Question

Because a perfectly competitive employer's MRC curve is___________,it will hire______,workers than would a monoposony employer with the same MRP curve. a. Upsloping; more. b. Upsloping; fewer. c. Flat; more. d. Flat; fewer. e. Downsloping; more. f. Downsloping; fewer.

Short answer

c. Flat; more.

Step-by-step solution

Understand the MRC in Perfect Competition

In a perfectly competitive labor market, the marginal resource cost (MRC) curve is flat. This is because the firm can hire any number of workers at the market wage rate without increasing the cost per additional worker hired since wages are constant across hires.

Analyze the Monopsony Situation

In a monopsony, which is a market with a single employer, the MRC curve is upsloping. This is because as the monopsonist hires more workers, they have to raise the wage rate for all employees, increasing the cost per additional worker hired.

Compare Hiring Decisions

A perfectly competitive employer will hire more workers at a given wage than a monopsony employer. This is because the monopsony employer's cost of hiring additional workers rises faster due to the upsloping MRC, thus they hire fewer workers compared to perfectly competitive firms for the same marginal revenue product (MRP).

Choose the Correct Option

Given the flat MRC for a perfectly competitive firm, the firm will hire more workers than a monopsony will, which aligns with option c. Flat; more.

Key concepts

Perfect Competition

In a perfect competition labor market, no single employer or employee has the power to influence wages or employment terms. This environment is characterized by many firms (employers) and workers (employees), where everyone is a price taker. In simple words, both firms and workers accept the market wage and cannot manipulate it.

A key feature of perfect competition is the flat Marginal Resource Cost (MRC) curve. This implies firms can hire as many workers as needed at the same wage rate. Consequently, each additional worker costs the same as the previous ones, which is a constant rate of pay determined by the market. This situation ensures that firms will continue to hire workers until the additional cost of hiring equals the additional revenue generated by the worker, known as Marginal Revenue Product (MRP).

Due to its structure, perfect competition leads to an efficient allocation of resources where supply equals demand at equilibrium. This ensures that the maximum number of workers are employed.

Monopsony

A monopsony occurs when there is only one employer in the labor market, giving this employer significant power over wage determination. Unlike perfect competition, a monopsonistic employer can influence the wage rate they pay their workers. This power comes from being the primary or sole source of employment for workers in that market.

In monopsony, the Marginal Resource Cost (MRC) curve is upward sloping. As the employer hires more workers, they must increase wages not only for the last worker hired but for all workers. This means the cost of hiring an additional worker is higher than the wage paid to that worker, resulting in a higher total wage cost for each added worker.

These dynamics lead employers in a monopsony to hire fewer workers compared to a market with perfect competition, as the increasing MRC makes additional hiring less financially appealing. The equilibrium in a monopsonistic market results in lower employment levels and higher wages than perfect competition.

Marginal Resource Cost (MRC)

Marginal Resource Cost (MRC) refers to the additional cost a firm incurs from hiring one more unit of labor. It is a crucial metric for understanding hiring decisions. In different labor market structures, the MRC behaves uniquely.

- **Perfect Competition:** Here, the MRC is flat as firms can hire any number of workers at a constant wage, with no additional cost per worker beyond the wage.
- **Monopsony:** The MRC curve is upward sloping because increasing the number of workers necessitates raising the wage for all existing and new hires, thereby increasing the cost of each additional worker.

Understanding MRC is vital for firms as they decide the optimal number of workers to hire. Firms will continue to hire more workers until the MRC equals the Marginal Revenue Product (MRP), which represents the maximum level of employment a firm can sustain economically.

Marginal Revenue Product (MRP)

Marginal Revenue Product (MRP) is the additional revenue a firm gains from employing one more unit of labor. It is calculated by multiplying the marginal product of labor (additional output from an extra worker) by the price of the product.

The concept of MRP helps firms decide how many workers to employ. In any market structure, firms aim to keep hiring more workers up to the point where the MRP equals the Marginal Resource Cost (MRC).

- **Perfect Competition:** Here, firms will hire up to the point where the constant market wage equals the MRP, ensuring resource allocation efficiency.
- **Monopsony:** Hiring continues until the upward sloping MRC curve intersects with the MRP curve, leading to fewer hires due to increased wage costs.

Understanding this balance aids firms in maximizing profit by aligning employment with revenue potential, taking into account the labor market structure at play.