Scenario 14.4:
John's firm is a competitor in your product market and a monopsonist in the labor market. The current market price of the product that your firm produces is $2. The total product and marginal product of labor are given as:
TP = 100L - 0.125L 2 MP = 100 - 0.25L
where L is the amount of labor employed. The supply curve for labor and the marginal expenditure curve for labor are given as follows:
L = P L -5 ME L = 2L + 5
-Refer to Scenario 14.4. Suppose that the price of the product rises to $5, the price of labor
A) will decrease.
B) will increase.
C) will not change.
D) will change in an indeterminate fashion.

Question

Quizplus · Accepted Answer

When the price of the product increases, John's monopsony power in the labor market decreases as it becomes relatively less important for him to lower wages to maintain profits. As a result, he will increase the price of labor to hire more workers and maximize profits. Therefore, the price of labor will increase.

Scenario 14.4: John's Firm Is a Competitor in Your Product Market and Market