BAB 12
description
Transcript of BAB 12
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Topics to be Discussed Competitive Factor Markets Equilibrium in a Competitive Factor
Market Factor Markets with Monopsony
Power Factor Markets with Monopoly Power
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Competitive Factor Markets Characteristics
1) Large number of sellers of the factor of production
2) Large number of buyers of the factor of production
3) The buyers and sellers of the factor of production are price takers
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Competitive Factor Markets Demand for a Factor Input When
Only One Input Is Variable– Demand for factor inputs is a
derived demand…derived from factor cost and
output demand
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Competitive Factor Markets
AssumeTwo inputs: Capital (K) and
Labor (L)Cost of K is r and the cost of
labor is wK is fixed and L is variable
Demand for a Factor Input WhenOnly One Input Is Variable
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Competitive Factor Markets
– ProblemHow much labor to hire
Demand for a Factor Input WhenOnly One Input Is Variable
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Competitive Factor Markets
Measuring the Value of a Worker’s Output– Marginal Revenue Product of
Labor (MRPL)– MRPL = (MPL)(MR)
Demand for a Factor Input WhenOnly One Input Is Variable
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Competitive Factor Markets
Assume perfect competition in the product market– Then MR = P
Demand for a Factor Input WhenOnly One Input Is Variable
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Competitive Factor Markets
Question– What will happen to the value of
MRPL when more workers are hired?
Demand for a Factor Input WhenOnly One Input Is Variable
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Marginal Revenue Product
Hours of Work
Wages($ perhour)
MRPL = MPLx P
Competitive Output Market (P = MR)
MRPL = MPL x MRMonopolistic Output Market
(P < MR)
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Competitive Factor Markets
Choosing the profit-maximizing amount of labor– If MRPL > w (the marginal cost of
hiring a worker): hire the worker– If MRPL < w: hire less labor– If MRPL = w: profit maximizing
amount of labor
Demand for a Factor Input WhenOnly One Input Is Variable
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w* SL
In a competitive labor market, a firm faces a perfectly elastic supply of labor
and can hire as many workers as it wants at w*.
Hiring by a Firm in theLabor Market (with Capital Fixed)
Quantity of Labor
Price ofLabor
Why not hire fewer or more workers than L*.
MRPL = DL
L*
The profit maximizing firm willhire L* units of labor at the point
where the marginal revenue productof labor is equal to the wage rate.
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Competitive Factor Markets
If the market supply of labor increased relative to demand (baby boomers or female entry), a surplus of labor would exist and the wage rate would fall.
Question– How would this impact the quantity
demanded for labor?
Demand for a Factor Input WhenOnly One Input Is Variable
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A Shift in the Supply of Labor
Quantity of Labor
Price ofLabor
w1S1
MRPL = DL
L1
w2
L2
S2
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Competitive Factor Markets Comparing Input and Output Markets
production of MC MPMP MR
MR))((MPMRP workersofnumber
maximizingprofit at and MR))(MP(MRP
L
L
L
L
LL
ww
ww
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Competitive Factor Markets Comparing Input and Output Markets
– In both markets, input and output choices occur where MR = MCMR from the sale of the outputMC from the purchase of the
input
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Competitive Factor Markets
Scenario– Producing farm equipment with
two variable inputs:LaborAssembly-line machinery
– Assume the wage rate falls
Demand for a Factor Input WhenSeveral Inputs Are Variable
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Competitive Factor Markets
Question– How will the decrease in the wage
rate impact the demand for labor?
Demand for a Factor Input WhenSeveral Inputs Are Variable
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MRPL1 MRPL2
When two or more inputs arevariable, a firm’s demand for one input
depends on the marginal revenue product of both inputs.
Firm’s Demand Curve for Labor(with Variable Capital)
Hours of Work
Wages($ perhour)
0
5
10
15
20
40 80 120 160
When the wage rate is $20, A represents one point on the firm’s
demand for labor curve.When the wage rate falls to $15, theMRP curve shifts, generating a new
point C on the firm’s demand forlabor curve. Thus A and C are
on the demand for labor curve, butB is not.
DL
A
B
C
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Assume that all firms respond to a lower wage– All firms would hire more workers.– Market supply would increase.– The market price will fall. – The quantity demanded for labor
by the firm will be smaller.
