Question

Suppose the following table that characterizes the situation of monopsony.

Total cost Wage Offered Marginal Marginal Number of workers expense revenue Product (МЕ) $10 $11 $12 $13 $14 5 ? 35 6 ? 29 7 ? ? 25 8 ? 20 9 18

a) Complete the table above by computing total and marginal expense of labor for each level of employment

b) Find the level of employment that maximizes profit? What wages will the monopsony offered?

c) On the same diagram, draw the supply curve, marginal expense curve and marginal revenue product curve.

Answer 1

a)

Total cost = Wages offered x number of workers

When number of workers is 5, total cost = $ 10 x 5 workers ( $ 50)

Total cost at 6 workers = $ 11 x 6 workers ( $ 66)

Total cost at 7 workers = $ 12 x 7 workers ( $ 84)

Total cost at 8 workers = $ 13 x 8 ( $ 104)

Total cost at 9 workers = $ 14 x 9 ( $ 126)

Marginal expense is the change in the total cost when one additional worker is added.

Marginal expense at 6 workers = Total cost at 6 workers - total cost at 5 workers

Marginal expense at 6 workers = $ 66 - $ 50

Marginal expense at 6 workers = $16

Marginal expense at 7 workers = $ 84 - $ 66

Marginal expense at 7 workers = $ 18

Marginal expense at 8 workers = $ 104 - $ 84

Marginal expense at 8 workers = $ 20

Marginal expense at 9 workers = $ 126 - $ 104

Marginal expense at 9 workers = $ 22

The completed table is shown below

Wages offered	Number of workers	Total cost	Marginal expense	Marginal revenue product
$10	5	$50	_	35
$11	6	$66	$16	29
$12	7	$84	$18	25
$13	8	$104	$20	20
$14	9	$126	$22	18

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b) The level of employment that maximizes the profit is the point where the marginal expense equals the marginal revenue product

From the table above we can observe that when the firm employs 8 workers, the marginal expense equals the marginal revenue product.

Hence profit is maximized by employing 8 workers.

The wages offered by the Monopsony is $ 13

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C)

The marginal expense curve of the firm is also its supply curve because it shows the quantities the firm will supply at different prices.

40 35 25 Number otworker Supply urv 20 Marginal expensa 15 arewue 10 S WAGES Ss $10 $15