.
9. When all firms using input A are monopolists in their respective product markets, D a is obtained by a consideration
of the firms’ MRP a curves and (a) the internal effects only of a change in P a ,(b) the external effects only of a change
in P a ,(c) either the internal effects or the external effects, or (d ) both the internal and the external effects.
Ans. (a) When all firms using input A are monopolists in their respective product markets, the effects of a change
in P a on P x , P y , P z , ... (i.e., the external effect of the change in P a ) have already been considered in their MRP a
curves. Therefore, only the internal effects need be considered in order to get D a .
10. The MRC a . P a when the firm is (a) a monopsonist, (b) an oligopsonist, (c) a monopsonistic competitor, or (d ) all
of the above.
Ans. (d ) Choices (a), (b), and (c) represent different forms of imperfectly competitive input markets. All imperfect
competitors in input markets must pay a higher P a in order to get a greater quantity of input A. Thus, for all of them
the MRC a . P a .
11. When VMP a . MRP a . P a , we have (a) monopolistic exploitation, (b) monopsonistic exploitation, (c) both monopolistic
and monopsonistic exploitation, or (d ) neither type of exploitation.
Ans. (c) See Examples 6 and 8.
12. The general condition for profit maximization for a firm under any form of organization in the input and product
markets is
(a)
(b)
(c)
MP a
P a
MP a
P a
¼ MP b
P b
¼ MP b
P b
¼¼ MP n
P n
¼ 1
MC x
¼ 1 P x
,
¼¼ MP n
P n
¼ 1
MC x
¼ 1
MR x
,
MP a
MRC a
¼ MP b
MRC b
¼¼ MP n
MRC n
¼ 1
MC x
¼ 1
MR x
,or
(d ) all of the above.
Ans. (c) See Section 13.14.
Solved Problems
INPUT PRICING AND EMPLOYMENT WITH PERFECT COMPETITION IN
THE INPUT AND PRODUCT MARKETS
13.1 (a) What do we mean when we say that a firm is a perfect competitor in the product and input markets?
(b) How does the firm decide whether or not to employ an additional unit of an input? (c) Why does the
firm’s VMP schedule for a factor decline after a point? Why are we interested in the declining portion of
the VMP schedule of an input?
(a)
With perfect competition in the product market, the firm can sell any quantity of the commodity at the given
market price for the commodity. That is, the firm faces an infinitely elastic demand curve for the commodity at
the given market price of the commodity. With perfect competition in the input market, the firm can purchase
any quantity of the input at the given market price of the input. That is, the firm faces an infinitely elastic
supply curve of the input at the given market price of the input.
Note that while commodities are supplied by firms, some inputs such as labor are supplied by individuals.
Also, at least in the case of labor and capital, we want to determine the price of using the input for a specified
period of time, not the price of purchasing the input.