5.4 Monopsonistic Markets

a. Define (using graphs as appropriate) the characteristics of monopsonistic markets. b. Explain (using graphs where appropriate) the profit-maximizing behavior of firms buying labor (with other inputs fixed) in monopsonistic markets. c. Calculate (using data from a graph or table where appropriate) measures representing the profit-maximizing behavior of firms buying labor (with other inputs fixed) in monopsonistic markets.

• In a monopsonistic labor market, a typical firm hires additional labor as long as the marginal revenue product is greater than the marginal factor (resource) cost (the wage of a new unit of labor plus the wage increase given to all existing labor).
• When a typical firm hires additional workers in a monopsonistic labor market, the marginal factor (resource) cost is greater than the supply price of labor.
• Enduring understanding PRD-4: Factor prices provide incentives and convey information to firms and factors of production.