In Chapter 11, we showed the relationship between marginal revenues and market price for a monopoly to be given by
MR = P(1 + 1/e),
where e is the price elasticity of demand for the product. For a monopsony, a similar relationship holds for the marginal expense associated with hiring more labor:
ME = w(1 + 1/e),
where e is the elasticity of supply of labor to the firm. Use this equation to show
a. That for a firm that is a price taker in the labor market, ME = w;
b. That ME > w for a firm facing a labor supply curve that is not infinitely elastic at the prevailing wage; and
c. That the gap between ME and w is larger the smaller e is. Explain all of these results intuitively.