Suppose that a monopoly firm finds that its MR is $50 for the first unit sold ea

Question

Suppose that a monopoly firm finds that its MR is $50 for the first unit sold each day, $49 for the second unit sold each day, $48 for the third unit sold each day, and so on. Further suppose that the first worker hired produces 5 units per day, the second 4 units per day, the third 3 units per day, and so on.

a. What is the firm’s MRP for each of the first five workers?
Worker MRP Unregulated
1 ----------------
2 ----------------
3 ----------------
4 ----------------
5 ----------------

b. Suppose that the monopolist is subjected to rate regulation and the regulator stipulates that it must charge exactly $40 per unit for all units sold. At that price, what is the firm’s MRP for each of the first five workers?
Worker MRP Unregulated
1 ----------------
2 ----------------
3 ----------------
4 ----------------
5 ----------------
c. If the daily wage paid to workers is $170 per day, how many workers will the unregulated monopoly demand?
________worker(s)
If the daily wage paid to workers is $170 per day, how many workers will the regulated monopoly demand?
________worker(s)
Looking at those figures, will the regulated or the unregulated monopoly demand more workers at that wage?
Choose: Unregulated monopoly and regulated monopoly

d. If the daily wage paid to workers falls to $77 per day, how many workers will the unregulated monopoly demand?
________worker(s)

If the daily wage paid to workers falls to $77 per day, how many workers will the regulated monopoly demand?
________worker(s)

Looking at those figures, will the regulated or the unregulated monopoly demand more workers at that wage?
Choose: Unregulated monopoly and regulated monopoly
e. Comparing your answers to parts c and d, does regulating a monopoly’s output price always increase its demand for resources?
Choose: Yes or No

Explanation / Answer

a. MRP = (Change in revenue)/(Change in Labour) For first worker = 50 + 49 + 48 + 47 + 46 = 240/1 = $240 (Since he produces 5 units) Second Worker = 45 + 44 + 43 + 42 = 174/1 = $174 (Since he produces 4) Similarly, Third worker = 41 + 40 + 39 = $120 Fourth worker = 38 + 37 = $75 Fifth worker = $36 b. Now all units are charged at $40 First worker = 5*40 = $200 Second = 4*40 = 160 third = 3*40 = 120 and so on.... c. Unregulated: For wage 170 they will hire 2 workers since for second worker MRP = 174 and goes below 170 for the third worker (optimum is 2 because every worker added now would incurr loss instead of profit) Regulated: If the wage is $170 it will demand workers until the MRP decreases below 170... and that happens for worker 2 here (since he can produce only $160 for $170 wage, he should not be hired) hence only one worker will be hired here d. Unregulated: 3 workers should be hired since for fourth worker MRP = 75 (

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