In a factor market dominated by a single buyer (monopsonist), how does the Marginal Factor… — JAMB UTME

In a factor market dominated by a single buyer (monopsonist), how does the Marginal Factor Cost ( $MFC$ ) curve compare to the supply curve of the factor?

The $MFC$ curve lies above the factor supply curve because employing an extra unit requires paying a higher price for all units.Answer
B
The $MFC$ curve is identical to the factor supply curve because marginal cost always equals price in factor markets.
C
The $MFC$ curve lies below the factor supply curve because the single buyer receives price discounts on higher quantities.
D
The $MFC$ curve is downward-sloping due to rival firms matching price increases.

Answer

The Marginal Factor Cost (

MFC

) curve lies above the factor supply curve because employing an extra unit requires paying a higher price for all units.

Under a monopsony, the firm faces the upward-sloping market supply curve of the factor. Assuming a single wage rate is paid to all units of labor, securing an additional unit requires offering a higher wage rate to all employed units. Consequently, the addition to total cost from hiring one more worker (Marginal Factor Cost) is higher than the wage rate paid to that worker (Average Factor Cost), placing the

MFC

curve strictly above the factor supply curve.

Step-by-Step Solution

Analyze the supply curve faced by a monopsonist

The monopsonist is the sole buyer in the market and therefore faces the upward-sloping market supply curve for the factor.

To acquire more units of the factor, the monopsonist must offer a higher price/wage rate.

Derive the Marginal Factor Cost (

MFC

)

Since uniform wages are paid to all workers, hiring an additional unit increases the wage rate for the new worker as well as all existing workers.

MFC = \text{Wage} + (\text{Quantity} \times \Delta \text{Wage})

, which makes

MFC > \text{Wage}

for all units after the first.

Determine the graphical relationship between

MFC

and the supply curve

The

MFC

curve lies above the factor supply curve at every quantity level greater than zero.

The supply curve reflects the Average Factor Cost (

AFC

), and when average cost is rising, marginal cost must lie above it.

Key Concept

Monopsony Factor Pricing and Marginal Factor Cost Relationship

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