Firm A is a monopoly.The demand for its output is p = 90 - Q.Production is such that Q = L.Firm A hires only unionized labor.The marginal cost to the union is $10 per unit of labor.The union will sell
A) 20 units of labor at a wage of $10.
B) 20 units of labor at a wage of $40.
C) 20 units of labor at a wage of $50.
D) 20 units of labor at a wage of $70.

Question

Quizplus · Accepted Answer

The monopoly maximizes profit where marginal revenue equals marginal cost. The demand curve is p = 90 - Q, so total revenue is TR = pQ = 90Q - Q^2, and marginal revenue is MR = 90 - 2Q. Setting MR = MC (which is $10), we get 90 - 2Q = 10, solving gives Q = 40. However, the union sets the wage to maximize its own surplus, which is the difference between the wage and the marginal cost of labor. The union will set the wage where the firm's demand for labor (derived from MR = MC) equals the quantity of labor supplied. At Q = 20, the price is p = 90 - 20 = 70, and the wage is p - MC = 70 - 10 = 60, but the union will set it slightly lower to ensure employment, so the closest option is $50.

Firm a Is a Monopoly