Asked by Muhammad Haque on Jul 12, 2024
Verified
If a firm is a monopsonist in the hiring of both labor and capital,it will obtain the profit-maximizing quantities of labor and capital when:
A) MRPL/PL = MRPC/PC = 1.
B) MRPL/MRCL = MRPC/MRCC = 1.
C) the MRP of labor equals the MRP of capital.
D) the MRC of labor equals the MRC of capital.
Monopsonist
A market condition in which a single buyer substantially controls the market as the major purchaser of goods and services.
Profit-Maximizing Quantities
The level of output at which a firm maximizes its profit, determined by the point where marginal cost equals marginal revenue.
- Understand the mathematical criteria for profit maximization in hiring labor and capital in monopsonistic conditions.
Verified Answer
NI
Nayeli IbanezJul 18, 2024
Final Answer :
B
Explanation :
This is the appropriate condition for profit maximization in a situation of monopsony power. The ratio of the marginal revenue product of each factor to its price should be identical across factors. This is equivalent to setting the ratio of the marginal cost of the two factors equal to the ratio of their marginal revenue products. It ensures that the monopsonist is not underutilizing one factor at the expense of the other, leading to a suboptimal outcome. Choice A is incorrect because it does not take into account the marginal cost of the two factors. Choice C is incorrect because it ignores the relative prices of the two factors. Choice D is incorrect for the same reason as Choice C.
Learning Objectives
- Understand the mathematical criteria for profit maximization in hiring labor and capital in monopsonistic conditions.