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 tax is imposed on each unit of the product that John produces. Which curve will shift?
A) Marginal product of labor
B) Marginal revenue product of labor
C) The supply of labor
D) All of the above will shift due to the tax on output.

Question

Quizplus · Accepted Answer

A tax on output will decrease John's revenue per unit and therefore decrease his willingness to pay for labor, causing a shift in the marginal revenue product of labor curve. The marginal product of labor and supply of labor curves are unaffected by the tax on output.

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