Answer to Question #233049 in Macroeconomics for nathan

Question

Explain the difference between competitive and monopsonistic labor markets. How does the

monopsonistic firm optimize its choice of optimal labor?

Answer 1

Solution:

A competitive labor market is one that consists of numerous firms that are in competition for workers. Firms in a competitive market have no power to determine or set wages since they are determined by the market. A firm may easily lose workers or sustain losses should they deviate from the market given wage-price.

 

On the other hand, a monopsonistic labor market is one that consists of a sole or dominant employer in a labor market. As such, the employer has the buying power over their potential employers, enabling them to have wage-setting power in the industrial labor market.

 

A monopsonistic firm optimizes its choice of optimal labor by selecting the employment that equates the marginal revenue product (MRP) to the marginal cost (MC).

A monopsonist firm will then choose the lowest wage possible to attract the number of workers required. The firm can pay a labor wage rate below its MRP.