A monopsonist that wants to hire more labor must pay more for the new labor than it is currently paying and increase the wage rate of all existing employees because

Question

Quizplus · Accepted Answer

A monopsonist has market power in the labor market and can hire labor at a lower wage than in a perfectly competitive market. However, if it wants to hire more labor, it will have to pay a higher wage to incentivize workers to enter the market. This implies that the supply of labor is upward sloping, meaning that as the wage rate increases, more workers will be willing to supply their labor. As a result, to hire more labor, the monopsonist must increase the wage rate of all existing employees to prevent them from leaving for better-paying jobs. Thus, the correct answer is C.

A Monopsonist That Wants to Hire More Labor Must Pay