Which of the following statements about a monopsonistic labor market is true?

• A. A monopsonist faces a perfectly elastic supply of labor.
• B. A monopsonist pays a lower wage than would prevail in a perfectly competitive labor market.
• C. A monopsonist hires more workers than a perfectly competitive firm.
• D. A monopsonist is a price taker in the labor market.

Answer: (B)

Verified step by step guidance

1. Step 1: Understand the definition of a monopsonistic labor market. A monopsonist is a single buyer of labor, meaning it has market power in hiring workers, unlike a perfectly competitive labor market where many firms compete for labor.
2. Step 2: Recall that in a monopsony, the labor supply curve facing the firm is upward sloping, not perfectly elastic. This means the firm must raise wages to attract additional workers, so the marginal cost of labor (MCL) is higher than the wage rate.
3. Step 3: Recognize that because the monopsonist faces an upward sloping labor supply, it pays a wage lower than the competitive equilibrium wage. This is because the monopsonist maximizes profit by hiring fewer workers at a lower wage compared to a competitive market.
4. Step 4: Compare the quantity of labor hired by a monopsonist to that in a competitive market. Since the monopsonist restricts employment to keep wages low, it hires fewer workers than a perfectly competitive firm would.
5. Step 5: Understand that a monopsonist is not a price taker in the labor market. Instead, it has wage-setting power due to its unique position as the sole or dominant employer.