Question

QUESTION 2). What is the marginal cost of labor (MCL) for a firm that operates in a competitive labor market? How does this compare with the MCL for a monopsony?

Answer 1

Competitive labour market determine the market wage rate by the market forces of demand and supply for labour. This wage rate becomes the marginal cost of labour because it represents the additional cost of hiring 1 unit of labour which is another way of interpreting the marginal cost of labour.

However in case of a monopsony which is the sole buyer of labour services, the marginal cost of labour is determined by the monopsony itself. The labour market is now imperfect which means labour demand function and marginal resource cost function will now determine the market wage rate. The marginal cost of labour function for a monopsony has the same intercept as the labour supply function but twice the slope. this implies that the marginal cost of labour function lies above the supply curve of labour. However, monopsony determined wage rate is less than the wage rate of the competitive market.