7. Monopsony

Big Cheese Inc. is the only employer in a small town in rural Wyoming and thus acts as a monopsonythat is, a buyer's monopoly. Its main product is cheddar cheese, which it sells in a perfectly competitive market. The following graph shows the marginal revenue product of labor (MRP) curve it faces, its labor supply curve, and its marginal factor cost (MFC) curve.

Use the black point (plus symbol) to indicate the quantity of labor Big Cheese Inc. will hire and the wage rate it will pay for its workers.

Monopsonistic Outcome

0

1

2

3

4

5

6

7

8

9

10

100

95

90

85

80

75

70

65

60

55

50

45

40

35

30

25

20

15

10

5

0

WAGE RATE (Dollars per hour)

QUANTITY OF LABOR (Workers per hour)

Labor Supply

MFC

MRP

Big Cheese Inc. will hireworkers at a wage rate ofper hour.

Which of the following explains why the MFC curve lies above the labor supply curve?

The marginal cost of hiring an additional worker includes not only that worker's wage but also an increase in the wages of all the other workers.

The firm faces a downward-sloping demand curve in the market for cheese.

Each additional worker has a lower marginal product than the previous worker.

Each worker must be paid benefits in addition to the wage rate.