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 pollution tax is imposed on each unit of a firm's output. 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

When a pollution tax is imposed on each unit of a firm's output, the cost of production increases. As a result, the marginal cost of production increases, causing a shift in the total product curve to the left. This leads to a decrease in the marginal product of labor, causing a decrease in the demand for labor. As a monopsonist in the labor market, John's firm has market power to set wages lower than the marginal revenue product of labor. Therefore, with the decrease in the demand for labor, John's firm can lower wages further and still hire the same number of workers as before. However, with lower wages, some workers may choose to work for other firms that offer better wages, leading to a decrease in the number of workers hired by John's firm. Hence, the number of workers hired will decrease.

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