A large manufacturing company is the sole employer in a small town, offering jobs to the local workforce. The company has the power to set wages below the equilibrium level because of its monopsony position. If the company decides to reduce wages further to maximize its profits, which of the following outcomes is most likely to occur in the labor market according to the principles of monopsony and marginal analysis?

In a monopsony, a single employer dominates the labor market, allowing it to pay lower wages than would be found in a competitive market. If the manufacturing company reduces wages further to maximize profits, it may initially save money, but this could lead to several negative consequences. Workers might feel undervalued and decide to leave for better opportunities elsewhere, leading to a decrease in the overall workforce. For example, if the company pays $10 an hour instead of $12, some workers may seek jobs in nearby towns where wages are higher, resulting in labor shortages. Ultimately, while the company aims to increase profits, the loss of skilled workers can hurt productivity and long-term profitability.