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

Since the firm becomes more profitable with the rise in product price, it will increase its demand for labor, which leads to an increase in the price of labor. Additionally, as a monopsonist in the labor market, John's firm has market power over labor, and thus, the price of labor will not be determined solely by the market price of the product. Therefore, the price of labor will increase.

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