Which of the following is a consequence of a monopsony labor market?

• A. Wages paid to workers are lower than in a competitive labor market.
• B. Firms hire more workers than in a perfectly competitive labor market.
• C. The labor supply curve becomes perfectly elastic.
• D. Workers receive higher wages due to increased bargaining power.

Answer: (A)

Verified step by step guidance

1. Step 1: Understand the definition of a monopsony labor market. A monopsony occurs when there is only one dominant buyer of labor (i.e., a single firm hiring workers), giving the firm market power over wages and employment levels.
2. Step 2: Recall the characteristics of a perfectly competitive labor market, where many firms compete to hire workers, leading to wages equal to the marginal revenue product of labor and an elastic labor supply curve to each firm.
3. Step 3: Analyze how a monopsony affects wages and employment. Since the monopsonist faces the entire labor supply curve, it must raise wages to attract additional workers, but this increases the cost of hiring all workers, leading to a marginal labor cost curve above the supply curve.
4. Step 4: Recognize that because the monopsonist maximizes profit by hiring where marginal labor cost equals marginal revenue product, it hires fewer workers and pays lower wages compared to a competitive market.
5. Step 5: Conclude that the correct consequence of a monopsony labor market is that wages paid to workers are lower than in a competitive labor market, and firms hire fewer workers, not more.