In this exercise and the next, we formalize the discussion of monopsony. Assume that a farmer can produce Q L of output at a per unit cost c L under a traditional technology. Assume that using a modern technology with investment I , the farmer can produce Q output at a per unit cost c H . Calculate the break-even price for the farmer under H of both technologies, that is, the price at which the farmer makes zero profits. What price level will encourage the farmer to invest in the new technology rather than the traditional one? What price can the monopsonist charge the farmer under both technologies? What effect does this have on the investment choice of the farmer? Explain.
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