26. Factor Markets - Solutions

26. Factor Markets - Solutions - Chapter 26 NAME Factor...

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Unformatted text preview: Chapter 26 NAME Factor Markets Introduction. In this chapter you will examine the factor demand de- cision of a monopolist. If a firm is a monopolist in some industry, it will produce less output than if the industry were competitively orga- nized. Therefore it will in general want to use less inputs than does a competitive firm. The value marginal product is just the value of the ex- tra output produced by hiring an extra unit of the factor. The ordinary logic of competitive profit maximization implies that a competitive firm will hire a factor up until the point where the value marginal product equals the price of the factor. The marginal revenue product is the extra revenue produced by hiring an extra unit of a factor. For a competitive firm, the marginal revenue product is the same as the value of the marginal product, but they differ for monopolist. A monopolist has to take account of the fact that increasing its production will force the price down, so the marginal revenue product of an extra unit of a factor will be less than the value marginal product. Another thing we study in this chapters is monopsony , which is the case of a market dominated by a single buyer of some good. The case of monopsony is very similar to the case of a monopoly: The monopsonist hires less of a factor than a similar competitive firm because the monop- sony recognizes that the price it has to pay for the factor depends on how much it buys. Finally, we consider an interesting example of factor supply, in which a monopolist produces a good that is used by another monopolist. Example: Suppose a monopolist faces a demand curve for output of the form p ( y ) = 100 − 2 y. The production function takes the simple form y = 2 x , and the factor costs $4 per unit. How much of the factor of production will the monopolist want to employ? How much of the factor would a competitive industry employ if all the firms in the industry had the same production function?...
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This note was uploaded on 07/16/2010 for the course ECON 21 taught by Professor Johng.sessions during the Summer '09 term at Dartmouth.

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26. Factor Markets - Solutions - Chapter 26 NAME Factor...

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