workers are employed at $15.00 per hour and that to attract an extra
worker, the wage must be raised to $15.25 per hour. The marginal cost of
that 101st worker is not the $15.25 per hour paid to the worker but $40.25
per hour—equal to the extra 25 cents per hour paid to the 100 existing
workers plus the $15.25 paid to the new worker. Thus, the marginal cost
is $40.25, whereas the average cost is $15.25.
The profit-maximizing monopsonist will hire labour up to the point at
which the marginal cost of labour just equals labour’s marginal revenue
product (MRP). The quantity of labour hired is thus determined by the
intersection of the firm’s marginal cost of labour curve and the MRP
curve, as illustrated in Figure 14-5. The wage rate for that quantity of
labour, however, is determined by the supply of labour curve.
The full exercise of monopsony power in a labour market will result in a lower level of
employment and lower wages than would exist in a competitive labour market.The intuitive explanation is that the monopsonistic employer is aware
that by trying to purchase more it is responsible for driving up the wage.
If it wants to maximize its profits it will therefore stop short of the point
that is reached when workers are hired by many competitive firms, not
one of which can exert a significant influence on the wage rate.
Bilateral Monopoly
What happens when a firm with monopsony power confronts a labour
union with monopoly power? This situation is quite common, as when