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1. Why is a firm”s demand for labor curve more inelastic when the firm has monopoly power in the output market than when the firm is producing competitively?
2. Why might a labor supply curve be backward bending?
3. How is a computer company”s demand for computer programmers a derived demand?
4. Compare the hiring choices of a monopolistic and a competitive employer of workers. Which will hire more workers, and which will pay the higher wage? Explain.
1.The firms demand curve for labor is determined by the incremental revenue from hiring an additional unit of labor known as the marginal revenue product of labor: MRPL= (MPL)(MR), the additional output that the last worker produced, times the additional revenue earned by selling that output. In a competitive industry, the marginal revenue curve is perfectly elastic and equal to price. For a monopolist, marginal revenue is downward sloping. As more labor is hired and more output is produced, the monopolist will charge a lower price and marginal revenue will diminish. All else the same, marginal revenue product will be smaller for the monopolist. This implies that the marginal revenue product for the monopolist is more inelastic than for the competitive firm. 2.A backward-bending supply curve for labor may occur when the income effect of an increase in the wage rate dominates the substitution effect. Labor supply decisions are made by individuals choosing the most satisfying combination of work and other (leisure) activities. With a larger income, the individual can afford to work fewer hours: the income effect. As the wage rate increases, the value of leisure time (the opportunity cost of leisure) increases, thus inducing the individual to work longer hours: the substitution effect. Because the two effects work in opposite directions, the shape of an individuals labor supply curve depends on the…

s preferences for income, consumption, and leisure. 3.A computer companys demand for inputs, including programmers, depends on how many computers it sells. The firms demand for programming labor depends on (is derived from) the demand it faces in its market for computers. As demand for computers shifts, the demand for programmers shifts. 4.Since the decision to hire another worker means the monopsonist must pay a higher wage for all workers, and not just the last worker hired, its marginal expenditure curve lies above the input supply curve (the average expenditure curve). The monopsonists profit-maximizing input demand, where the marginal expenditure curve intersects the marginal revenue product curve, will be less than the competitors profit-maximizing input choice, where the average expenditure curve intersects the demand curve. The monopsonist hires less labor, and the wage paid will be less than in a competitive market.


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