Monopsony: The Single Buyer Advantage 💰

Hey there, future AP Micro ace! Let's dive into the world of monopsonies, where one buyer calls the shots. Think of it as the flip side of a monopoly, but instead of controlling the price of goods, a monopsony controls the price of resources, like labor. This is a concept that often pops up, so let's make sure you've got it down!

What Exactly is a Monopsony?

A monopsony is a market where there's only one buyer for a resource, like labor, and many sellers. Imagine a small town with just one major employer – that's your classic monopsony. This sole buyer has significant market power to influence wages. It's all about that single demand-side power!

Key Characteristics of Monopsonies

Single Large Firm: One big company dominates the hiring scene. They're the only game in town for workers. 🏢
Imperfectly Competitive: Unlike perfect competition, this market has unique rules where the firm has control over the wage.
Wage Maker: The monopsony firm isn't a wage taker; it sets the wage, aiming for the lowest possible rate workers will accept.
MRC > Supply: The Marginal Resource Cost (MRC) is greater than the supply curve (willingness to sell). This is because to hire another worker, the firm must increase the wage for all workers, not just the new one. 💡
Hiring Rule: Firms hire labor up to the point where Marginal Revenue Product (MRP) = MRC, maximizing their profit. This is a

Key Concept

for factor markets.

Wage Below MRP: Workers get paid less than their MRP because of the firm's market power. This is a critical difference from perfectly competitive markets.

Memory Aid

Think of MRC > S like this: When a monopsony hires an extra worker, it's like a ripple effect. The firm has to pay that new worker a higher wage, but it also has to raise the wage of all the previous workers to match. This makes the cost of hiring that last worker (MRC) higher than the wage they're willing to work for (Supply).

Monopsony vs. Perfectly Competitive Labor Market

Feature	Perfectly Competitive Labor Market	Monopsony
Number of Firms	Many	One
Wage Control	Wage Taker	Wage Maker
Wage Rate	Market Determined	Below MRP
MRC vs Supply	MRC = Supply	MRC > Supply
Employment Level	Higher	Lower
Worker Exploitation	None	Yes, workers paid less than MRP

Perfectly Competitive Labor Market vs Monopsony

Graphing a Monopsony

Alright, let's get visual! Here's how a monopsony looks on a graph:

Demand (MRP): This curve shows the value of each worker to the firm. It slopes downwards due to the law of diminishing marginal returns. 📉
Supply (S): This is the labor supply curve, showing the minimum wage workers are willing to accept. It slopes upwards.
Marginal Resource Cost (MRC): This curve lies above the supply curve. It represents the cost of hiring each additional worker, considering the wage increase for all existing workers. ⬆️
Profit Maximizing Quantity: This is where the MRC and MRP curves intersect. Go down to the horizontal axis to find the number of workers hired.
Wage Rate: Go down from the intersection of MRC and MRP to the supply curve, and then across to the vertical axis. This is the wage the monopsony will pay. 💰

Quick Fact

Remember, the monopsonist hires where MRP = MRC, but pays a wage based on the supply curve. They exploit their market power to pay workers less than their marginal revenue product.

AP Micro 2011B Problem 3: A Monopsony in Action

Let's tackle a real AP problem to solidify your understanding. This one involves TreeMart, a monopsony in a small town.

Question:

(a) Identify the profit-maximizing quantity of labor for TreeMart.
(b) Identify the wage rate TreeMart pays to hire the profit-maximizing quantity of labor.
(c) Identify the quantity of labor hired in each of the following scenarios:
- (i) TreeMart operates in a competitive labor market.
- (ii) The government imposes a minimum wage of $12.50.

Answer and Explanation:

(a) TreeMart hires where MRP = MRC, which is at QL = 100.
(b) At QL = 100, go down to the supply curve to find the wage, which is w = $10.
(c)
- (i) In a competitive market, MRC = S. So, we hire where S = MRP, which is at QL = 200.
- (ii) A minimum wage of $12.50 acts as a price floor. The MRC becomes horizontal at$ 12.50 until it intersects with the original MRC curve. The new quantity hired is where the new MRC intersects with MRP, which is at QL = 150.

Exam Tip

When dealing with monopsony graphs, always remember to find the quantity at the intersection of MRP and MRC, and the wage from the supply curve at that quantity. This is a common source of error, so double-check your work!

Final Exam Focus

Alright, let's talk strategy for the big day. Here's what to keep in mind for monopsonies:

Key Concepts: Make sure you understand the difference between MRC and the supply curve, and how a monopsony exploits its market power to keep wages low. This is a .
Graphing: Practice drawing and interpreting monopsony graphs. Be ready to identify the profit-maximizing quantity and wage rate. 📈
Real-World Examples: Think about industries or situations where a single buyer has a lot of power (e.g., a large employer in a small town).
Policy Implications: Be prepared to discuss the effects of government interventions like minimum wages on monopsonies. ⚖️

Common Mistake

A common mistake is to confuse the wage rate with the intersection of MRP and MRC. Remember, the wage is determined by the supply curve at the profit-maximizing quantity.

