Sunday, November 16, 2014

Monopolistic Resource Market 1 - Monopolistic Output - Perfectly Competitive Labor

Monopolistic Resource Market 1 -  Monopolistic Output - Perfectly Competitive Labor

2005B AP Microeconomics Exam

Perfectly Competitive Resource Market 3 - Perf. Comp. Output market & Monopsony (Labor) Market

Resource Markets 3 - Perfectly Competitive Firm as a Monopsonist 

Monopsonist - a firm that raises wages to attract new workers into the market.
(a single buyer of labor)

mjmfoodie - video with a Perfectly competitive output market but a Monopsonist in the labor market.

In a Monopsonist labor market, MRC is always greater than the wage rate: a wage-maker is a firm that must raise the wages it offers workers in order to attract more individuals to come to work for the firm. Since hiring one more worker requires raising wages for workers already employed (no workers will settle for others hired to do the same job at a lower pay) the cost of hiring the additional workers is higher than the actual wage the firm has to pay that worker.

Profit Max in a Monopolist Labor Market

  • a monoposonist must raise wages to attract new workers
  • the firm is a wage maker
  • MRC is always greater than what the wage rate the firm is paying

Example of a small shop, Notice:
  • because the single employer must raise wages to attract more workers, it will always cost the firm more to hire one more worker than the wage it has to pay that worker.
  • wages must be raised for all workers
  • the MRC rises faster than the wage rate (notice that the wage rate is going up by $10 but the MCL (MRC) by an ever increasing amount
  • as a result the firm will hire fewer workers and pay them lower wages than a perfectly competitive labor market.

Assuming the monopsonist tries to maximise profits, it will demand labour up to the point where MCL = MRP. This will occur at 3 hairdressers, where the MCL and MRP are both £50 per hour, as shown below:

However, the wage paid to the workers is only £30. In this case, the monopsonists is said to be exploiting the workers by paying less than the MRP – i.e. wages are £30 per hour, and the MRP is £50 per hour, meaning that the monopsonist has gained £20. It can achieve this because it does not have to pay the full value of the MRP.

    • as a result the firm will hire fewer workers and pay them lower wages than a perfectly competitive labor market.

    Minimum Wages in Labor Markets

    In the monopsonistic labor market: (Minimum wage increases employment)
    • before the minimum wage, the single firm faced an MRC that was always higher than the wage it pays to hire additional workers.
    • This restricted the level of employment the firm desires to the MRP=MRC level.
    • with the minimum wage, the firm can hire as many workers as it wants at the (minimum wage level). The minimum wage becomes the marginal resource cost. The firm is now a wage-taker.
    • The result is a new equilibrium level of employment that is greater than before the minimum wage was employed.
    "a minimum wage may have negative unintended consequences when labor markets are competitive, in the form of higher unemployment. However, in monopsonist labor markets, the imposition of a minimum wage may lead to greater employment and higher wages for those employed."

    2011B AP Microeconomics Exam FRQ, 3

    a) identify the profit-max quantity of labor for tree mart - Max-Profit is where MRP=MRC/MFC so, MFC crosses the MRP curve at a wage rate of $20 and a quantity of 100.

    b) Identify the wage rate pays to hire the profit-max quantity of labor, the firm will pay a wage rate of $10 dollars.

    c) Identify the quantity of labor hired in each of the following:
    • Tree market operates in a competitive market: In a competitive market the supply of labor is the equilibrium quantity or 200 units.
    • The government imposes a 12.50 minimum wage. The supply curve will become horizontal at the $12.50 rate up to a quantity of 150 units.

    Perfectly Competitive Resource Market 2 - Perfectly Competitive Output & Labor Market - FRQ's

    Resource Markets 2 - Perfect Competition - output and resource - FRQ's

    2008B AP Microeconomics Exam - Look at (Resource Markets  #1).

    2005 AP Microeconomics Exam - FRQ's #3

    a) In what kind of market structure does this firm sell its output? Look at the directions above,,, "The firm can sell all the shirts it can produce to retailers at the price of $20 dollars. Read it again,"The firm can sell all the shirts it can produce to retailers at the price of $20 dollars. Read it again,"The firm can sell all the shirts it can produce to retailers at the price of $20 dollars. Question - can a monopoly sell all the goods it wants at the same price,,, NO., it must lower its price to sell more.. Only a perfectly competitive (price taker) industry market could do this.... 
    (Answer: Perfectly Competitive Market)

    b) In what kind of market structure does this firm hire its workers? Again, look at the directions, "P & L can hire all of the workers it wants at a market wage rate of $120 per day per worker. Read it again, "P & L can hire all of the workers it wants at a market wage rate of $120 per day per worker." Read it again, "P & L can hire all of the workers it wants at a market wage rate of $120 per day per worker." (Answer: this is a Perfectly Competitive (price taker) labor market.)

    The rest is self explanatory - use a chart!!!

    2007 AP Microeconomics FRQ, #2

    a) draw a CLG of the firm's supply curve for unskilled labor.

    Remember, a firm in a perfectly competitive market, that can hire all it wants at the wage rate of $90 a day per worker has a horizontal labor supply curve.  

    c) productivity increases what happens to quantity of labor and wage rate.

    Notice, with the increase productivity (MP of labor has increased) and the firms demand for labor shifts right (increases) more labor is desired. Because the Perfectly Competitive firm's productivity happens to it first the market is unaffected and therefor the wage rate is unchanged. 

