Learning Path
Question & Answer1
Understand Question2
Review Options3
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Explore TopicChoose the Best Answer
A
The marginal factor cost is always equal to the supply curve, leading to efficient outcomes.
B
The marginal factor cost is lower than the supply curve, resulting in underemployment and inefficiency.
C
The marginal factor cost is higher than the supply curve, ensuring all workers are hired at optimal wages.
D
The marginal factor cost is independent of the supply curve, which guarantees social optimality.
Understanding the Answer
Let's break down why this is correct
Answer
In a monopsony, there is only one buyer for a certain type of labor, which means this buyer has significant control over wages. The marginal factor cost, which is the cost of hiring one more worker, is higher than the wage paid to all workers because the monopsonist must raise wages for all workers to attract additional labor. This creates a situation where the supply curve of labor does not reflect the actual cost of hiring more workers, leading to lower employment levels than would exist in a competitive market. For example, if a company needs more workers and raises wages, it must increase wages for all workers, making the cost of hiring one more worker higher than the wage it pays. As a result, this inefficiency can lead to fewer workers being hired overall, which is not ideal for the economy.
Detailed Explanation
In a monopsony, the marginal factor cost is lower than the supply curve. Other options are incorrect because Some might think the marginal factor cost matches the supply curve; It's a common mistake to think that higher marginal factor costs mean better hiring.
Key Concepts
Monopsony
Marginal Factor Cost
Labor Market Efficiency
Topic
Monopsony and Marginal Analysis
Difficulty
medium level question
Cognitive Level
understand
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