Last-Minute Tips

Time Management: Don't spend too long on any one question. If you're stuck, move on and come back later.
Read Carefully: Pay close attention to the wording of each question, especially in the FRQs.
Show Your Work: Even if you don't get the right answer, you can still earn partial credit for showing your reasoning.
Stay Calm: You've got this! Take a deep breath, and trust in your preparation.

Practice Questions

Practice Question

Multiple Choice Questions

A monopsonist in the labor market will hire workers up to the point where: (A) The wage rate equals the marginal revenue product. (B) The wage rate equals the marginal resource cost. (C) The marginal resource cost equals the marginal revenue product. (D) The marginal resource cost equals the average revenue product. (E) The wage rate equals the average revenue product.
Compared to a perfectly competitive labor market, a monopsony will typically have: (A) A higher wage rate and a higher level of employment. (B) A higher wage rate and a lower level of employment. (C) A lower wage rate and a higher level of employment. (D) A lower wage rate and a lower level of employment. (E) The same wage rate and a higher level of employment.
If the government imposes a minimum wage above the equilibrium wage in a monopsonistic labor market, the level of employment will: (A) Always increase (B) Always decrease (C) Increase if the minimum wage is below the marginal revenue product at the monopsonist's original employment level. (D) Decrease if the minimum wage is above the marginal revenue product at the monopsonist's original employment level. (E) Increase if the minimum wage is below the marginal resource cost at the monopsonist's original employment level.

Free Response Question

Assume that the market for nurses in a small town is characterized by monopsony. The demand for nurses (marginal revenue product) and the supply of nurses are given by the following equations:

MRP = 20 - 0.25Q

S = 5 + 0.10Q

Where Q is the quantity of nurses and the wage is in dollars per hour.

(a) Calculate the marginal resource cost (MRC) equation. (b) Calculate the wage rate and the number of nurses employed by the monopsonist. (c) Calculate the wage rate and the number of nurses employed if the market were perfectly competitive. (d) Suppose the government sets a minimum wage of $12 per hour. Calculate the new wage rate and the number of nurses employed. (e) Is the minimum wage of$ 12 efficient? Explain.

Answer Key and Scoring Rubric for FRQ

(a) Calculate the marginal resource cost (MRC) equation. (2 points)

To find the MRC, we need to first find the total cost (TC) of labor. Since the supply curve represents the average cost of labor, we can find TC by multiplying the supply equation by Q. TC = (5 + 0.10Q) * Q = 5Q + 0.10Q^2
MRC is the derivative of TC with respect to Q. MRC = 5 + 0.20Q
- 1 point for showing the correct total cost equation
- 1 point for the correct MRC equation

(b) Calculate the wage rate and the number of nurses employed by the monopsonist. (3 points)

The monopsonist hires where MRP = MRC. 20 - 0.25Q = 5 + 0.20Q 15 = 0.45Q Q = 33.33 (approximately 33 nurses)
To find the wage, plug the quantity into the supply equation. W = 5 + 0.10(33.33) W = 8.33 (approximately $8.33 per hour)
- 1 point for setting MRP equal to MRC
- 1 point for the correct quantity
- 1 point for the correct wage

(c) Calculate the wage rate and the number of nurses employed if the market were perfectly competitive. (2 points)

In perfect competition, firms hire where MRP = S. 20 - 0.25Q = 5 + 0.10Q 15 = 0.35Q Q = 42.86 (approximately 43 nurses)
To find the wage, plug the quantity into the supply equation. W = 5 + 0.10(42.86) W = 9.29 (approximately $9.29 per hour)
- 1 point for setting MRP equal to S
- 1 point for the correct quantity and wage

(d) Suppose the government sets a minimum wage of $12 per hour. Calculate the new wage rate and the number of nurses employed. (2 points)

The minimum wage acts as a price floor. The new MRC becomes horizontal at $12 until it intersects with the original MRC curve. We need to find the quantity where the MRP =$ 12. 12 = 20 - 0.25Q 0.25Q = 8 Q = 32 nurses
The wage is $12 per hour.
- 1 point for setting the minimum wage equal to MRP
- 1 point for the correct quantity and wage

(e) Is the minimum wage of $12 efficient? Explain. (2 points)

The minimum wage of $12 is not efficient. While it increases wages, it also decreases employment, leading to a deadweight loss. The socially optimal level of employment is where the MRP = S, which is 43 nurses. The minimum wage causes a reduction in employment below the socially optimal level.
- 1 point for stating it is not efficient
- 1 point for the explanation

Alright, you've got this! Review these concepts, practice the graphs, and you'll be ready to tackle any monopsony question the AP exam throws your way. Good luck, and go get that 5! 🎉

Monopsony Markets

Paul Scott