If a firm is a monopsonist in the hiring of both labor and capital,it will obtain the profit-maximizing quantities of labor and capital when:

Question

Quizplus · Accepted Answer

This is the appropriate condition for profit maximization in a situation of monopsony power. The ratio of the marginal revenue product of each factor to its price should be identical across factors. This is equivalent to setting the ratio of the marginal cost of the two factors equal to the ratio of their marginal revenue products. It ensures that the monopsonist is not underutilizing one factor at the expense of the other, leading to a suboptimal outcome. Choice A is incorrect because it does not take into account the marginal cost of the two factors. Choice C is incorrect because it ignores the relative prices of the two factors. Choice D is incorrect for the same reason as Choice C.

If a Firm Is a Monopsonist in the Hiring of Both