If the market demand elasticity is constant at -3 and a monopolist's MPL = 1.2L⁻⁰.⁵,then the labor demand for the monopoly is
A) 0.8PL⁻⁰.⁵.
B) 0.4PL⁻⁰.⁵.
C) 0.8PL⁻².
D) 0.4PL⁻².

Question

Quizplus · Accepted Answer

The monopolist's labor demand is derived from the marginal revenue product of labor, which is the product of the marginal product of labor (MPL) and marginal revenue (MR). Given constant elasticity of demand, MR is related to price (P) by MR = P(1 + 1/elasticity). With elasticity of -3, MR = P(1 - 1/3) = 0.67P. The MPL is given as 1.2L⁻⁰.⁵, so the labor demand is MR * MPL = 0.67P * 1.2L⁻⁰.⁵ = 0.8PL⁻⁰.⁵.

If the Market Demand Elasticity Is Constant at -3 and a Monopolist's