The graph above displays a monopsony in the labor market. Use the graph to answer the following questions:

Assume the monopsonist is profit-maximizing. The monopsonist should set the wage to $12 to reach the goal of hiring 3 workers.

Question

The graph above displays a monopsony in the labor market. Use the graph to answer the following questions:

Assume the monopsonist is profit-maximizing. The monopsonist should set the wage to $12 to reach the goal of hiring 3 workers.

BlackTom AI · Accepted Answer

To analyze a monopsony, we examine where the marginal factor cost (MFC) of labor equals the marginal revenue product (MRP) of labor (the labor-demand curve). The firm hires up to the point where MFC = MRP, because hiring an additional worker must add more to the total revenue than it costs to hire them, otherwise it would reduce profit.

Option 1: Wage = $12
- At 3 workers, look at the graph: the labor supply curve determines the wage the firm must pay, and the MFC curve shows the total cost of hiring each additional worker. The point where the MFC of the third worker lines up with the MRP (demand) indicates the profit-maximizing quantity under monopsony. From the graph, at Q = 3, the wage on the supply curve is about $12, and the corresponding MFC is also aligned with the MRP at that quantity, suggesting the firm should hire 3 workers with a wage roughly $12. This is consistent with the monopsony outcome where hiring stops where MFC ≈ MRP.

Option 2: Wage = $12 but hire more or fewer than 3 workers
- If the firm hired fewer than 3 workers, MRP would still exceed MFC for the next possible hire, so there would be an incentive to hire more until MFC catches MRP; thus hiring fewer than 3 would not be profit-maximizing.
- If the firm hired 4 workers, the MFC of that additional hire would exceed the MRP at Q = 4, meaning the extra hire would reduce profit. Therefore, 4 workers is not profit-maximizing.

Option 3: Hire 4 workers with wage 12
- As described, moving from 3 to 4 workers would require paying a higher total cost per marginal worker (MFC increases with employment in a monopsony). Since the MRP at Q = 4 is not high enough to cover that higher MFC, the firm would choose not to hire the fourth worker. In other words, at Q = 4, MFC > MRP, so 4 is not optimal.

Option 4: Hire 2 workers with wage 12
- At Q = 2, the MRP is still higher than the MFC for the next hire, so there would be an incentive to hire a third worker. The profit-maximizing condition MFC = MRP is not yet satisfied at 2, so 2 is not the optimal quantity.

In summary, solving the monopsony condition MFC = MRP using the graph points indicates the economy would hire 3 workers and pay approximately $12 in wages. This aligns with the provided answer choices: wage of $12 and 3 workers.

Princip of Econ-Microeconomics Quiz 11

The graph above displays a monopsony in the labor market. Use the graph to answer the following questions: Assume the monopsonist is profit-maximizing. The monopsonist should set the wage to $12 to reach the goal of hiring 3 workers.

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