Question

In January, General Motors laid off 2,000 workers. Suppose you are hired as a consultant to estimate the impact of these layoffs on the number of cars that GM will be able to produce this year. To do so, you need to estimate the marginal productivity of workers at GM. You go to the company’s web page and learn that the company pays the average worker $140,000 per year and is able to sell the average car for $20,000. If GM has monopsony power (or faces an upward sloping labor supply curve for some other reason), is this enough information to calculate the marginal productivity of workers at the company? If so, how many fewer cars per year will GM be able to produce this year given that it laid off 2,000 workers? If not, what is the most you can say about the marginal productivity of workers at GM given this information?

Answer 1

If GM has monopsony power, it means that it is the only buyer of inputs including labor in the market. Hence, it can set up a wage which may not equal the marginal product of labor as what happens in a competitive set up. Hence, the wage of $140,000 may not reflect the marginal product of labor as in this case. Exact value of marginal product can not be known from this information but it is plausible that the marginal product is more than what the firms are offering in this market as wage