Question

What is the marginal cost of labor for a firm that operates in a competitive labor market? How does this compare with the MCL for a monopsony?

Short answer

In a competitive labor market, the marginal cost of labor (MCL) is constant and equal to the market-determined wage rate (MCL = W). However, in a monopsony, the MCL is higher than the wage rate and increases with each additional worker hired (MCL = W + ΔW * L), due to the market power of the monopsony firm leading to higher wage costs as more workers are employed. In comparison, the MCL for a firm in a competitive labor market is lower and constant.

Step-by-step solution

Find the MCL for a competitive labor market

In a competitive labor market, the wage rate (W) is determined by the market and is constant for all firms. The marginal cost of labor is equal to the wage rate paid for the last unit of labor hired. Since the wage rate is constant, the MCL will also be constant and equal to the wage rate. MCL = W

Find the MCL for a monopsony

In a monopsony, the single buyer of labor has control over the wage rate. As the firm hires an additional worker, the wage rate increases for both the new worker and the existing workers. To find the MCL for a monopsony, we first need to find the difference between the wages paid for the new worker and the previous worker (ΔW). The marginal cost of labor is then the sum of the ΔW for the new worker and the wage increases for the existing workers. Let's denote the total number of workers hired by L. Then the MCL can be found using the formula: MCL = W + ΔW * L

Compare the MCL for a competitive labor market and a monopsony

For a competitive labor market, MCL is constant and equal to the wage rate (MCL = W). In contrast, for a monopsony, the MCL is higher than the wage rate due to the wage increases incurred for both the new worker and the existing workers (MCL = W + ΔW * L). In conclusion, the marginal cost of labor for a firm in a competitive labor market is lower and constant compared to the MCL for a monopsony, where the MCL is higher and increases with each additional worker hired. This is due to the market power of the monopsony firm, which leads to higher wage costs as more workers are added.