AP Syllabus focus: ‘A monopsonist hires additional labor as long as marginal revenue product is greater than marginal factor cost.’
A monopsony is a labour market with a dominant buyer of labour. These notes explain the profit-maximising hiring rule by linking a firm’s extra benefit from hiring to its extra cost.
Core idea of the monopsony hiring rule
A monopsonist chooses the quantity of labour where the marginal benefit of hiring equals the marginal cost of hiring. Because the firm has wage-setting power, the relevant “cost” is not just the posted wage; it is the firm’s marginal factor cost.
Marginal revenue product (MRP): The additional revenue a firm earns from hiring one more unit of an input (here, one more worker).
MRP is the firm’s marginal benefit from hiring an additional worker: it measures the extra revenue created by that worker’s extra output.
Marginal factor cost (MFC): The additional cost to the firm of hiring one more unit of an input.
In monopsony, the firm faces the market labour supply curve, so the cost of expanding employment is captured by MFC, which is derived from the labour supply the firm faces.
The profit-maximising condition
The monopsony hiring rule compares MRP to MFC at each employment level.
= marginal revenue product of labour (dollars of revenue per worker)
= marginal factor cost of labour (dollars of cost per worker)
This condition is the “stop rule”: it identifies the last worker hired as the worker whose contribution to revenue just equals the additional cost of employing that worker.
The “keep hiring” versus “stop hiring” logic
The specification statement can be applied as a decision rule:
If MRP > MFC, hiring one more worker raises profit because the extra revenue exceeds the extra cost.
If MRP < MFC, hiring one more worker lowers profit because the extra cost exceeds the extra revenue.
If MRP = MFC, the firm is at the profit-maximising employment level (no incentive to change employment by one worker).
This is why the syllabus states: a monopsonist hires additional labor as long as marginal revenue product is greater than marginal factor cost.
How to read the rule on a graph (conceptually)
On the standard monopsony labour market diagram, the key curves are interpreted from the firm’s perspective:
AP-style monopsony diagram: the MRP curve is the firm’s labor demand, and the MFC curve lies above the labor supply curve because hiring another worker requires raising wages on inframarginal workers. The profit-maximizing employment occurs where MRP intersects MFC, while the wage paid is determined by the labor supply curve at that quantity. Source
The firm’s MRP curve is the labour demand curve (it shows the revenue generated by successive workers).
The firm’s MFC curve is compared to MRP to choose employment.
The wage the firm actually pays is then found from the labour supply curve at the chosen quantity of labour (the supply curve tells the wage needed to attract that many workers).
A crucial implication is that the monopsonist’s employment choice is pinned down by the intersection of MRP and MFC, not by the intersection of labour demand and labour supply.
Monopsony labor-market equilibrium diagram: the firm chooses employment at the intersection of the marginal revenue product (MRP) and marginal factor cost (MFC) curves, then pays the wage found on the labor supply curve at that employment level. This figure makes the “wage is read from supply, not from MFC” step visually explicit. Source
Common interpretation pitfalls to avoid
Do not set MRP equal to the wage in monopsony; the hiring rule uses MFC.
Distinguish the chosen employment level (from MRP = MFC) from the wage paid (read from the labour supply curve at that employment).
Remember that “as long as MRP exceeds MFC” is a marginal comparison; it refers to the next worker, not to average revenue or total cost.
FAQ
The $MRP = MFC$ intersection occurs at a lower $L$.
Employment falls; the wage may also fall because it is read off the supply curve at the new, lower $L$.
The $MRP$ curve shifts up, so $MRP = MFC$ occurs at higher $L$.
Employment rises; the wage typically rises as the firm moves up the labour supply curve.
Employment is chosen by the marginal rule $MRP = MFC$.
After choosing $L$, the firm must offer the wage on the labour supply curve that attracts exactly that many workers.
Yes, in principle, because the decision rule is $MRP$ versus $MFC$, not $MRP$ versus wage.
Whether it occurs depends on the shapes of $MRP$, labour supply, and $MFC$.
If the minimum wage changes the relevant marginal cost of labour, the firm compares $MRP$ to the new marginal hiring cost schedule.
The profit-maximising $L$ is still where marginal benefit equals marginal cost, but the marginal cost curve may be altered.
Practice Questions
Q1 (1–3 marks) State the monopsony hiring rule using marginal revenue product and marginal factor cost.
1 mark: Identifies the rule as comparing and .
1 mark: Correct condition for profit maximisation or “hire until equals ”.
1 mark: States “hire more if ; stop if ”.
Q2 (4–6 marks) Explain why a monopsonist uses and (rather than the wage) to determine the profit-maximising quantity of labour, and how the wage is then determined.
1 mark: is the marginal benefit (extra revenue) from hiring one more worker.
1 mark: is the marginal cost of hiring one more worker.
1 mark: Profit maximisation occurs where (or hires while ).
1 mark: In monopsony, the firm faces the market labour supply, so the wage is not a fixed parameter for the firm.
1 mark: The wage paid is read from the labour supply curve at the chosen employment level.
1 mark: Clear statement that the wage is not the decision criterion; is.
