Chapter 13R, Problem 3FRQ

a)

To determine

The question requires us to identify the market structure.

Explanation of Solution

The market with a single employer or single buyer of workers is known as the Monopsony market. This market is considered imperfect because the firm produces less than the perfectively competitive market and charges a higher price than the perfectively competitive market.

The Monopsony market is opposite to the monopoly because, unlike the monopoly, Monopsony has one buyer of workers and multiple sellers in the form of many potential workers. In a Monopsony market, the firm decides the demand for the workers with the help of the marginal revenue product of the labor, the labor supply curve, and the marginal factor cost of the firm.

b)

To determine

The question requires us to draw a graph representing the labor market and correctly label the given variables.

Explanation of Solution

The following diagram represents the Monopsony labor market:

  

Here, the upward-sloping curve, MFC, represents the marginal factor cost curve of the firm, while the MRPL curve represents the marginal revenue product of the labor that also shows the firm's demand curve. The firm will decide the market wage (W) and the number of workers corresponding to the intersection of the MFC curve and the MRPL curve. The firm will hire the worker till point A. So, the equilibrium wage corresponding to point B is W*, and the equilibrium quantity of workers are represented by Q in the above graph.

c)

To determine

The question requires us to draw a graph representing the labor market in a perfectly competitive market structure, and correctly label the given variables.

Explanation of Solution

The following diagram represents the equilibrium wage and equilibrium number of workers in the Monopsony market and in the perfectly competitive market:

  

In a perfectively competitive market, the equilibrium can be achieved at the intersection of the market supply curve for workers and the market demand curve (MRPL represents the demand curve). So, point E represents the equilibrium in the perfectly competitive market, where Wpc is the equilibrium wage, and Qpc is the equilibrium number of workers firms are hiring at the given wage rate.

In the Monopsony market, the firm will give Wm wage to its workers and hire Qm workers at this wage.

If the firm is a monopsonist, it will hire fewer workers than the firms in the perfectly competitive market and it will provide lower wages to its workers than in the perfectly competitive workers.