ECON 426 Study Guide - Midterm Guide: Monopsony, Marginal Revenue, Demand Curve
13 Jun 2018
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To maximize: when MR = MC
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MRPL - the marginal revenue generated by the marginal output created by employing an additional worker
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In a competitive labor supply market, Ls = Ld = MRPL
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In a monopsonistic labor supply market, Ls = the intersection of the MC and MRPL (Ld) curve
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Labor Demand Curve (Competitive) = Marginal Revenue Product of Labor
Remember that a Monopolist will maximize by reducing output, not price. This is because they have a linear downward sloping
output demand curve, and will not produce in the inelastic portion of that curve. This means they will not continuously raise
output to make profit, but will restrict it.
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Of course, the firm could choose a point at which demand is unit price elastic. At that point, total revenue is maximized. But the
firm seeks to maximize profit, not total revenue. A solution that maximizes total revenue will not maximize profit unless marginal
cost is zero.
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Labor Demand Curve (Monopolist)
Budget Constraint
C = (wT + V) - wL
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Budget line:
Midterm Review
Thursday, February 15, 2018
5:57 PM
ECON 426 Page 1
C = (wT + V) - wL
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Point E - the endowment point, shows how much the person can consume if they don't enter the labor market
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The worker moves up the budget line as she trades off an hour of leisure for additional consumption
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The absolute value of the slope of the budget line is the wage rate
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Wage rate - the rate at which the market allows the worker to substitute one hour of leisure time for consumption
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MRS = w
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Implies that the last dollar spent on leisure activities buys the same number of utils as the last dollar spent on consumption
goods - maximizing utility
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Where the budget line is tangent to the indifference curve, the slop of the indifference curve = the slope of the budget line:
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MUL gives the additional utility from consuming an extra hour of leisure, w
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Number of utils received from spending an additional dollar on leisure:
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Increases in nonlabor income necessarily make the worker better off - expands the budget set
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Income effect - impact of the change in nonlabor income (holding wages constant) on the number of hours worked
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ECON 426 Page 2
Document Summary
Labor demand curve (competitive) = marginal revenue product of labor. Mrpl - the marginal revenue generated by the marginal output created by employing an additional worker. In a competitive labor supply market, ls = ld = mrpl. In a monopsonistic labor supply market, ls = the intersection of the mc and mrpl (ld) curve. Remember that a monopolist will maximize by reducing output, not price. This is because they have a linear downward sloping output demand curve, and will not produce in the inelastic portion of that curve. This means they will not continuously raise output to make profit, but will restrict it. Of course, the firm could choose a point at which demand is unit price elastic. But the firm seeks to maximize profit, not total revenue. A solution that maximizes total revenue will not maximize profit unless marginal cost is zero.
