Suppose that competing firms form an employers’ association that hires labor as a monopsonist would.
a. Suppose that competing firms form an employers’ association that hires labor as a monopsonist would. This will cause a?
b. Hospital administrators sometimes complain about a “shortage” of nurses. The shortage is the result of?
Answer:
a) divergence of the marginal resource cost and the supply curve, which will result in fewer workers hired at a lower wage rate.
b) low wages that occur in the monopsonized market and could be eliminated if nurses earn wages closer to their MRP.
Explanation
a. There will be a divergence of the marginal revenue cost (MRC) and the supply curve (S). The marginal revenue cost curve will be above the supply curve and have a steeper slope. The intersection of the marginal revenue cost curve and marginal revenue product curve will occur at a lower employment level (Qm), and result in fewer workers hired (Qc – Qm), at a lower wage rate (Wm) than would occur in competition (Wc).
b. If there are only one or two hospitals in an area, there exists a monopsonistic market for nurses. Their wages would be less than those for nurses where there is competition among employers (numerous hospitals and/or clinics). Consider the figure below. Because hospitals prefer to hire more nurses at a monopsonistic wage Wm, they view the difference between Qc and Qm as a shortage. However, since their profits are maximized at Wm, they are unwilling to raise wages voluntarily. The hospital administrator might offer a higher wage, but this wage would not be profit maximizing. Another solution would be for nurses to organize and demand higher wages. This would allow nurses to earn wages closer to their MRP and as wages rise toward Wc, the shortage would disappear.
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