Competitive Factor MarketsIndustry Demand for Labor
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MRPL1
The Industry Demand for Labor
Labor(worker-hours)
Labor(worker-hours)
Wage($ perhour)
Wage($ perhour)
0
5
10
15
0
5
10
15
50 100 150 L0 L2
DL1
Horizontal sum ifproduct price
unchanged
120
MRPL2
L1
IndustryDemandCurve DL2
Firm Industry
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The Industry Demand for Labor Question
– How would a change to a non-competitive market impact the derivation of the market demand for labor?
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The Demand for Jet Fuel Observations
– Jet fuel is a factor (input) cost– Cost of jet fuel
1971--Jet fuel cost equaled 12.4% of total operating cost
1980--Jet fuel cost equaled 30.0% of total operating cost
1990’s--Jet fuel cost equaled 15.0% of total operating cost
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The Demand for Jet Fuel Observations
– Airlines responded to higher prices in the 1970’s by reducing the quantity of jet fuel used
– Ton-miles increased by 29.6% & jet fuel consumed rose by 8.8%
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The Demand for Jet Fuel Observations
– The demand for jet fuel impacts the airlines and refineries alike
– The short-run price elasticity of demand for jet-fuel is very inelastic
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Short-run Price Elasticityof Demand for Jet Fuel
American -.06 Delta -.15Continental -.09 TWA -.10Northwest -.07 United-.10
Airline Elasticity Airline Elasticity
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The Demand for Jet Fuel Question
– How would the long-run price elasticity of demand compare to the short-run?
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The Short- and Long-RunDemand for Jet Fuel
Quantity of Jet Fuel
Price
MRPLRMRPSR
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Competitive Factor Markets The Supply of Inputs to a Firm
– Determining how much of an input to purchaseAssume a perfectly competitive
factor market
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SMarket Supplyof fabric
A Firm’s Input Supply in aCompetitive Factor Market
Yards ofFabric (thousands)
Yards ofFabric (thousands)
Price($ peryard)
Price($ peryard)
D
Market Demandfor fabric
100
ME = AE10 10
Supply ofFabric Facing Firm
50
Demand for Fabric
MRP
Observations1) The firm is a price taker at $10.2) S = AE = ME = $103) ME = MRP @ 50 units
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Competitive Factor Markets The Market Supply of Inputs
– The market supply for physical inputs is upward slopingExamples: jet fuel, fabric, steel
– The market supply for labor may be upward sloping and backward bending
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Competitive Factor Markets The Supply of Labor
– The choice to supply labor is based on utility maximization
– Leisure competes with labor for utility
– Wage rate measures the price of leisure
– Higher wage rate causes the price of leisure to increase
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Competitive Factor Markets The Supply of Labor
– Higher wages encourage workers to substitute work for leisure (i.e. the substitution effect)
– Higher wages allow the worker to purchase more goods, including leisure which reduces work hours (i.e. the income effect)
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Competitive Factor Markets The Supply of Labor
– If the income effect exceeds the substitution effect the supply curve is backward bending
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Income Effect <Substitution Effect
Income Effect >Substitution Effect
Backward-Bending Supply of Labor
Hours of Work per Day
Wage($ perhour) Supply of Labor
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12
C
Worker chooses point A:• 16 hours leisure, 8 hour work• Income = $80
16Q
P
A
w = $10
Substitution and IncomeEffects of a Wage Increase
Hours of Leisure
Income($ per
day)
0
240
8 24
480
20
B
w = $20
Suppose wages increase to $20
Substitution effectIncome effect
Increase wage to $20 worker chooses: 20 hour leisure, 4 hours work income = $80
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Labor Supply for One- andTwo-Earner Households
Female Percent of Labor Force–1950 -- 29%–1999 -- 60%
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Elasticities of Labor Supply (Hours Worked)Head’s Hours Spouse’s Hours Head’s Hours
with Respect to with Respect to with Respect toGroup Head’s Wage Spouse’s Wage Spouse’s Wage
Unmarried males .026(no children)Unmarried females .106(with children)Unmarried females .011(no children)One-earner family -.078(with children)One-earner family .007(no children)Two-earner family -.002 -.086 -.004(with children)Two-earner family -.107 -.028 -.059(no children)
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Equilibrium in aCompetitive Factor Market
A competitive factor market is in equilibrium when the price of the input equates the quantity demanded to the quantity supplied.
