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 a subsidy is implemented on each unit of labor hired. Then the number of workers hired:
A) will decrease.
B) will increase.
C) will not change.
D) will change in an indeterminate fashion.

Question

Quizplus · Accepted Answer

A subsidy on each unit of labor hired effectively reduces the cost of hiring workers for the firm. This makes hiring additional workers more attractive, leading to an increase in the number of workers hired.

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