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# Class Note for FINA 6387 at UH

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COURSE
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KARMA
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This 10 page Class Notes was uploaded by an elite notetaker on Friday February 6, 2015. The Class Notes belongs to a course at University of Houston taught by a professor in Fall. Since its upload, it has received 38 views.

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Date Created: 02/06/15
Chapter I 3Pricing and Employment of Inputs Topics to be Discussed n n n Competitive Factor Markets Factor Markets with Monopsony Power Factor Markets with Monopoly Power Competitive Factor Markets n Characteristics 1 Large number of sellers and buyers of the factor of production 2 The buyers and sellers of the factor of production are price takers We will illustrate the demand for a factor input and assume only one input is variable Demand for factor inputs is a derived demand 7 Depends on output demand The Decision to Hire or Fire Assume 7 Two inputs are needed to produce output Capital K and Labor L 7 Cost ofK is r and the cost oflabor is w 7 K is fixed andL is variable Problem 7 How much labor to hire Measuring the Value of a Worker s Output The owner of donut shop wants to know whether it is profitable to hire an additional worker It will be pro table if the additional revenue from an additional worker is greater than its cost ie MRPL gt wage Marginal Revenue Produce MRPL MRPL MR MPL Assume perfect competition in the product market Then MR P o MRPL P MPL Competitive Factor Markets n Question When more workers are hired what will happen to the value of MRPL Marginal Revenue Product Competitive Output NIarket NIonopolistic Output hiarket Hours of Work MRPL is downward sloping because MPL decreases due to diminishing marginal returns n Question Why is the MRPL for the monopoly output market below the MRPL for the competitive output market In a competitive output market MRP In a monopolistic output market MR lt P n Choosing the pro tmaximizing amount of labor If MRPL gt w the marginal cost of hiring a worker hire the worker If MRPL lt w hire less labor If MRPL w pro t maximizing amount of labor Hiring by a Firm in the LaborMarket with Capital Fixed The pro t maximizing firm will hire L units of labor at the point where the marginal revenue product of labor is equal to the wage rate Hiring by a Firm in the Labor Market with Capital Fixed Price oi I Labor l i W SL MRPL DL L Quantity of Labor Competitive Factor Markets n If the market supply of labor increased relative to demand baby boomers or female entry a surplus of labor would exist and the wage rate would fall n Question How would this impact the quantity demanded for labor Competitive Factor Markets n Comparing Input and Output Markets MRPL MPL MR and at profit maximizing number of workers MRPL w MPL MR w MR 2 wMPL wMPL 2 MC of production Competitive Factor Markets n Comparing Input and Output Markets In both input and output choices occur where MR MC 7 MR from the sale of the output 7 MC from the purchase of the input Competitive Factor Markets n The Supply of Inputs to a Firm Determining how much of an input to purchase 7 Assume a perfectly competitive factor market A Firm 3 Input Supply in a Competitive Factor Market wag quot wage Market Supply S of Labor Supply of Labor Facing Firm Market Demand for Labor 10 Elli MRP Demand for Labor D of Workers of Workers n Observations The rm is a price taker at 10 SAEME10 ME MRP 50 units n Question Why is 50 units the pro t maximizing quantity Competitive Factor ilarket n A competitive factor market is in equilibrium when the price of the input equates the quantity demanded to the quantity supplied Labor MarketEquilibrium Labor Market Equilibrium ompetitive Output NIarket wage h lonopolistic Output Market SL AE VM DL MRPL DL MRPL L C Number of Workers L A Nlunber of Workers n Equilibrium in a Competitive Output Market D LMRPL SL WC MRPL MRPL PXMPL Markets are ef cient n Equilibrium in a Monopolistic Output Market MR lt P MRP MRMPL Hire LM at wage wM vM marginal bene t to society w M marginal cost to the rm Pro ts maximized Using less than the ef cient level of input Equilibrium in a Competitive FactorMarket n Economic Rent For a factor market economic rent is the ali erence between the payments made to a factor of production and the minimum amount that must be spent to obtain the use of that factor Economic Rent Wage Economic Rent DLMRPL l I I L Number of Workers Economic Rent n Question What would be the economic rent if S L is perfectly inelastic n Land A Perfectly Inelastic Supply With land inelastically supplied its price is determined entirely by demand at least in the short run Factor Markets with M onopsony Power n Assume The output market is perfectly competitive Input market is pure monopsony Marginal and Average Expenditure Marginal and Average Expenditure Price lVIarginal w nit Expenditure lIE ut h S L Average 15 Expenditure AE 1 MRPL l l 012 L Factor NIarkets with M onopsony Power n Examples of Monopsony Power Government 7 Soldiers Missiles B2 Bombers NASA 7 Astronauts Lu 4 5 6 Units of Input Factor Markets with Monopoly Power n Just as buyers of inputs can have monopsony power sellers of inputs can have monopoly power n The most important example of monopoly power in factor markets involves labor unions Objectives of the Union Leader 1 To maximize the number of workers hired L at wage w 2 To maximize the economic rent that employees earn L1 at wage w 3 To maximize total wages paid to workers L2 at awage rate of w2 Monopoly Power of Sellers of Labor Wage per A worker w Bilateral Monopoly M arketsr n Bilateral Monopoly Market in which a monopolist sells to a monopsonist Bilateral Monopoly ME 10 20 25 40 Number of Workers n Observations Hiring without union monopoly power 7 MRP ME at 20 workers and w 10hr Union s objective 7 MR MC at 25 workers and w l9hr Bilateral Monopoly n Who Will Win Depending on the bargaining power The union will if its threat to strike is credible The rm will if its threat to hire nonunion workers is credible If both make credible threats the wage will be at wc Minimum Wage above higher market wage Explained alreaaly Issue 39 0 how many jobs are lost due to the minimum wage 0 sn t there any side e ects in imposing minimum wage 0 Summary In a competitive input market the demand for an input is given by the MRP the product of the firm s marginal revenue and the marginal product of the input A rm in a competitive labor market will hire workers to the point at which the marginal revenue product of labor is equal to the wage rate When factor markets are competitive the buyer of an input assumes that its purchase will have no effect on the price of the input Economic rent is the difference between the payments to factors of production and the minimum payment that would be needed to employ those factors When a buyer of an input has monopsony power the marginal expenditure curve lies above the average expenditure curve When the input seller is a monopolist such as a labor union the seller chooses the point on the marginal revenue product curve that best suits its objective When a monopolistic union bargains with a monopsonistic employer the wage rate depends on the nature of the bargaining process 10

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