4.4 — Factor Markets — Practice Problems

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Answer Key

Carl’s Coal Mining operates in a remote area. Because of its location, it has monopsony power in the local labor market for miners. Its marginal revenue product of labor is \[MRP_L = 400-5L\] where $L$ is the total number of miners. The labor supply curve of local miners is \[w = 5L-50\] where $w$ is the wage (in $1000’s per miner).

a

Write a function for the marginal cost of labor.

b

What quantity of workers will the mine hire, and what wage will it pay its workers?

c

What would the quantity of workers be, and what would the wage be, if there was competition among other local mines for labor?

d

Sketch a graph of this market, and be sure to label all of your findings (and show the Deadweight Loss) from Parts A-C.