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SL = AESL = AE
DL = MRPL DL = MRPL
P * MPL
Labor Market Equilibrium
Number of Workers Number of Workers
Wage WageCompetitive Output Market Monopolistic Output Market
wC
LC
wM
LM
vM
A B
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Labor Market Equilibrium Equilibrium in a Competitive Output
Market– DL(MRPL) = SL– wC = MRPL– MRPL = (P)(MPL)– Markets are efficient
Equilibrium in a Monopolistic Output Market– MR < P– MRP = (MR)(MPL)– Hire LM at wage wM
– vM = marginal benefit to consumers– wM = marginal cost to the firm
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Labor Market Equilibrium Equilibrium in a Competitive Output
Market– DL(MRPL) = SL
– wC = MRPL
– MRPL = (P)(MPL)– Markets are efficient
Equilibrium in a Monopolistic Output Market– Profits maximized– Using less than the efficient level of
input
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Economic Rent– For a factor market, economic rent
is the difference between the payments made to a factor of production and the minimum amount that must be spent to obtain the use of that factor.
Equilibrium in aCompetitive Factor Market
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Total expenditure (wage) paidis 0w* x AL*Economic Rent
Economic rent is ABW*
B
Economic Rent
Number of Workers
Wage
SL = AE
DL = MRPL
w*
L*
A
0
The economic rent associated with theemployment of labor is the excess of wages
paid above the minimum amount neededto hire workers.
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Economic Rent Question
– What would be the economic rent if SL is perfectly elastic or perfectly inelastic?
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Land: A Perfectly Inelastic Supply– With land inelastically supplied, its
price is determined entirely by demand, at least in the short run.
Equilibrium in aCompetitive Factor Market
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EconomicRent
s1Economic
Rent
s2
Land Rent
Number of Acres
Price($ peracre)
Supply of Land
D2
D1
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Pay in the Military During the Civil War 90% of the
armed forces were unskilled workers involved in ground combat.
Today, only 16% are unskilled workers involved in ground combat.
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Pay in the Military Shortages of skilled personnel has
occurred? Why?– Hint: If there is a shortage, the
wage must be below the…?
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The Shortage ofSkilled Military Personnel
Number of Skilled Workers
Wage SL
DL = MRPL
w*
w0Shortage
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Pay in the Military Military pay is based on years of
service not MRP. MRP increases and the private sector
pay is greater than military pay. Many leave the military.
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Pay in the Military Solution
– Selective reenlistment bonuses– Base pay on MRP
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Factor Markets with Monopsony Power
Assume– The output market is perfectly
competitive.– Input market is pure monopsony.
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SL = Average Expenditure (AE)
MarginalExpenditure (ME)
Why is marginal expendituregreater than SL?
D = MRPL
Marginal and Average Expenditure
Units of Input
Price(per unitof input)
0 1 2 3 4 65
5
10
15
20
w* = 13
L*
wc
Lc
C
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Factor Markets with Monopsony Power
Examples of Monopsony Power– Government
SoldiersMissilesB2 Bombers
– NASAAstronauts
– Company town
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Monopsony Power inthe Market for Baseball Players
Baseball owners created a monopsonistic cartel– Reserve clause prevented
competition for players– 1975--Free agency after six years– 1969--Average salary was $42,000
($200,000 in 1999 dollars)– 1997--Average salary was
$1,383,578
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Baseball owners created a monopolistic cartel– 1975 salaries were 25% of team
expenditures– 1980 salaries were 40% of team
expenditures
Monopsony Power inthe Market for Baseball Players
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Teenage Labor Marketsand the Minimum Wage
When the minimum wage rose in New Jersey in 1992 from $4.25 to $5.05, a survey conducted found a 13% increase in employment.
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Explanations– Reduction in fringe benefits– Lower pay for more productive
workers– Monopsony market
Teenage Labor Marketsand the Minimum Wage
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Findings– None of the explanations are
validated by the survey results– Indicates of the need for further
study
Teenage Labor Marketsand the Minimum Wage
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Factor Markets with Monopoly Power
Just as buyers of inputs can have monopsony power, sellers of inputs can have monopoly power.
The most important example of monopoly power in factor markets involves labor unions.
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SL
DL
MR
When a labor union is a monopolist, it chooses among points on the buyer’s
demand for labor curve.
Monopoly Power of Sellers of Labor
Number of Workers
Wageper
worker
A
L*
w*
The seller can maximize the number of workershired, at L*, by agreeing that workers will
work at wage w*.
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EconomicRent
w1
L1
The quantity of labor L1 that maximizesthe rent that employees earn is determinedby the intersection of the marginal revenueand supply or labor curves; union members
receive a wage rate of w1.
