Question

BigBiz, a local monopsonist, currently hires 50 workers and pays them \(\$ 6\) per hour. To attract an additional worker to its labor force, BigBiz would have to raise the wage rate to \(\$ 6.25\) per hour. What is BigBiz's marginal factor cost? a. \(\$ 6.25\) per hour b. \(\$ 12.50\) per hour c. \(\$ 18.75\) per hour d. \(\$ 20.00\) per hour

Short answer

c. $18.75 per hour

Step-by-step solution

Calculate the total wage cost before hiring the extra worker

BigBiz is currently paying 50 workers at a wage rate of $6 per hour. We can calculate the total wage cost by multiplying the number of workers by the wage rate: Total Wage Cost = Number of Workers × Wage Rate Total Wage Cost = 50 × $6

Calculate the total wage cost after hiring the extra worker

To hire the additional worker, BigBiz would have to raise the wage rate to $6.25 per hour. After hiring the new worker, BigBiz will have 51 workers in total. Calculate the new total wage cost with the increased wage rate: New Total Wage Cost = (Number of Workers + 1) × New Wage Rate New Total Wage Cost = (50 + 1) × $6.25

Calculate the marginal factor cost

To find the marginal factor cost, we need to subtract the total wage cost before hiring the additional worker from the total wage cost after hiring the additional worker. This will show us how much more BigBiz has to spend to attract the additional worker: Marginal Factor Cost = New Total Wage Cost - Total Wage Cost Marginal Factor Cost = (51 × \(6.25) - (50 × \)6) Now let's compute the values to find the marginal factor cost: Total Wage Cost = 50 × \(6 = \)300 New Total Wage Cost = 51 × \(6.25 = \)318.75 Marginal Factor Cost = \(318.75 - \)300 = $18.75 By calculating the difference in wages, we find that the marginal factor cost for BigBiz to hire an additional worker is: c. $18.75 per hour

Key concepts

Monopsonist

A monopsonist is a type of market player with unique characteristics. Imagine if there was only one major employer in a town. This particular employer has a lot of control over the job market, especially in setting wages. That’s because they are the main buyer of labor. This situation contrasts with a competitive labor market, where many employers compete for workers.

• In a monopsony, the employer can influence the wage rate because the workers don't have many alternatives.
• The employer decides the wage rate for hiring new workers, and any change in this rate affects labor costs for all employees.
• Monopsonists must raise wages not just for the new worker but for all current workers to attract more employees, which impacts their costs significantly.

Understanding how a monopsonist operates helps us see the broader dynamics of labor markets where power is unevenly distributed.

Wage Rate

The wage rate is one of the most crucial aspects of the employee-employer relationship. It is the payment workers receive for their labor. In our scenario, BigBiz currently pays a wage rate of $6 per hour.

• The wage rate determines the total earnings of a worker over a set period, usually per hour.
• It directly impacts the affordability of life essentials and living standards for workers.
• In a monopsony, altering the wage rate affects the total wage bill significantly as higher wages apply to all workers.

BigBiz deciding to increase the wage to $6.25 to attract new workers illustrates how the wage rate can be used strategically to manage labor supply.

Labor Economics

Labor Economics is the study of labor forces and how they function within economies. It explores the dynamics between employers, employees, and their operating environments.

• It examines labor market dynamics, including wage formation and employment levels.
• Involves understanding policies affecting employment, such as minimum wage laws and labor regulations.
• Describes how labor markets operate differently in structures like monopsony or perfect competition.

In our exercise, BigBiz’s scenario highlights the role of wage decision-making in a monopsonistic labor market and how such decisions impact economic dynamics.

Marginal Analysis

Marginal analysis is a concept used to understand the additional benefits or costs associated with a particular decision. This approach helps decision-makers evaluate the incremental changes in their business operations.

• Marginal Factor Cost (MFC) is crucial in understanding how much extra cost a firm incurs when it increases the labor by one unit.
• In the BigBiz exercise, the MFC is the increase in total wage cost when one additional worker is hired.
• This helps companies make informed decisions about hiring, as it directly impacts profitability.

By applying marginal analysis, BigBiz can assess whether the benefit from the output of hiring an extra worker outweighs the additional labor cost.