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

304 INPUT PRICING AND EMPLOYMENT [CHAP. 13
this monopsonistic firm will employ if it wants to maximize total profits; what P a will the firm pay? (b)
What is the amount of monopsonistic exploitation?
Fig. 13-21
(a)
(b)
This monopsonist should use four units of input or resource A (given by point E, where the monopsonist’s MRP a
curve intersects the MRC a curve that this firm faces) and P a ¼ $30 (given by point G on the S a curve). Note
that since the monopsonistic firm stops hiring input A when the MRP a ¼ (MP a )(MR x ) ¼ MRC a . P a ,
the firm hires fewer units of input A than if it were a perfect competitor in the input A market. If the
monopsonist were to hire where the MRP a ¼ P a ¼ $40, the firm would not be maximizing its total profits
since the fifth unit of input A adds $60 to TC but only $45 to TR and the sixth unit of input A adds $70
to TC but only $40 to TR (see Fig. 13-21). Thus, the firm could increase its total profits by cutting back
to four units on its use of input A.
The amount of monopsonistic exploitation (i.e., the excess of the MRP a over P a at equilibrium) is $20, or EG,
in Fig. 13-21.
13.22 State (a) the least-cost input combination to produce any level of output for a monopsonist using more
than one variable input or resource and (b) the condition for profit maximization for a monopsonist using
more than one variable input or resource. (c) With reference to part (b), indicate how from a nonmaximizing
profit position the monopsonist moves to a profit-maximizing position.
(a)
MP a
MRC a
¼ MP b
MRC b
¼¼ MP n
MRC n
where A, B, ..., N refer to the monopsonist’s variable input or resource. But MRC a /MP a is the change in the
monopsonist’s TC per unit change in the output of commodity X, resulting from the use of an additional unit
of input A. Thus,
MRC a
MP a
¼ MC x or
MP a
¼ 1
MRC a MC x
This is true for every other variable input used by the monopsonist. Therefore, the best or least-cost input or
resource combination to produce any output of commodity X (or any other commodity) can be rewritten as
MP a
MRC a
¼ MP b
MRC b
¼¼ MP n
MRC n
¼ 1
MC x
(b)
MP a
MRC a
¼ MP b
MRC b
¼¼ MP n
MRC n
¼ 1
MC x
¼ 1
MR x
If the monopsonist is a perfectly competitive seller of commodity X, then MR x ¼ P x .