SL
DL
MR
Monopoly Power of Sellers of Labor
Number of Workers
Wageper
worker
A
L2
w2
Finally, if the union wishes to maximize totalwages paid to workers, it should allow L2
union members to be employed at a wagerate of w2 because the marginal revenue
to the union will then be zero.
L*
w*
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The primary determinant of controlling wage and economic rent is controlling the supply of labor
Factor Markets with Monopoly Power
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A Two-Sector Model of Labor Employment– Union monopoly power impacts
the nonunionized part of the economy.
Factor Markets with Monopoly Power
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Wage Determination inUnionized and Nonunionized Sectors
Number of Workers
Wageper
worker
DUDNU DL
SL
w*
UL
wU
When a monopolistic unionraises the wage rate in the
unionized sector of theeconomy from w* to wU,
employment in that sector falls.
For the total supply of labor toremain unchanged, the wage in
the nonunionized sectormust fall from w* to wNU..
MUL
wNU
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Bilateral Monopoly– Market in which a monopolist sells
to a monopsonist.
Factor Markets with Monopoly Power
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Bilateral Monopoly
Numberof Workers
Wageper
worker
DL = MRPL
MR5
10
15
20
25
10 20 40
SL = AE
ME
25
19
WagePossibilities
wC
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Bilateral Monopoly
Numberof Workers
Wageper
worker
DL = MRPL
MR5
10
15
20
25
10 20 40
SL = (AE)
ME
25
19wC
Observations– Hiring without
union monopoly power MRP = ME at
20 workers and w = $10/hr
– Union’s objective MR = MC at 25
workers and w = $19/hr
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Bilateral Monopoly Who Will Win?
– The union will if its threat to strike is credible.
– The firm will if its threat to hire non-union workers is credible.
– If both make credible threats the wage will be at wc.
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The Decline of Private Sector Unionism
Observations– Union membership and monopoly
power has been declining.– Initially, during the 1970’s, union
wages relative to nonunion wages fell.
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Observations– In the 1980’s union wages
stabilized relative to non-union wages.
– In the 1990’s membership has been falling and wage differential has remained stable.
The Decline of Private Sector Unionism
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Explanation– The unions have been attempting
to maximize the individual wage rate instead of total wages paid.
– The demand for unionized employees has probably become increasingly elastic as firms find it easier to substitute capital for skilled labor.
The Decline of Private Sector Unionism
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Wage Inequality--HaveComputers Changed the Labor Market?
1950 - 1980–Relative wage of college graduates
to high-school graduates hardly changed
1980-1995–The relative wage grew rapidly
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Wage Inequality--HaveComputers Changed the Labor Market?
In 1984, 25.1% of all workers used computers
1993 -- 46.6% 1999 -- nearly 60%
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Wage Inequality--HaveComputers Changed the Labor Market?
Percent change in use of computers –College degrees
1984 - 1993 -- 42 to 70%–Less than high school degree
5 to 10%–With high school degree
19 to 35%
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Wage Inequality--HaveComputers Changed the Labor Market?
Growth in wages -- 1983 - 1994–College graduates using
computers - 11%–Non-computer users -- less than
4%
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Wage Inequality--HaveComputers Changed the Labor Market?
1993 - 1997–High school dropouts out of
school less than 10 years earned 29% less than high school graduates
–1963 -- The differential was only 19%
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Wage Inequality--HaveComputers Changed the Labor Market?
1993 - 1997–Average weekly wage for college
graduates (out of school less than 10 years) was 96% higher than high school graduates.
–College graduation premium has more than doubled.
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Summary In a competitive input market, the
demand for an input is given by the MRP, the product of the firm’s marginal revenue, and the marginal product of the input.
A firm in a competitive labor market will hire workers to the point at which the marginal revenue product of labor is equal to the wage rate.
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Summary The market demand for an input is
the horizontal sum of the industry demands for the input.
When factor markets are competitive, the buyer of an input assumes that its purchase will have no effect on the price of the input.
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Summary The market supply of a factor such
as labor need not be upward sloping. Economic rent is the difference
between the payments to factors of production and the minimum payment that would be needed to employ those factors.
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Summary When a buyer of an input has
monopsony power, the marginal expenditure curve lies above the average expenditure curve.
When the input seller is a monopolist such as a labor union, the seller chooses the point on the marginal revenue product curve that best suits its objective.
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Summary When a monopolistic union bargains
with a monopsonistic employer, the wage rate depends on the nature of the bargaining process.