5 Steps to a 5 AP Microeconomics, 2014-2015 Edition

150 á Step 4. Review the Knowledge You Need to Score High

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Quantity Labor

Wm

Lc

S

Lm

MRPc

MFC

Wc

Figure 10.7

• Under monopsony, employers hire Lm<Lc.


• Monopsony firms pay Wm<Wc=MRPL.

Remember that MRPLmeasures the value of the last worker to the firm. The outcome

that workers receive less than their value to the firm might be alarming. Does this happen?

TIP

market is that the employer must increase the wage to increase the quantity of labor that is

supplied. In other words, the labor supply to the firm is upward sloping, not horizontal.

Marginal factor cost is now greater than the wage. Table 10.5 illustrates how this happens.

Table 10.5

MARGINAL

LABOR SUPPLIED NECESSARY HOURLY TOTAL WAGE FACTOR

TO THE FIRM (Ls) WAGE (W) BILL = Ls¥W COST (MFC)

0$ 0

1$ 4 $4$ 4

2 $5 $10 $6

3 $6 $18 $8

4 $7 $28 $10

5 $8 $40 $12

6 $9 $54 $14

Example:

Molly’s lemonade conglomerate can employ more workers but must increase the

wage to do so. However, not only does she have to increase the wage for addi-

tional workers but also to her current workers. This creates a situation where

the MFC >W. See Figure 10.7. Molly still chooses to employ where MRPL=

MFC, but the wage is determined from the labor supply curve. Graphically the

MFC curve lies above the labor supply curve, which means that labor is paid

below their MRPL.

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