Question

How does monopsony affect the equilibrium wage and employment levels?

Short answer

By comparing the marginal revenue product of labor with the marginal cost of labor, it determines the ideal number of workers to hire.

Step-by-step solution

Definition

Monopsony is a market structure in which a solitary purchaser controls a critical part of the market as the essential buyer of labor and products from countless expected providers.

Explanation

In case of a monopsony labor market, there is the presence of only one purchaser for the labour. The buyer will be able to determine the price to pay as well as the quantity of labor to purchase or hire because a single consumer will be the price maker. This quantity and pricing would be lower in a completely competitive market.

When the marginal cost of labor matches the marginal revenue output of labor, the equilibrium number of workers is reached.

Conclusion

As a result, in a monopsony market, the equilibrium number of workers to hire is determined by matching the marginal revenue product of labor to the marginal cost of labor.