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

Understanding MRC Curve and Employment Decision

In a perfectly competitive labor market, the Marginal Resource Cost (MRC) curve is flat, indicating that the cost of hiring an additional worker is constant. This means that we assume the wage rate does not change with the level of employment.

Comparing MRP with MRC

A perfectly competitive employer hires workers until their Marginal Resource Cost (MRC) equals the Marginal Revenue Product (MRP). Since the MRC is flat, they continue hiring as long as the cost of hiring one more worker (MRC) is not greater than the additional revenue that worker generates (MRP).

Monopsony Characteristics

A monopsonist, unlike a perfectly competitive employer, faces a rising MRC curve. This is because they must raise wages to hire additional workers, which increases the cost of hiring each additional worker and all existing workers.

Employment Decision of Monopsonist vs Perfectly Competitive Employer

Due to its rising MRC, a monopsonist will hire fewer workers compared to a perfectly competitive employer with the same MRP curve. The monopsonist stops hiring earlier because the MRC exceeds MRP at a lower level of employment.

Conclusion: Selecting the Correct Answer

Since the perfectly competitive employer's MRC curve is flat, it can hire more workers than the monopsony. Therefore, the correct option is c: Flat; more.

Key concepts

Marginal Resource Cost (MRC)

In economics, the Marginal Resource Cost (MRC) represents how much it costs to employ one more unit of labor. In a perfectly competitive labor market, the MRC curve is flat. This means the cost of hiring additional workers remains constant, regardless of how many workers are already employed. This is because wage rates do not change. For employers in this market structure, the decision to hire more labor is simpler. They simply continue to employ more workers as long as the MRC is lower than the revenue generated by each additional worker.

Marginal Revenue Product (MRP)

The Marginal Revenue Product (MRP) is a crucial measure that helps firms decide how many workers to hire. It reflects the additional revenue a firm earns from adding one more worker to its workforce. In a perfectly competitive market, the employer will hire workers as long as the MRP is greater than or equal to the MRC. This implies that the value a worker brings should justify their cost.

• MRP is determined by the worker's productivity and the price at which the firm can sell its product.
• It is typically downward sloping, as each additional worker contributes less and less to output.

Therefore, understanding the MRP allows businesses to optimize employment levels, ensuring they do not overspend on labor costs.

Monopsony Characteristics

A monopsony is a market structure where there is only one buyer—but many sellers. In the case of labor markets, it means there is only one employer hiring workers. Due to this unique position, a monopsonist faces an upsloping MRC curve. Unlike in perfectly competitive markets, the employer must increase wages not just to attract one more worker, but also for all current employees. This increase in wage affects the MRC significantly.

• A monopsonist wields significant power over wage determination.
• They tend to employ fewer workers at lower wages compared to competitive markets.
• Their employment decision balances between keeping labor costs manageable and meeting staffing needs.

Ultimately, a monopsony's characteristics lead to distinctive patterns in hiring and wage determination.

Employment Decision

Employment decisions in different labor market structures hinge on the comparison between MRC and MRP. In a perfectly competitive labor market, employers hire up to the point where MRC equals MRP. This ensures that each additional worker's cost is covered by the revenue they bring in. Since the MRC is flat, they often hire more because the costs don't rise.
In contrast, a monopsonistic market sees an increase in MRC with each additional worker hired. The upsloping curve means they hire fewer workers because it becomes costlier to employ additional help. They stop when MRC surpasses MRP, which happens sooner compared to competitive markets. Hence, understanding these dynamics is crucial for businesses to make informed hiring decisions.

Labor Market Structures

Labor market structures significantly impact how businesses operate and make decisions about hiring and wages. There are two primary structures:

• Perfectly Competitive Market: Many employers and employees exist, with none having market power. Wage rates are determined by supply and demand, and firms hire as long as MRC equals MRP.
• Monopsony Market: A single employer dominates the market, setting wage rates. The firm controls hiring to manage overall labor costs, often paying lower wages.

These structures guide firms in making strategic employment choices, influencing overall labor market health and efficiency. Each has distinct advantages and challenges, affecting workers’ opportunities and firms' profitability.