Question

. Suppose that firm A is a monopsony that demands labor and XYZ Union is a monopoly that provides labor. Other things constant, the equilibrium wage and quantity of labor will depend on what factor?

Answer 1

In the case of monoposony, the ultimate equilibrium wage where the economy will settle will depend on the relative bargaining power of workers vis-a-vis employers. If the bargaining power of employers is more than the bargaining power of employees, then the wage rate paid will be less in case of monopsony and if the bargaining power of employees is more than bargaining power of employers, then wage rate paid will be more and the monoposny will settle at a higher wage rate.The workers demand a wage rate where their marginal labor cost is equal to demand for labor. On the other hand, employers want to give a wage rate where Supply of Labor or Average Cost of Labor is equal to Demand for labor. Thus, they want to pay a lower wage rate than what employers are demading. The ultimate wage rate settles between these two levels depending on the bargaining power of employers and employees.