Dominick Salvatore Schaums Outline of Microeconomics, 4th edition Schaums Outline Series 2006
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308 INPUT PRICING AND EMPLOYMENT [CHAP. 13
(c)
In order to maximize total profits, the monopsonist should use four units of input A (given by point B) at the
price of $30 (given by point A).
(d ) In Problem 13.26, there is disagreement between the monopolist and the monopsonist with respect to both the
quantity and the price of the input. This is the typical case of bilateral monopoly. On the other hand, in
Fig. 13-25, the monopolist and the monopsonist disagree on P a but agree on the quantity of four units of
input A. This is a special and less general case of bilateral monopoly.
(e) In the real world, the P a will be somewhere between $30 and $50. The greater the relative bargaining strength
of the monopolist, the closer will P a be to $50; the greater the relative bargaining strength of the monopsonist,
the closer will P a be to $30.
( f ) If the two firms merged into a single firm, the merged firm would maximize its total profits at point E, where its
MRP a ¼ MC a . That is, the merged firm would continue to supply input A for its own use until the extra
revenue it receives from the use of one additional unit of input A exactly equals the extra cost of supplying
that unit. The result is that the merged firm will supply and use six units of input A at the per-unit cost of $40.
EXTENSIONS AND APPLICATIONS
13.28 From what do economic profits arise?
Profits can be regarded as the reward for a successful innovation, as a reward for bearing uncertainty, and as a
result of monopoly power. We saw in Section 9.7, that in a long-run and perfectly competitive equilibrium, all firms
make zero profit. In the short run, a firm may make profits by introducing a successful innovation such as a new
product or a cost-reducing production technique. However, in the long run other firms will imitate the innovation
until all profits are competed away. In the meantime, other innovations may be introduced. The expectation of
higher profits is also necessary to induce investments in more uncertain ventures. For example, petroleum exploration
and the introduction of new products face greater uncertainties and possibilities of losses than entering established
industries to produce traditional products. Investments will flow into new ventures facing greater
uncertainties only in the expectation of higher profits. Similarly, buying a stock may give a greater but more uncertain
return than putting the money in a savings account. Finally, monopolists and oligopolists produce at a price
which exceeds marginal cost, and by keeping competitors out, they can continue to make profits in the long run.
13.29 Getting an education and training is sometimes referred to as an “investment in human capital.” (a) In
what way is this similar to any other investment? (b) Why is treating education and training as investments
in human capital useful? (c) What are its shortcomings? Are there any objections to this point of
view?
(a)
(b)
(c)
Getting an education and training can be considered an investment in human capital because, like any other
investment, it involves a cost and entails a return. The cost of getting an education and training involves such
explicit expenses as tuition and books; the cost is also implicit in the wages foregone while in school and the
lower wages received while in training. The return on education and training takes the form of the higher
wages and salaries received during the individual’s working life. By discounting all costs and extra income
to the present and comparing returns on costs, we can calculate the rate of return on the investment in
human capital and compare it to the returns from other investments.
Viewing education and training as investments in human capital is useful in explaining many otherwise unexplainable
real-world occurrences, such as why we educate and train the young more than the old, why young
people migrate more readily than the old, etc. The answer is that young people have a longer working time
over which to receive the benefits of education, training, and migration.
Some shortcomings of this line of thinking are as follows: (1) Not all expenses for education and training represent
costs. Some of these expenses should be regarded as consumption since they do not contribute to subsequent
higher earnings (for example, when an engineering student takes a course in poetry). (2) Higher
subsequent earnings may be as much the result of innate ability and greater intelligence and effort as it is
of training. (3) The antipoverty programs of the 1960s to improve the health of and to train low-income
people failed to reduce income inequalities.
Besides these shortcomings, there is the objection that education and training deal with human beings
and should not be compared or analyzed with the same tools used to analyze investment in machinery,
factories, etc.