In contrast to a firm that buys its factors of production in perfectly competitive markets, a pure monopsonist

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BlackTom AI · Accepted Answer

This question contrasts a monopsonist with a firm in perfectly competitive factor markets and asks about how it determines the quantity of a factor to hire.
Idea behind the correct concept: a profit-maximizing firm hires the input up to the point where the extra benefit from one more unit equals the extra cost of that unit. For a monopsony, the cost of hiring an additional unit of a factor (the marginal factor cost, MEC) rises as more of the input is purchased because the firm must pay higher wages to attract additional workers who are drawn away from other opportunities.
Option: 'equates marginal expenditure with marginal value to decide how much of the factor to use.' Here, marginal expenditure corresponds to MEC, the additional amount spent on hiring an extra unit of the factor. The marginal value of the factor is the marginal revenue product, MRPL, the extra revenue generated by that additional unit of input.
From a standard monopsony framework, the employer selects the quantity of the input where MEC = MRPL. This is the textbook condition for profit maximization with an upward-sloping supply of the input: the firm compares the cost of hiring one more unit to the revenue it can produce and stops when they are equal.
Reason this is consistent with theory: in perfect competition for the input, MEC would be equal to the market wage, and MRPL would equal price times marginal product, but with a monopsonist MEC exceeds the wage, and the hiring rule MEC = MRPL captures the idea that the firm weighs the rising cost of an extra unit against the additional output value it yields.
Why this makes sense conceptually: it reflects the fundamental optimization principle under imperfect competition in input markets: hire until the added cost of labor matches the added value generated by that labor, acknowledging that the cost curve (MEC) can be steeper than the value created (MRPL) due to supply constraints.
In summary, the statement correctly describes the monopsonist’s hiring decision rule as equating marginal expenditure with marginal value (MEC = MRPL) to determine the approved quantity of the factor to employ.

ECON 4001.01 SP2025 (19496) Week 10 quiz

In contrast to a firm that buys its factors of production in perfectly competitive markets, a pure monopsonist

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