Chapter 11: Problem 11

To maximize profits, a monopsonist will hire the quantity of labor to the point where the marginal factor cost is equal to a. marginal physical product. b. marginal revenue product. c. total revenue product. d. any of the above.

Short Answer

Expert verified

To maximize profits, a monopsonist will hire the quantity of labor to the point where the marginal factor cost (MFC) is equal to the marginal revenue product (MRP). Therefore, the correct answer is option (b).

Step by step solution

Definition of Marginal Factor Cost (MFC)

MFC is the additional cost of hiring one more unit of labor. It represents the change in total cost when the quantity of labor changes by one unit.

Definition of Marginal Physical Product (MPP)

MPP is the additional output (quantity of goods) produced when one more unit of labor is employed. It measures the change in total output when the quantity of labor changes by one unit.

Definition of Marginal Revenue Product (MRP)

MRP represents the change in total revenue when one more unit of labor is employed. It is calculated by multiplying the marginal physical product (MPP) by the marginal revenue (MR) that each additional unit of output generates. Now, let's analyze each option to find the correct answer.

Option (a): Marginal Factor Cost = Marginal Physical Product

Setting the marginal factor cost equal to the marginal physical product (MFC = MPP) doesn't indicate the point of profit maximization, as it ignores the revenue aspect.

Option (b): Marginal Factor Cost = Marginal Revenue Product

When the marginal factor cost equals the marginal revenue product (MFC = MRP), the monopsonist is considering both the additional cost of hiring more labor and the additional revenue generated by that labor. This condition ensures that the profit is maximized as the benefit from employing the last labor unit (MRP) is equal to its cost (MFC).

Option (c): Marginal Factor Cost = Total Revenue Product

Equating marginal factor cost to total revenue product (MFC = TRP) is not a correct representation of the profit maximization condition, as TRP refers to the total revenue generated by all units of labor, not the additional revenue generated by a specific unit of labor.

Option (d): Any of the above

Since we already determined that only one of the options above is the correct condition for profit maximization, this option is incorrect.

Conclusion

To maximize profits, a monopsonist will hire the quantity of labor to the point where the marginal factor cost (MFC) is equal to the marginal revenue product (MRP), which is option (b).

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