In a monopsonistic labor market, the employer will maximize profits by employing workers up to that point at which
A) the difference between the wage rate and marginal resource (labor) cost is at a maximum.
B) marginal revenue product equals marginal resource (labor) cost.
C) the wage rate equals marginal revenue product.
D) the wage rate equals marginal resource (labor) cost.

Question

Quizplus · Accepted Answer

In a monopsonistic labor market, the employer has market power as the buyer of labor and faces an upward-sloping labor supply curve. Therefore, the employer can hire additional workers at a lower wage rate than the current rate. However, hiring more workers also increases the marginal resource (labor) cost, which is the additional cost incurred by hiring one more worker. The employer will continue to hire more workers until the marginal revenue product (the additional revenue generated by hiring one more worker) equals the marginal resource (labor) cost. This is the profit-maximizing level of employment in a monopsonistic labor market.

In a Monopsonistic Labor Market, the Employer Will Maximize Profits