ECON 139 set 4 (20 pages)

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ECON 139 SP 15 Antonovics 4 4 21 15 1 April 21 2015 Profit Maximization How do you draw the labor demand curve for a monopsonist The monopsonist simultaneously picks w and E so there is no labor demand curve for a monopsonist Comparison with Perfect Competition The firm is better off In a monopsonistic labor market W VMPE Fewer people are hired than in a perfectly competitive market and wages are lower Page 1 of 20 This is because the marginal cost of hiring an additional worker is higher for a monopsonist than for a perfectly competitive firm Workers worse off relative to perfectly competitive labor market Sport Economics Monopsony in Professional Sports Sports owners are a small and interconnected group Possibly can band together and act as monopsonists Main issue here is that the owners can set wages that is wages are not determined by perfect competition Two implications The greater is a league s monopsony power the lower will be player salaries Players will be paid below their VMPE Note in the reading they call the value of the marginal product of labor the marginal revenue product of labor Page 2 of 20 Salaries of Major League Baseball Players 1876 1920 From around 1876 1881 since professional players can t decide where they wanted to go after contract ended as there was only one team their wages dropped After 1882 when the American Association started the market became competitive so the players wages went up After 1891 Major League players wages dropped again until another league entered Evidence on the Degree of Monopsonistic Exploitation If an employer is a monopsony then workers are paid less than the value of marginal product of labor How does the value of the marginal product of labor for players compare with their salary Two steps Calculate how various measures of player performance affect a team s winning percentage MPE Calculate how a team s winning percentage affects revenue p Page 3 of 20 VMPE p MPE Estimates Late 1960s players paid 15 20 of VMPE