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 number of workers hired:
A) will decrease.
B) will increase.
C) will not change.
D) cannot be determined without knowing the wage rate.

Question

Quizplus · Accepted Answer

When the price of the product increases, the revenue generated per unit of product increases, making it more profitable to produce additional units. Since the marginal product of labor (MP) contributes to production, the firm is likely to hire more workers to increase production and capitalize on the higher product price, assuming the cost of labor does not outweigh the additional revenue generated from selling the product at a higher price.

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