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Difficulty: MediumMonopsony and Other Buyer-Dominated Market Structures

Match each factor market phenomenon associated with buyer-dominated market structures on the left with its corresponding economic feature or outcome on the right.

  • Marginal Factor Cost (MFCMFC) exceeding Average Factor Cost (AFCAFC)The outcome of facing an upward-sloping supply curve, requiring higher prices on all previous units to hire an additional unit.
  • Monopsonistic exploitationThe condition where the factor price paid is strictly lower than the factor's Marginal Revenue Product (MRPLMRP_L).
  • Imposition of an effective minimum wageThe scenario where employment and factor prices can rise simultaneously by making the buyer a price-taker over a specific range.
  • Upward-sloping factor supply curveThe factor market constraint demonstrating that additional resource units can only be attracted by offering progressively higher prices.

Answer

Marginal Factor Cost (MFCMFC) exceeding Average Factor Cost (AFCAFC) matches the outcome of facing an upward-sloping supply curve, requiring higher prices on all previous units to hire an additional unit. Monopsonistic exploitation matches the condition where the factor price paid is strictly lower than the factor's Marginal Revenue Product (MRPLMRP_L). Imposition of an effective minimum wage matches the scenario where employment and factor prices can rise simultaneously by making the buyer a price-taker over a specific range. Upward-sloping factor supply curve matches the factor market constraint demonstrating that additional resource units can only be attracted by offering progressively higher prices.
Each factor market phenomenon is correctly matched according to monopsony theory: MFC>AFCMFC > AFC is caused by price increases across all hired units when expanding inputs; monopsonistic exploitation represents paying factors less than their marginal revenue product (MRPLMRP_L); minimum wage enforcement eliminates the upward marginal factor cost slope to allow joint wage and employment gains; and the upward-sloping factor supply curve shows higher prices are needed to attract more inputs.

Step-by-Step Solution

1
Analyze the relationship between Marginal Factor Cost (MFCMFC) and Average Factor Cost (AFCAFC) under monopsony.
Since the firm is the sole buyer, hiring an extra factor unit raises the factor price for all existing units, causing MFCMFC to lie above AFCAFC.
To establish the pair for MFC>AFCMFC > AFC.
2
Identify the economic definition of monopsonistic exploitation.
Monopsonistic exploitation occurs when factor owners (e.g., labor) are paid less than their marginal productivity (W<MRPLW < MRP_L).
To correctly pair monopsonistic exploitation with its productivity-gap definition.
3
Examine the impact of a price floor or minimum wage in a buyer-dominated market.
A minimum wage creates a horizontal supply section for the monopsonist, eliminating the upward wage pressure on MFCMFC and enabling higher employment alongside higher wages.
To match minimum wage imposition with simultaneous increases in employment and factor prices.
4
Evaluate the nature of an upward-sloping factor supply curve.
The upward slope indicates that higher factor prices must be offered to incentivize additional suppliers to enter or expand supply.
To pair the upward-sloping supply curve with the factor attraction constraint.

Key Concept

Monopsony Factor Markets, Marginal Factor Cost, and Market Distortions
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Topics

Monopsony and Other Buyer-Dominated Market Structures

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