Production and Price for a Monopsonist

Workers

Wage Rate

Total Labor Cost

Marginal Factor Cost (MFC)

Marginal Revenue Product (MRP)

0

$9

0

---

---

1

$11

(A)

(G)

$35

2

$13

(B)

(H)

$32

3

$15

(C)

(I)

$29

4

$17

(D)

(J)

$26

5

$19

(E)

(K)

$23

6

$21

(F)

(L)

$20

The table describes the costs and MRP for a monopsonist. Use the table above. Just like with a monopoly, a monopsony causes deadweight loss by hiring fewer workers than the true market quantity dictates, and paying each worker less than their marginal revenue product. What quantity of workers should be hired to minimize deadweight loss?

Question

Production and Price for a Monopsonist

Workers

Wage Rate

Total Labor Cost

Marginal Factor Cost (MFC)

Marginal Revenue Product (MRP)

0

$9

0

---

1

$11

(A)

(G)

$35

2

$13

(B)

(H)

$32

3

$15

(C)

(I)

$29

4

$17

(D)

(J)

$26

5

$19

(E)

(K)

$23

6

$21

(F)

(L)

$20

The table describes the costs and MRP for a monopsonist. Use the table above. Just like with a monopoly, a monopsony causes deadweight loss by hiring fewer workers than the true market quantity dictates, and paying each worker less than their marginal revenue product. What quantity of workers should be hired to minimize deadweight loss?

BlackTom AI · Accepted Answer

To analyze the monopsony table, I’ll compare, for each possible hiring level, the marginal revenue product (MRP) with the marginal factor cost (MFC). The rule to minimize deadweight loss is to hire up to the point where MRP is at least as large as MFC, and stop when adding another worker would make MRP drop below MFC.

Option 2 (hiring 2 workers): At Q = 2, MRP = 32 and MFC = 13. Since 32 > 13, hiring 2 workers is still potentially profitable, but we must check the next step to see if continuing is better. The decision at 2 is not final by itself; we compare with higher quantities to see where MRP falls below MFC.

Option 4 (hiring 4 workers): At Q = 4, MRP = 26 and MFC = 17. Here MRP still exceeds MFC, suggesting we could hire more workers. However, we must assess subsequent levels to find the turning point where MRP becomes less than MFC.

Option 6 (hiring 6 workers): At Q = 6, MRP = 20 and MFC = 21. Now MRP is less than MFC, meaning hiring the sixth worker would reduce net benefit. This indicates that the optimal hiring level occurs before 6.

Option 0 (hiring 0 workers): At Q = 0, there is no labor hired, so MRP is not defined for a worker, and there is no production. Generally, this is a baseline with no employment and would produce maximal deadweight loss in the presence of any positive MRP for potential hires, but we assess numbers above to find the balance.

Option 1 (hiring 1 worker): At Q = 1, MRP = 35 and MFC = 11. Since MRP > MFC, hiring the first worker adds value. But the key is whether continuing to hire raises net value or eventually loses net value as MRP falls and MFC rises.

Option 5 (hiring 5 workers): At Q = 5, MRP = 23 and MFC = 19. Here MRP still exceeds MFC, so hiring a fifth worker adds value. We compare with the next level to see if moving to 6 is beneficial.

Option 3 (hiring 3 workers): At Q = 3, MRP = 29 and MFC = 15. With MRP well above MFC, hiring more would seem profitable, but again the test is whether the next step keeps MRP above MFC.

Putting the comparisons together, the critical threshold lies between 5 and 6 workers: at 5, MRP (23) exceeds MFC (19), but at 6, MRP (20) falls below MFC (21). Therefore, hiring up to 5 workers gives positive net value, while hiring a sixth would reduce net value, creating deadweight loss if pursued. Among the given options, 5 is the quantity that minimizes deadweight loss by the standard MRP vs. MFC rule.

In summary, the reasoning hinges on the relationship MRP vs. MFC across successive hires: the step where MRP ceases to exceed MFC marks the optimal stopping point, which occurs just before the sixth worker is hired. The other quantities either stop too early (before MRP has fallen toward MFC) or overshoot (by hiring the sixth worker when MRP < MFC).

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