    2003B AP Microeconomics Exam FRQ, #3

    Make a chart:
    a) a profit max = MRP = MRC (MFC) marginal factor cost
    b) how many workers to Profit Max - 4 or 5,
    c) wage rate is reduced to $6 an hour - Chart!!!
    how many workers? at wage rate of $6,,,  5 or 6 workers will be hired. as MRP = MRC at the 6th worker but the firm is indifferent to the sixth worker as he costs as much as he brings in.

    d) price of pencils drops to $1 per dozen and the $6 rate stays the same. Chart!!!
    at a price of $1 the MRP decreases where the firm to profit max will only hire 2 or 3 workers.

    2006B AP Microeconomics Exam FRQ, #3

    2011 AP Microeconomics Exam FRQ, #2

    c) could be tricky, unless you read the question where it stated that assume avocado producers hire from a perfectly competitive labor market. Also that MFC and MRC are the same thing.

    2003 AP Microeconomics Exam FRQ, #3

    Perfectly Competitive Resource Market 1 - Perfectly Competitive Output & Labor

    Perfectly Competitive 1 - Output & Labor 

    Marketmjmfoodie - Factor Market Overview - video

    mjmfoodie - Factor Market - Perfectly Competitive Factor and Output Markets - video
    Perfectly Competitive Labor Market
    • (wage takers) - hire as many workers @ the equilibrium wage rate.
    • Market price is the wage rate.
    Derived  Demand - demand for a resource, depends on other factors:
    • Price of the good the resource is used for.
    • Productivity of the resource
    Input - (Labor) - is effected by the Law of Diminishing Marginal Returns
    • as more labor is added to a fixed amount of capital, output eventually decreases at an increasing rate.
    • demand for labor is inversely related to price
    • firms will only hire more labor if the wage rate falls

    MRP (Marginal Revenue Product)

    MRP is change in the firms total revenue resulting from the employment of one additional worker. It can be measured by the Marginal Physical Product of labor multiplied by the price of the good being produced. 

    Reffonomics on MRP=MRC

    MRP = 

    MRP is (revenue attributed to the last worker hired)

    The MRP curve shows/ illustrates the firms demand for labor.

    MRC (Marginal Revenue Cost)

    A firm faces a downward sloping demand for labor curve due to the decreasing productivity of labor in the short-run. 

    In a Perfectly Competitive Market, MRC = the Wage Rate,  A wage taker is a firm that can hire as many workers as it wants at the market wage rate. Te cost of each additional worker, therfore, is simply the wage the firm must pay that worker.

    Notice, that the wage rate for the firm is its supply curve and that it is perfectly elastic in that they can hire as many workers as they want at that prevailing wage.

    Profit Max = (MRP = MRC)

    If the cost of hiring an additional worker (MRC) is more than the benefit of hiring the worker (MRP) then the worker should not be hired. Conversely, if the benefit of hiring the worker (MRP) is hirer than the cost of hiring the next worker (MRC) then the worker should be hired.

    A Perfectly Competitive employer will want to hire workers until the MRP of the last worker equals the market wage rate.


    2008B AP Microeconomics Exam

    Make a chart:
    a) after which worker do DMR set in,, by looking at MP we can see that the second worker produces an additional 16 units, an increase from the first workers output. Yet the third worker produces only 10 additional units a decrease from the 2nd workers additional output, thus diminishing marginal returns have set in after hiring the 2nd worker. Answer: after the 2nd worker

    b) Calculate the Marginal Physical Product of the fifth worker. MPP is the change in the quantity of the total physical product produced divided by the change in input (labor/additional worker). Also known here as Marginal Product. The change in the fifth workers output was 44 to 49 units produced or 5 units were produced by hiring worker #5. Answer: 5 units

    c) Calculate the MRP of the 3rd worker - done. Look at the chart - Answer: 3rd worker MRP = 20

    d) How many workers will GW hire to Max Profit. Remember, max profit is where MRP = MRC, so looking down the chart the 5th worker's MRP is $10 while his MRC is $15.. we are loosing money on hiring the 5th worker. SO we look at worker 4, his MRP is $16 while his MRC (wage rate) is $15,, we are making a $1 on hiring him. As you can's hire a part of a worker,, we should consider profit max is at hiring of worker #4. Answer: hiring of worker #4

    e) GW has fixed costs of $20, what are the Short-run profits of hiring 2 workers. Dirty bastards, they are trying to see if we know that the formula for profits is TR (total revenue) minus TC (total costs)... Knowing that , TC is a combination of fixed & variable, fixed being the $20 and variable being the wage rate of $15 per worker. So $20 plus $30 (15 x 2) = $50 dollars (TRC) - and TRP is the amount produced by the two workers (TP = 26 units times the price of the units) is $52 or you can simply add the MRP of worker 1 & 2 (20 + 32) = $52. So $52(TR) - $50(TC) = Profit of $2 dollars.

    f) price of hats increases what happens to the number of workers in the short-run. Look at the chart below,,,, double the price and what happens to MRP,,, it increases.

    Now, at what point with the new price would MRP = MRC,,, at worker #5,, worker #6 is still to expensive, but with the additional revenue from the rise in the price of the good (hats,,not labor) we would hire an additional worker,,, it works the same if productivity had increased. In the short run we would hire additional workers.