Exercise 2

I. Monopsony
A. True/False
1. A profit-maximizing monopsony will determine the appropriate level of input use
where the marginal cost of labor (MFCL) intersects demand (MRPL)
2. A monopsonists MFCL is not equal to its AFCL.
3. The monopsony realizes a profit by paying the laborer a wage lower than the
value of the marginal product (VMP) that the laborer is producing.
4. A firm which is monopolist in the product market is likely to be monopsonist in the
labour market if it is the only buyer of a particular type of labour.
5. The monopsonistic employer faces directly the aggregate labour supply curve
which is upward sloping, implying that he can choose the wage along that curve:
even if the wage is reduced reduced, the firm does not loose all its workforce.
B. Refer to the graph below. Determine the optimal employment and wage level of
the monopsonist

II. Natural resources, environment, externalities

A. Negative Externality: Determine the following:
1. Market equilibrium
2. Spillover cost
3. Socially optimal output
4. Suppose a tax was imposed to reduce the consumption of the good
producing negative externality, find the area of the consumer surplus,
producer surplus and government revenue.

B. Positive Externality: Determine the following:

1. What should the government do to achieve a socially efficient output?
2. Determine the socially efficient output
3. Determine welfare loss; why is there a welfare loss?

b
a