Assume a firm is a monopsonist that can hire its first worker for $6 but must in

Question

Assume a firm is a monopsonist that can hire its first worker for $6 but must increase the wage rate by $3 to attract each successive worker (so that the second worker must be paid $9, the third $12, and so on). The marginal revenue product of labor is given in the table below.

a. Draw the firm’s labor supply and marginal resource cost curves.

draw the marginal resource cost curve

Are the labor supply and MRC curves the same or different?

If they are different, which one is higher? .

b. What is the competitive equilibrium wage rate?

What is the equilibrium level of employment?

c. What is the wage rate under monopsonistic conditions?

What is the equilibrium level of employment under monopsonistic conditions? .

By how much does the monoposonist reduce wages below the competitive wage?

By how much does the monopsonist reduce employment below the competitive level?

UNITS OF LABOR MARGINAL REVENUE PRODUCT 0 - 1 30 2 24 3 18 4 15 5 12 6 10

Explanation / Answer

a. The monopsonist faces the market labor supply curve S—it is the only firm hiring this labor. MRC lies above S and rises more rapidly than S because all workers get the higher wage rate that is needed to attract each added worker. Equilibrium wage/rate = $15; equilibrium employment = 4 (where MRP = MRC). The monopsonist can pay a below-competitive wage rate by restricting its employment.

b. The equilibrium wage rate is $15 the equilibrium level of employment is 4

c. The wage under monopsonistic conditions is $12 the equilibrium level of employment under monopsonistic conditions is 3 the wage was reduced $3 employment was reduced by 1.

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