Question

Assume that a monopsony firm and a perfectly competitive labor market. Contrast the two

with respect to (a) wage rate, (b) employment level, and (c) profit maximization condition.

Since both monopolists and competitive firms follow the MFC = MRC rule in maximizing profits,

how do you account for the different results? Why might the labor supply of a perfectly

competitive firm and those of a monopolist be different? What are the implications of such a

difference? Show your discussions graphically

Answer 1

For a monopsony firm comparing to a perfectly competitive labor market:

(a) wage rate is lower,

(b) employment level is lower,

(c) profit maximization condition is at the employment level, that equates the marginal revenue product (MRP) to the marginal cost MC. The wage is then determined on the labour supply curve.

But perfectly competitive labor market maximization point is at MRC = MRP.