Question

1. A firm which uses just one input, zeds, faces market supply function w_z = 50 + Z, where Z is the quantity of zeds used, w_z is the factor price per unit Z, and a marginal revenue product of MRP = 650 - Z. What is the equilibrium quantity and price of zeds purchased by the firm

a) if the firm is a monopsonist?

      b) if the firm is operating in perfectly competitive input and output markets?

2. If firms purchase an input Z up to the point at which the MRP(z) = MFC(z), then the allocation of resources is always efficient. True or False? Explain.

Answer 1

The diagram below gives the equilibrium answers for both monopsony and perfect competitive buyer. MFC has been calculated by dTC/dZ.

The point marked as M is the Monopsony equilibrium where the MFC = MRP and the equilibrium quantity is 200 zeds and the equilibrium price of zeds is 250 (calculated by putting equilibrium quantity in the market supply curve given in the question)

The point marked as C is the Perfect competitive equilibrium where the MRP=S and the equilibrium quantity is 300 zeds and the equilibrium price of zeds is 350.

1600 1400 MFC 1200 1000 800 SEAFC M MRP 100 200 300 400 500 600

2. The given statement is false. As can be seen from the above figure when MFC=MRP there is a deadweight loss equal to the area of triangle MEC. This is because the only efficient allocation is when market supply curve and market demand curve intersect and it happens at a point like C when S=MRP (the demand curve).