7. Monopsony Monopsony: the only firm in an input market Consider a monopsony: w(a) is the supply function of input, R(a)is the revenue The mcp is t MCP(x)=(x)+ru()=(x)1+ where e is the price elasticity of supply e(x)≡ a du Asε→∞, monopsony→ competitor in the input market The condition(2.10) determines the optimal a Example 2.11. Minimum Wage. Suppose that the government imposes a minimum vage W'min on the labor market. L 8. Vertical Relationships A upstream firm produces output a with cost c(a)and a downstream firm inputs .r to produce output for revenue R(r). Consider a case with R(a)=(a-b c(a)=ca Upstream firm Cost c(x)=cx Input Market Monopolistic supplier Competitive demander Revenue R(x=()x7. Monopsony Monopsony: the only firm in an input market. Consider a monopsony: w(x) is the supply function of input, R(x) is the revenue function. The MCP is † MCP(x) = w(x) + xw0 (x) = w(x)  1 + 1 ε(x)  , where ε is the price elasticity of supply: ε(x) ≡ w x ∂xs ∂w . As ε → ∞, monopsony → competitor in the input market. The condition (2.10) determines the optimal x∗. Example 2.11. Minimum Wage. Suppose that the government imposes a minimum wage wmin on the labor market.  8. Vertical Relationships A upstream firm produces output x with cost c(x) and a downstream firm inputs x to produce output for revenue R(x). Consider a case with R(x)=(a − bx)x, c(x) = cx. Cost ( ) c x cx = Upstream firm Input Market Monopolistic supplier Competitive demander x Downstream firm x Revenue R(x) (a bx)x = − 2 — 15