Suppose you manage a firm, which is a monopsony in the labor market and a monopoly in the product market. Suppose another firm moves into your market, hiring from the same pool of workers and selling an identical product to the same set of customers. Use the model of monopsony to analyze the impact of the new firm on the quantity of output you produce (Q), the price your firm should charge (P), the quantity of workers you employ (L), and the wage you pay (W).
Show graphically and explain your reasoning in detail. For example, if wages change, how and why do they change the way you say? Complete the following:
- Create a graphic to illustrate producer equilibrium for monopsony in the labor market. Draw labor supply, labor demand and equilibrium for quantity of workers and wage.
- Create a graphic to illustrate producer equilibrium for monopoly in the product market. Draw monopsony producer equilibrium with downward sloping marginal revenue product curve, and upward sloping labor supply and marginal cost of labor.
- Conduct appropriate qualitative analysis to explain how Q, P, L and W will change when the new firm enters the industry. Explain your economic reasoning and show graphically.