A monopsonist in the labor market must choose both how many workers to hire and what wage will result. This page focuses on reading and constructing monopsony outcomes using graphs or tables.

Core objects you must be able to identify

Wage and labor quantity in monopsony

In monopsony, the firm faces the market labor supply curve and must raise the wage to attract additional workers. As a result, the chosen wage and quantity of labor come from the firm’s optimization, not from a competitive intersection.

Marginal factor cost (MFC)

Because raising the wage can apply to many or all existing workers, hiring an additional worker typically increases total wage costs by more than the wage paid to that last worker.

This figure isolates the relationship between the market labor supply curve and the monopsonist’s marginal factor cost curve. It visually reinforces that $MFC$ lies above supply because increasing employment requires a higher wage that applies to existing workers as well, making the incremental cost of the next worker exceed the wage. Source

A key identification skill is distinguishing:

• Wage (W): the per-worker payment at a given employment level (read from the labor supply curve at that quantity)

• MFC: the per-worker incremental cost created by increasing employment by one worker (typically above wage)

Using a graph to find the monopsony outcome

Curves on the monopsony hiring diagram

A standard monopsony labor market diagram includes:

• An upward-sloping labor supply curve, $S_L$ (also interpretable as wage as a function of labor, $W(L)$)

• An MFC curve that lies above $S_L$ for relevant ranges

• A downward-sloping marginal revenue product of labor curve, MRP_L (sometimes labeled MRPL)

Between constructing curves and choosing the optimum, keep the roles clear: MRP_L is the marginal benefit of labor to the firm, while MFC is the marginal cost.

Profit-maximizing hiring level on a graph

To identify the profit-maximizing hiring level on the graph:

• Locate the quantity of labor where MRP_L intersects MFC

• Drop a vertical line to the horizontal axis to read the monopsonist’s employment level, often labeled $L_m$

Wage paid by the monopsonist

After finding $L_m$, the monopsonist’s wage is not read from the MFC curve. Instead:

• Move up from $L_m$ to the labor supply curve $S_L$

• Read the associated wage on the vertical axis; this is the monopsony wage, often labeled $W_m$

This “two-step” identification (quantity from MRP_L = MFC, wage from supply at that quantity) is the most common graph-reading requirement.

This monopsony hiring diagram highlights the two-step reading method: the firm chooses employment where labor demand (interpretable as $MRP_L$) intersects marginal hiring cost ($MFC$), giving $L_m$. The wage actually paid, $W_m$, is then read from the labor supply curve at $L_m$, not from the $MFC$ curve. Source

Identifying MFC from the graph

When asked to identify marginal factor cost on a graph:

• Ensure you are pointing to the MFC curve, not the supply curve

• At $L_m$, the relevant MFC is the height of the MFC curve at that quantity (the marginal hiring cost at the optimum)

Using a table to calculate and identify monopsony outcomes

What a typical table provides

A table-based problem often provides some combination of:

• Employment levels ($L$)

• Wages required to hire each level ($W$)

• Total wage bill or total factor cost ($TFC = W \times L$)

• Output information to compute MRP_L (sometimes given directly)

Your job is to identify, from the table, the monopsony wage, labor quantity, MFC, and the profit-maximizing hiring level.

Computing MFC from discrete table data

When labor changes in whole workers, compute MFC as the change in total wage bill when hiring one more worker:

• Compute $TFC$ at each $L$ (if not provided) as $W \times L$

• Compute MFC between rows as $\Delta TFC / \Delta L$

• Associate each MFC with the move to that new employment level (be consistent with how the table is structured)

Identifying the profit-maximizing hiring level from a table

Once MFC and MRP_L are available in the table, identify the profit-maximizing hiring level by comparing marginal benefit to marginal cost:

• Continue increasing employment while MRP_L exceeds MFC

• Stop when the next worker would make MFC greater than MRP_L

• If the table includes an exact equality, the profit-maximizing hiring level occurs where MRP_L equals MFC

Identifying the wage from a table

After selecting the profit-maximizing employment level:

• The monopsony wage is the wage listed in the table row corresponding to that employment level (the wage required to hire that many workers)

• Do not confuse the wage with MFC; in monopsony, MFC typically exceeds wage

Common identification pitfalls (what to avoid)

• Reading the wage off the MFC curve instead of the labor supply curve at $L_m$

• Treating MFC as equal to wage in a setting where the firm faces an upward-sloping labor supply

• Computing MFC as the change in wage rather than the change in total wage bill

• Selecting employment where MRP_L is highest rather than where MRP_L and MFC determine the marginal hiring decision