A monopsony maximises its profit by hiring the level of employment that sets
A) the value of marginal product equal to the demand for labour.
B) the value of marginal product equal to the wage.
C) the value of marginal product equal to the marginal cost of labour.
D) labour supply equal to labour demand.

Question

Quizplus · Accepted Answer

A monopsony maximizes its profit by hiring the level of employment where the value of marginal product (VMP) is equal to the marginal cost of labour (MCL), not just the wage rate, because the monopsony faces an upward-sloping labour supply curve, meaning that to hire additional workers, it must pay a higher wage not only to the marginal worker but to all the workers it hires.

A Monopsony Maximises Its Profit by Hiring the Level of Employment