What is a monopsony and how does a monopsonistic firm determine the wage rate to pay its employees?

What will be an ideal response?


Monopsony is the situation when there is a single buyer of an input, such as labor, so that it alone faces the market input supply curve. For a monopsonist, hiring additional employees requires raising the wage rate for all workers, so its marginal factor cost curve lies above the labor supply curve. The monopsonist employs workers to the point at which marginal revenue product equals marginal factor cost and then pays the wage rate that those workers will accept for their labor services. As a consequence, the monopsonist’s wage rate is lower than the marginal revenue product of labor.