Dominick Salvatore Schaums Outline of Microeconomics, 4th edition Schaums Outline Series 2006
306 INPUT PRICING AND EMPLOYMENT [CHAP. 1313.25 Starting with Fig. 13-21, explain what happens if the government establishes a minimum P a of (a) $40,(b) $50, (c) $60, or (d) $35.(a)(b)(c)Fig. 13-23The monopsonist’s S a curve becomes ABR and the MRC a curve becomes ABCF. The monopsonist will thenbehave as a perfect competitor in the input A market and hires six units of input A at P a ¼ $40 (given by pointB, where the MRP a ¼ MRC a ¼ P a ). Thus, monopsonistic exploitation is entirely eliminated and more of inputA is used (compare point B to point E in Fig. 13-23). In the real world, it may be difficult to determine theprecise P a at which the MRP a ¼ P a .The monopsonist will hire four units of input A but all monopsonistic exploitation is eliminated (see point E).Monopsonistic exploitation is completely eliminated but the firm hires only two units of input A (see point T).(d ) The monopsonist’s S a is given by HLBR, the new MRC a curve is HLMCF, and the firm hires five units of inputA (given by point N, where the MRP a curve crosses the discontinuous or vertical segment LM of his MRC acurve). Thus, the monopsonist hires one more unit of input A than in the absence of the minimum P a of $35(compare point N to point E), but only half of monopsonistic exploitation is eliminated (compare NL ¼ $10 toEG ¼ $20).BILATERAL MONOPOLY13.26 In Fig. 13-24 the monopolist seller of input A faces the monopsonistic buyer of input A. Assume thatinput A is the only variable input for this monopsonist. (a) At what point would the monopolistic sellerof input A maximize total profits? (b) At what point would the monopsonistic buyer of input A maximizetotal profits? (c) What will the actual result be? (d ) Give some examples of bilateral monopoly.Fig. 13-24
CHAP. 13] INPUT PRICING AND EMPLOYMENT 307(a)(b)When input A is the only variable input, the monopsonist’s d a is given by the MRP a curve. Since the monopsonistis the only buyer of input A, the monopsonist’s MRP a curve represents the D a facing the monopolistseller of input A; MR a is then the monopolist’s marginal revenue curve in selling input A. If the monopolist’sMC to supply various units of input A is given by the MC a curve, the best level of sales of input A for themonopolist is four units (given by point A, where the monopolist’s MR a curve intersects the MC a curve)and P a ¼ $8 (given by point A 0 on the monopolist’s D a curve).The monopolist’s MC a curve represents the S a curve facing the monopsonist. The monopsonist would thusmaximize total profits upon hiring three units of input A (given by point B, where the monopsonist’sMRP a curve intersects the MRC a curve that the monopsonist faces) and pays P a ¼ $3 (given by point B 0on the S a curve facing the monopsonist).(c) The results of (a) and (b) show that the monopolist’s and the monopsonist’s aims are in conflict. From a theoreticalpoint of view, the result is indeterminate in this case. The actual quantity of input A sold and its pricedepends here on the relative bargaining strength of the two firms and will lie somewhere on or within theboundary B 0 AA 0 B.(d ) An example of bilateral monopoly occurs when the union representing the workers in an isolated locality facesthe single employer in the area. Another example is when a shipowners’ association faces the longshoremen’sunion. Note that we also have bilateral monopoly when the single seller of any commodity faces the singlebuyer of the commodity.13.27 Assume that (1) the MRP of the sole buyer of input A is the same as that in Problems 13.20 and 13.25,(2) input A is the only variable input for this monopsonist and (3) the MC curve of the sole seller of inputA is identical with the S a curve of Problems 13.20, 13.21, and 13.25. For this bilateral monopoly,(a) draw a figure as in Problem 13.26 and label each curve. (b) What is the best level of output forthis monopolist seller? At what price does the monopolist want to sell? (c) What quantity of input Ashould the monopsonist use in order to maximize total profits? What price is the monopsonist willingto pay for this quantity of input A? (d ) How is this case of bilateral monopoly different from that inProblem 13.26? (e) What is the actual result of this bilateral monopoly? ( f ) If the two firms mergedinto a single firm, where would the merged firm maximize its total profits?(a)Fig. 13-25(b)The best level of output for the monopolistic seller of input A is four units (given by point A) which the monopolistwants to sell at the price of $50 (given by point B).
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CHAP. 13] INPUT PRICING AND EMPLOYMENT 307
(a)
(b)
When input A is the only variable input, the monopsonist’s d a is given by the MRP a curve. Since the monopsonist
is the only buyer of input A, the monopsonist’s MRP a curve represents the D a facing the monopolist
seller of input A; MR a is then the monopolist’s marginal revenue curve in selling input A. If the monopolist’s
MC to supply various units of input A is given by the MC a curve, the best level of sales of input A for the
monopolist is four units (given by point A, where the monopolist’s MR a curve intersects the MC a curve)
and P a ¼ $8 (given by point A 0 on the monopolist’s D a curve).
The monopolist’s MC a curve represents the S a curve facing the monopsonist. The monopsonist would thus
maximize total profits upon hiring three units of input A (given by point B, where the monopsonist’s
MRP a curve intersects the MRC a curve that the monopsonist faces) and pays P a ¼ $3 (given by point B 0
on the S a curve facing the monopsonist).
(c) The results of (a) and (b) show that the monopolist’s and the monopsonist’s aims are in conflict. From a theoretical
point of view, the result is indeterminate in this case. The actual quantity of input A sold and its price
depends here on the relative bargaining strength of the two firms and will lie somewhere on or within the
boundary B 0 AA 0 B.
(d ) An example of bilateral monopoly occurs when the union representing the workers in an isolated locality faces
the single employer in the area. Another example is when a shipowners’ association faces the longshoremen’s
union. Note that we also have bilateral monopoly when the single seller of any commodity faces the single
buyer of the commodity.
13.27 Assume that (1) the MRP of the sole buyer of input A is the same as that in Problems 13.20 and 13.25,
(2) input A is the only variable input for this monopsonist and (3) the MC curve of the sole seller of input
A is identical with the S a curve of Problems 13.20, 13.21, and 13.25. For this bilateral monopoly,
(a) draw a figure as in Problem 13.26 and label each curve. (b) What is the best level of output for
this monopolist seller? At what price does the monopolist want to sell? (c) What quantity of input A
should the monopsonist use in order to maximize total profits? What price is the monopsonist willing
to pay for this quantity of input A? (d ) How is this case of bilateral monopoly different from that in
Problem 13.26? (e) What is the actual result of this bilateral monopoly? ( f ) If the two firms merged
into a single firm, where would the merged firm maximize its total profits?
(a)
Fig. 13-25
(b)
The best level of output for the monopolistic seller of input A is four units (given by point A) which the monopolist
wants to sell at the price of $50 (given by point B).
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