If minimum wages in a monopsony labor market are set above the firm's MFC at its initial hiring level, the effect would be to
A)increase the hiring of unskilled workers.
B)increase productivity.
C)reduce factor costs.
D)reduce employment.

Question

Quizplus · Accepted Answer

In a monopsony labor market, the firm has market power over the wages it pays to its workers. If minimum wages are set above the firm's MFC at its initial hiring level, it would result in an increase in the wage rate paid to workers. Since the firm has market power, it is unlikely to pass on the increased cost to consumers in the form of higher prices, and therefore it would experience a reduction in profits. As a result, the firm would reduce its employment level to minimize the cost of the minimum wage. Therefore, minimum wages set above the firm's MFC in a monopsony labor market would lead to a reduction in employment.

If Minimum Wages in a Monopsony Labor Market Are Set