The following figure represents the equilibrium in the labor market.Figure 14.4
In the figure,
MFC: Marginal Factor Cost curve
D: Demand or the Marginal Revenue Product curve
S: Supply curve
-A monopsonist firm pays a price to a factor that is:
A)equal to the marginal revenue product of the factor.
B)greater than the marginal revenue product of the factor.
C)equal to the marginal factor cost.
D)greater than the marginal factor cost.
E)less than the marginal revenue product of the factor.

Question

The following figure represents the equilibrium in the labor market.Figure 14.4
  In the figure,
MFC: Marginal Factor Cost curve
D: Demand or the Marginal Revenue Product curve
S: Supply curve
-A monopsonist firm pays a price to a factor that is:
A)equal to the marginal revenue product of the factor. 
B)greater than the marginal revenue product of the factor. 
C)equal to the marginal factor cost. 
D)greater than the marginal factor cost. 
E)less than the marginal revenue product of the factor.

Quizplus · Accepted Answer

A monopsonist has market power in the labor market and can pay a wage that is less than the marginal revenue product of the factor (represented by the demand curve D in the graph). The monopsonist will choose to hire workers up to the point where the marginal factor cost (MFC) is equal to the marginal revenue product (MRP) of labor. Therefore, the wage paid by the monopsonist will be equal to the MFC, which is lower than the MRP of labor. Hence, the correct answer is E, which states that the monopsonist pays a price that is less than the marginal revenue product of the factor.

The Following Figure Represents the Equilibrium in the Labor Market