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• Chapter 27 Factor Markets • Up to now we only consider a competitive input market. That is, a firm is a price taker in the input market. We can now relax this a bit. • A monopsony is the situation where there is a single buyer. The buyer is called a monopsonist. For simplicity assume the monopsonist sells in a competitive market. • The profit maximization of a monopsonist is maxx (=pf(x)-w(x)x) where w(x) gives the factor price when the monopsonist employs x amount of factor. In other words, w(x) is the inverse upward sloping factor supply curve. The FOC becomes pf’(x)=w(x)+w’(x)x. The LHS is the value of marginal product. The RHS is new. To use one more x, the marginal unit cost w(x), however, since supply is upward sloping, all units employed before cost more too. • We can do some algebra. w(x)+w’(x)x=w(x)[1+w’(x)x/w(x)]=w(x) [1+1/(x)] where (x) is the factor supply elasticity. As in what we discussed for a firm’s revenue, we can now define the marginal expenditure and average expenditure in the factor market. ME= w(x)[1+1/(x)] and AE=w(x)x/x=w(x) so ME>AE (again, this is due to (x)>0 and moreover when supply is upward sloping, ME>AE.) • We can graphically illustrate the optimum.