Assume that the market demand for a good is p = 100 - Q. Assume that the marginal product of labor is 1 and the firm can get all the labor it needs at a wage equal to 5. Compare the quantity of labor hired if the output market is competitive with the quantity hired if the output market is a monopoly
What will be an ideal response?
If the output market is competitive, then price will equal marginal cost, which is 5. Output is 95, requiring 95 units of labor. If a monopoly controls the output market, the firm sets w = 5 = (100 - 2L), or L = 47.5. Thus, the monopoly hires half as much labor and produces half as much output as a competitive market would.
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