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Question
Macroeconomics
Posted 4 months ago
Beth is an evil genius who hires workers to be her minions and carry out her dastardly deeds in a monopsonistically competitive labor market. She also wants to maximize profit.
When should Beth stop hiring workers, and how much should she pay them?
Choose 1 answer:
(A) the supply of labor equals the marginal revenue product of labor, and pay a wage greater than the marginal revenue product of labor
(B) the supply of labor equals the marginal revenue product of labor, and pay a wage equal to the marginal revenue product of labor
(C) stop hiring when the marginal factor cost of a worker equals the marginal revenue product of labor; pay a wage less than the marginal revenue product of labor
(D) the marginal factor cost is less than the marginal revenue product of labor, and pay a wage less than the marginal revenue product of labor.
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Answer from Sia
Posted 4 months ago
Solution
a
Monopsony in Labor Market: In a monopsonistically competitive labor market, a single buyer (employer) faces an upward-sloping labor supply curve, which means that the marginal factor cost (MFC) of labor is greater than the wage rate at every level of employment except the first worker hired
b
Profit Maximization Condition: To maximize profits, a firm should hire workers up to the point where the marginal revenue product of labor (MRPL) equals the marginal factor cost (MFC). This is because hiring beyond this point would add more to costs than to revenues, reducing profits
c
Wage Determination: The wage paid to the last worker sets the wage for all workers in a monopsony due to the firm's market power. This wage will be less than the MRPL at the last worker hired because the MFC curve lies above the supply curve
Answer
Option C: stop hiring when the marginal factor cost of a worker equals the marginal revenue product of labor; pay a wage less than the marginal revenue product of labor
Key Concept
Profit Maximization in Monopsony
Explanation
In a monopsonistic labor market, a profit-maximizing employer hires workers up to the point where the marginal factor cost equals the marginal revenue product of labor and pays a wage less than the marginal revenue product of labor.
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