Question

2 Monopsony

Suppose that the supply of quarterbacks is given by:

w = $5, 000, 000 + 1, 000, 000L

Further suppose that the marginal revenue product of professional basketball players is:

MRPL = $29, 000, 000 ? 2, 000, 000L

Suppose that we are in a monopsonisitic market.

a) What is the optimal labor (LM) and wage (wM)?

b) Find the buyer surplus.

c) Find the producer surplus.

Answer 1

Monopsony faces a marginal cost function, that has twice the slope of labor supply and this along with MRPL determines the optimum labor. At this labor what the labor supply curve requires the wage rate, gives the optimum wage

a) Marginal cost MC = 5,000,000 + 2,000,000L and MRPL = 29,000,000 - 2,000,000L

Optimum labor is determined when MC = MRPL

5,000,000 + 2,000,000L = 29,000,000 - 2,000,000L

4,000,000L = 24,000,000

L = 6 and wage is w = $5,000,000 + 1,000,000*6 = $11,000,000

b) Buyer / monopsonist 's surplus = 0.5*(29,000,000 - 11,000,000 + 17,000,000 - 11,000,000)*6 = 72,000,000

c) Producer surplus = 0.5*(11,000,000 - 5,000,000)*6 = 18,000,000