Big Cheese Inc. is the only employer in a small town in rural Louisiana and thus acts as a monopsony-that is, a buyer's monopoly. Its main product is cheddar cheese, which it sells in a perfectly competitive market. The following graph shows the marginal revenue product of labor (MRP) curve it faces, its labor supply curve, and its marginal factor cost (MFC) curve. Use the black point (plus symbol) to indicate the quantity of labor Big Cheese Inc. will hire and the wage rate it will pay for its workers. WAGE RATE (Dollars per hour) 60 57 54 51 48 45 42 38 12 82 2 3 3 3 322222mo MRP MFC + 01 2 3 4 5 8 7 8 9 10 QUANTITY OF LABOR (Workers per hour) + Monopsonistic Outcome Labor Supply Big Cheese Inc. will hire workers at a wage rate of $ per hour. Which of the following explains why the MFC curve lies above the labor supply curve? Each worker must be paid benefits in addition to the wage rate. The marginal cost of hiring an additional worker includes not only that worker's wage but also an increase in the wages of all the other workers. Each additional worker has a lower marginal product than the previous worker. The firm faces a downward-sloping demand curve in the market for cheese.
Big Cheese Inc. is the only employer in a small town in rural Louisiana and thus acts as a monopsony-that is, a buyer's monopoly. Its main product is cheddar cheese, which it sells in a perfectly competitive market. The following graph shows the marginal revenue product of labor (MRP) curve it faces, its labor supply curve, and its marginal factor cost (MFC) curve. Use the black point (plus symbol) to indicate the quantity of labor Big Cheese Inc. will hire and the wage rate it will pay for its workers. WAGE RATE (Dollars per hour) 60 57 54 51 48 45 42 38 12 82 2 3 3 3 322222mo MRP MFC + 01 2 3 4 5 8 7 8 9 10 QUANTITY OF LABOR (Workers per hour) + Monopsonistic Outcome Labor Supply Big Cheese Inc. will hire workers at a wage rate of $ per hour. Which of the following explains why the MFC curve lies above the labor supply curve? Each worker must be paid benefits in addition to the wage rate. The marginal cost of hiring an additional worker includes not only that worker's wage but also an increase in the wages of all the other workers. Each additional worker has a lower marginal product than the previous worker. The firm faces a downward-sloping demand curve in the market for cheese.
Chapter16: Labor Markets
Section: Chapter Questions
Problem 16.5P
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