Exercises: Monopsonistic Labor Markets

Define monopsony in a labor market. Give one realistic example of a setting in the United States where a single employer might hire most of the workers in a local labor market (for example, a small town with one large factory).

A monopsonist faces an upward-sloping labor supply curve. Explain why its marginal factor cost (MFC) of labor is greater than the wage. In your answer, state whether the MFC curve lies above or below the labor supply curve.

State the rule a profit-maximizing monopsonist uses to decide how many workers to hire. Then explain whether the monopsonist pays the wage found where MRP = MFC, or the wage read from the labor supply curve at that quantity.

A hospital is the only major employer of nurses in a small town. The table shows the labor supply of nurses it faces.

(a) Compute the marginal factor cost of each nurse (the 1st nurse's MFC is $\$20$).

(b) Explain why the MFC is greater than the wage for every nurse after the first.

Use the hospital's labor supply table from the nurse example: wages are $\$20$, $\$22$, $\$24$, $\$26$, $\$28$ per hour for 1, 2, 3, 4, 5 nurses, so the MFC values are $\$20$, $\$24$, $\$28$, $\$32$, $\$36$. The hospital's MRP of nurses is $\$40$ for the 1st nurse, $\$36$ for the 2nd, $\$32$ for the 3rd, $\$28$ for the 4th, and $\$24$ for the 5th.

(a) How many nurses does the hospital hire to maximize profit?

(b) What wage does it pay?

(c) Is the wage equal to, above, or below the MRP of the last nurse hired? Explain what this means.

A town's labor market for fast-food workers is perfectly competitive, with equilibrium wage $\$14$ and 600 workers employed. Suppose instead that one company, acting as a monopsonist, hired all workers in this market with the same MRP and labor supply curves.

(a) Would the monopsonist hire more than, fewer than, or the same number of workers as the competitive market? Explain.

(b) Would the monopsonist pay a wage higher than, lower than, or the same as $\$14$? Explain.

(c) Is there a deadweight loss? Describe it in one or two sentences.

A textile mill is the only employer in a small town. Labor supply is $w = 4 + 0.02L$, where $w$ is the hourly wage in dollars and $L$ is the number of workers. The mill's marginal revenue product is $MRP = 24 - 0.02L$.

(a) Derive the total labor cost $TLC = wL$ and the marginal factor cost $MFC$.

(b) Find the profit-maximizing number of workers and the wage the monopsonist pays.

(c) Find the number of workers and the wage that would occur if the labor market were perfectly competitive.

(d) Compare your results from (b) and (c), and state how much less the monopsonist pays than the MRP of the last worker hired.

The only major employer in a rural county is a poultry plant acting as a monopsonist, paying a wage of $\$13$ per hour. Policymakers consider imposing a binding minimum wage. Suppose the monopsonist's MRP at its current employment level is $\$18$ per hour.

(a) Draw (describe in words) a graph of the monopsony labor market with the labor supply curve, MFC, and MRP, and identify the profit-maximizing quantity and wage.

(b) Explain why a minimum wage set above $\$13$ but below the competitive wage could increase employment in a monopsony, in contrast to a competitive labor market.

(c) Explain what happens to employment if the minimum wage is set well above the competitive wage.

(d) A student argues, "A monopsonist always hires fewer workers than a competitive market, so any minimum wage hurts workers." Evaluate this claim.