Suppose a monopsonist hires its second worker and this hiring has a marginal factor cost of $75 per day. If the market wage is now $62.50 per day, what was the first employee earning when she worked alone?

Question

Quizplus · Accepted Answer

In a monopsony market, a firm is the only buyer of labor and it faces an upward sloping supply curve of labor. This means that in order to hire additional workers, the firm has to pay a higher wage not only to the new worker but also to the previous workers. The marginal factor cost (MFC) is the additional cost of hiring one more worker and is greater than the wage rate in a monopsony market.

In this case, the MFC of hiring the second worker is $75 per day, which is higher than the market wage of $62.50. This means that the firm has to increase the wages of both the first and second workers to attract them to work for the firm. However, we don't know what the first employee was earning when she worked alone.

Let's assume that the first employee was earning a wage of $W when she worked alone. When the firm hires the second worker, it has to increase the wage rate of the first worker by the amount of MFC, which is $75 - $62.50 = $12.50 per day. This means that the new wage rate for the first worker is $W + $12.50 per day. The total wage bill for the two workers is now:

Total wage bill = ($W + $12.50) + $62.50 = $W + $75

We know that this is the MFC of hiring the second worker. Therefore, we can set up the following equation:

MFC = $75 = Total wage bill for two workers - Wage bill for one worker = ($W + $12.50 + $62.50) - $W = $75

Solving for $W, we get:

$W = $50

Therefore, the first employee was earning a wage of $50 per day when she worked alone. The correct answer is (C).

Suppose a Monopsonist Hires Its Second Worker and This Hiring