Suppose that a monopsonist is able to perfectly discriminate among workers and pay each her reservation...

Suppose that a monopsonist is able to perfectly discriminate among workers and pay each her reservation wage. Graphically illustrate equilibrium employment and wages for a perfectly-discriminating monopsonist. How do they compare to a firm which hires labor in a perfectly competitive market? Assume the firm has no monopoly power and sells output in a competitive market. (You will need to draw the diagram, photograph your diagram, email it to yourself, and copy-and-paste it into the space below. Please type the explanation.)

Expert Solution

If a monopsonist can practice perfect price discrimination, it can increase its surplus by the shaded triangle. A perfectly-discriminating monopsonist will equate the marginal cost of labor with demand to determine the most profitable level of employment. However, since the firm can somehow determine how much each worker is willing to work for, it can match the wage to the worker and pay each worker a different wage. For example, the monopsonist with the ability to “wage discriminate” (similar to price discrimination by an output market monopolist) need only pay a wage equal to W8 to attract the 8th worker, a wage equal to W10 to attract the 10th worker, and so forth. Therefore, equating MCL with D results in the perfectly discriminating monopsonist hiring L* workers, and paying each one a different wage, with the marginal worker (or last worker hired) receiving W*.

Rahul Sunny answered 2 years ago

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