Monopsonistic Markets - AP Microeconomics

1. In a monopsony, how does $MFC$ compare to $AFC$ (labor supply) above the first worker?

   $MFC > AFC$ for additional labor units. Must raise wages for all workers to attract more, so marginal exceeds average.

2. With a binding minimum wage, what is the monopsonist's $MFC$ for labor up to the available workers?

   $MFC$ becomes horizontal at the minimum wage up to the supply limit. Fixed minimum wage removes need to raise all wages when hiring more.

3. Under monopsony, what can a moderate minimum wage do to employment relative to no minimum wage?

   It can increase employment up to the competitive level. Eliminates monopsony power partially, making hiring less costly.

4. What is the marginal revenue product (MRP) of labor in a competitive product market?

   $MRP=MP\times P$. Revenue from last worker equals their output times product price.

5. What is the profit-maximizing hiring rule for a monopsonist in the labor market?

   Hire where $MRP=MFC$. Equates marginal benefit and marginal cost of hiring.

6. What is $MRP_L$ in an imperfectly competitive output market?

   $MRP_L = MP_L \times MR$. With market power in output, use $MR$ not $P$ to value marginal product.

7. Which condition indicates a binding minimum wage in a monopsony labor market?

   Minimum wage set above the monopsony wage. Effective when set higher than what monopsonist would pay.

8. Given $S_L$ implies $w = 2 + 0.5L$, and monopsony hires $L = 8$; what wage is paid?

   $w = 6$. Substitute $L = 8$ into supply: $w = 2 + 0.5(8)$.

9. What is monopsonistic exploitation in labor markets?

   Wage below $MRP_L$ at the chosen employment level. Workers paid less than their marginal contribution to revenue.

10. What is the key reason a monopsony faces an upward-sloping labor supply curve?

    It must raise the wage to attract additional workers. Higher wages needed since it's the only employer competing for workers.

11. What hiring rule determines the monopsonist's profit-maximizing quantity of labor?

    Hire where $MRP_L = MFC$. Profit maximizes where marginal benefit equals marginal cost of labor.

12. Given $w=10+L$ and $L^*=10$, what wage does the monopsonist pay?

    $w^*=20$. Substitute optimal employment into supply function.

13. What is a monopsony in an input (labor) market?

    A market with a single buyer of an input, facing the market supply. Single buyer has market power over input price, unlike competitive markets with many buyers.

14. In a competitive labor market, what condition determines equilibrium employment?

    Employment where labor demand ($MRP$) equals labor supply. Competitive wage where demand and supply intersect.

15. After a monopsonist chooses $L^*$ where $MRP=MFC$, how is the wage $w^*$ determined?

    From the labor supply (AFC) curve at $L^*$. Read wage from supply curve at optimal employment level.

16. What is the competitive labor market condition for efficient employment?

    $MRP_L = S_L$ (wage equals both). Supply and demand intersect where marginal social benefit equals cost.

17. If labor supply is $w=a+bL$, what is the monopsonist's $MFC$ function?

    $MFC=a+2bL$. For linear supply, MFC has same intercept but double the slope.

18. What is the definition of marginal factor cost (MFC) of labor?

    The additional cost of hiring one more unit of labor. Includes wage increase for all workers when hiring one more.

19. What is the effect of a binding minimum wage set between monopsony and competitive wages?

    Higher wage and higher employment (up to competitive level). Forces monopsonist to act more like competitive employer.

20. If competitive equilibrium is $L_C = 10$ and monopsony employment is $L_M = 8$, which is larger?

    $L_C$ is larger. Monopsony restricts employment below competitive level.

21. Compared with competitive equilibrium, what does a monopsony typically do to wage and employment?

    Lower wage and lower employment. Monopsony power restricts hiring and depresses wages.

22. Identify the deadweight loss in a monopsony labor market relative to competition.

    The loss from $L_M < L_C$ where $MRP_L > S_L$ for missed hires. Triangle between $MRP_L$ and $S_L$ curves from $L_M$ to $L_C$.

23. What is marginal revenue product of labor ($MRP_L$) in a competitive output market?

    $MRP_L = MP_L \times P$. Marginal product times output price gives revenue from last worker.

24. What is the labor supply curve facing a monopsonist also called?

    The monopsonist's average factor cost (AFC) curve. AFC shows the average cost per worker, which equals the supply curve price.

25. What does marginal factor cost (MFC) represent for a monopsonist employer?

    The extra cost of hiring one more unit of labor. Includes wage increase for all workers when hiring one more.

26. Which two curves intersect at the monopsonist's optimal employment level on the standard graph?

    $MRP_L$ and $MFC$ intersect at the chosen $L$. Profit-maximizing condition where marginal benefit equals marginal cost.

27. What is the allocative inefficiency condition in a monopsony labor market outcome?

    $MRP>w$ at the monopsony quantity of labor. Workers produce more value than their wage cost.

28. Which relationship between curves is true in a monopsony: MFC vs labor supply (AFC)?

    MFC lies above the labor supply (AFC) curve. Must pay all workers the higher wage, so MFC exceeds supply price.

29. What is the marginal revenue product (MRP) of labor in an imperfectly competitive product market?

    $MRP=MP\times MR$. With market power in output, use MR not price.

30. Find the monopsony employment if $MRP_L = 20 - L$ and $MFC = 4 + L$.

    $L = 8$. Set $20 - L = 4 + L$, so $2L = 16$.

31. Identify the curve that is the monopsonist's labor demand curve.

    The $MRP$ curve. Shows willingness to pay for each additional worker.

32. What is a monopsony in a factor market?

    A single buyer of a factor of production (usually labor). Has market power as the sole employer in the labor market.

33. After choosing $L$ where $MRP_L = MFC$, how does a monopsonist determine the wage paid?

    Pay the wage on the labor supply ($AFC$) at that $L$. Read wage from supply curve at optimal $L$, not from $MFC$ curve.

34. What is the deadweight loss in a monopsony labor market caused by?

    Underemployment: $L_m<L_c$ where $MRP>w$ for missing workers. Some workers willing to work for less than their MRP aren't hired.

35. What does the labor supply curve to a monopsonist represent?

    The average factor cost (AFC) of labor at each quantity. Shows the wage needed to hire each quantity of workers.

36. Compared with a competitive labor market, what happens to wage and employment under monopsony?

    Lower wage and lower employment than competitive equilibrium. Market power reduces both wage and employment below competitive levels.

37. If labor supply is perfectly elastic at wage $w$, what is $MFC$ for the employer?

    $MFC = w$ (constant and equal to $AFC$). Horizontal supply means constant wage regardless of quantity hired.

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