Question

Macroeconomics

Posted 6 months ago

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This graph illustrates a firm's marginal factor cost of labor $\left(M F C_{L}\right)$, marginal revenue product of labor $\left(M R P_{L}\right)$, and the supply of labor $\left(S_{L}\right)$. This firm hires labor in a monopsony labor market.
What is deadweight loss in this market?
Choose 1 answer:
(A) $\$ 22,000$
(B) $\$ 10,000$
(c) $\$ 6,000$
(D) $\$ 7,000$
(E) $\$ 3,000$
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Answer from Sia

Posted 6 months ago

Solution

a

Deadweight Loss Calculation: Deadweight loss in a monopsony market occurs because the quantity of labor hired by the monopsonist is less than the socially optimal quantity. To calculate the deadweight loss, we need to find the area of the triangle formed by the socially optimal quantity of labor, the monopsonist's quantity of labor, and the difference in wage rates at these quantities

b

Triangle Area Formula: The area of a triangle is given by $\frac{1}{2} \times \text{base} \times \text{height}$. The base of the triangle is the difference in quantities of labor between the socially optimal level and the monopsonist's level. The height is the difference in wage rates at these quantities

c

Applying the Formula: Using the graph, the base is $600 - 400 = 200$ workers, and the height is $55 - 35 =$20. Thus, the area of the triangle, representing the deadweight loss, is $\frac{1}{2} \times 200 \times 20$

d

Calculating Deadweight Loss: The deadweight loss is $\frac{1}{2} \times 200 \times 20 = 2000$

Answer

$4,000

Key Concept

Deadweight loss in a monopsony market

Explanation

Deadweight loss is the loss of economic efficiency when the equilibrium outcome is not achievable or not achieved. In the context of a monopsony labor market, it is the loss of welfare due to the monopsonist hiring fewer workers than the socially optimal level at a lower wage.

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