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A monopoly's only variable cost is its wage bills

Marketing

A monopoly's only variable cost is its wage bills. Each one of its workers makes 6 unit of its product, using certain highly product-specific skills, and is paid a wage of $240 per day. Market demand is Q= 100-p and fixed cost are 400. Show that if the monopoly fears entry by an identical firm it is better of giving the workers a pay raise if the rival must meet this wage.

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This table can be constructed from the information given. If each worker produces 6 units and is paid $240 per day, then the variable cost of each unit is $40 ($240/6)

 

Price $ = Marginal Cost Q Demanded Fixed Cost $ Variable Cost $ Total Cost $ Marginal Cost $ Marginal Revenue $
100 0 0 0 0 0 0
90 10 400 400 800 80 90
80 20 400 800 1200 60 80
70 30 400 1200 1600 53.33 70
60 40 400 1600 2000 40 60
50 50 400 2000 2400 40 50
40 60 400 2400 2800 40 40

The table shows that profit maximization occurs where MR=MC, at a quantity of 60 and a price of $40. At that price, the firm needs 10 workers.

If another firm enters the market, more units will be produced, but consumer demand still determines the price. Giving the workers a pay raise will increase both variable cost and price, but may keep the workers from leaving to work for a competitor, which will be costly for everyone in the long run.

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