Question

Suppose the MLB is a monopsonist buyer of baseball players, and faces a supply curve described by the equation wS = MC = 10LS with marginal expenditure curve ME = 20LS. Suppose the MLBPA is a monopolist producer of baseball players, and faces a demand curve described by the equation wD = MB = 1,200 – 20LD with marginal revenue curve MR = 1,200 – 40LD.

a) What is the equilibrium amount of labor demanded by the MLB and supplied by the MLBPA? (Hint: Set MR = MC or MB = ME and solve for L.)

b) What is the contract zone for wages? (Hint: Plug L from part (a) into the demand equation to get the highest wage the MLB would be willing to offer, and plug L from part (a) into the supply equation to get the lowest wage the MLBPA would be willing to accept.)

Answer 1

SOLUTION:-

(a) Equilibrium demand or supply of labour can be found by putting

In equilibrium : LD = LS = L

  

  

(b) Contract zone for for wages : for this we need to find lower & higher bound.

MLB would be willing to offer = 1200 - 20 (24)

= 1200 - 480

= 720   Highest wage

And, ML BPA willing to accept : 10 (24)

= 240 Lowest wage

contract is :  

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