Figure 14-5 A Monopsony Firm in a Labour Market
of labour. And what is the marginal cost of an extra worker? In order to
hire one more worker the monopsonist must offer a higher wage to all
workers as it moves up the supply curve, meaning that at any level of
employment the marginal cost of labour is higher than the wage. The
supply curve shows the average cost of labour; the marginal cost of labour
is above the supply curve, as shown in the figure.
A profit-maximizing monopsonist lowers both the wage rate and
employment below their competitive levels. MRP and S are the
competitive demand and supply curves, respectively. The competitive
equilibrium is The marginal cost of labour (MC) to the monopsonist is
above the average cost. The monopsonistic firm maximizes profits at
It hires only units of labour. At the marginal cost of the last worker
is just equal to the amount that the worker adds to the firm’s revenue, as
shown by the MRP curve. The wage that must be paid to get workers
is only
The marginal cost exceeds the wage paid (the average cost) because the
increased wage rate necessary to attract an extra worker must also be
paid to everyone already employed. [ 27 ] For example, assume that 100
E 0.
L 1 L 1 ,
L 1
w 1.