Coursenotes_ECON301

Remember pq is simply the p q pq cq q pq

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Unformatted text preview: firm is a monopsonist in the labour market, as in Case 5, the relevant variable in the optimal decision is the marginal expenditure on labour, MEL, instead of the exogenously fixed market wage, w, when dealing with PC markets. Given an upward sloping supply curve for labour, L = L(w) we have the following expression for the total expenditure on labour: EL = w L(w) (Lerner Condition) 64 and the marginal expenditure on labour, MEL, (i.e. the change in the total expenditure on labour as a result of an additional unit of labour): MEL = w + L w L where, w / L is the slope of the labour supply curve (w / L > 0). Notice that there is a markup in terms of the marginal expenditure on labour over the perfectly competitive wage, w. The monopsony employer now sets their demand for labour according to MEL (also thought of as marginal cost of labour by some) = MRP. The optimal decision rule of the firm in the competitive goods market remains as: MRP = w or, MP P = w This type of situation leads to what is called Monopsonistic Exploitation. So you might want to ask me at this point, "What in the HECK are you talking about?" Let me attempt to clarify using a more familiar formulation of the problem and using a graphical representation... Monopsonistic Exploitation is when the firm is the only buyer of labour in the labour market and the consumer supplies their work effort in a competitive labour market. In this case, the firm can induce a w* < MRP and exploit the worker! Let's see how this works by considering the firm's maximization problem. The firm wants to: Max {P f(L) w(L) L} L FOCL P f (L) w(L) L w(L) = 0 P f (L) = w(L) + L w(L) [MRP] = [MCL in PC] + [Premium] 65 so, [MRP] = [MCL in Monopsony or MEL] The graph shows that the firms demand for labour is equal to the MRP and their optimal decision is to set MRP equal to MEL (not the actual supply of labour!). This means that w* < MRP and the worker receives a lower wage than they would if the firm was not the only buyer of labour in the market...thus the terminology "Monopolistic Exploitation". w MEL Deadweight Loss S = ACL w*PC w*M D = MRP = P MPL L L*M L*PC We said that while competitive firms must take the market price (price-takers), P in the goods market and w in the labour market, monopolists and monopsonists ope...
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