A Level Economics AQA Practice Exam

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What happens in a monopsony regarding wage rates?

The firm has no influence over wages
The firm becomes a wage maker
The wage rates are subject to market demand
Multiple firms compete for workers' wages

The correct answer is: The firm becomes a wage maker

In a monopsony, the characteristics of the market structure allow the single buyer of labor, often referred to as the monopsonist, to have significant control over wage rates. Unlike in competitive labor markets where multiple firms are vying for workers, a monopsonist is the sole employer and can influence the wage level it pays. This control occurs because the monopsonist faces a downward-sloping labor supply curve. To attract additional workers, the firm must raise the wage not just for the new employees it hires, but also for all existing employees. As a result, the monopsonist is seen as a "wage maker" rather than a "wage taker," as it can set wages lower than what would be determined in a competitive market. This ability is a fundamental characteristic of monopsonistic markets and emphasizes the firm's power over wage-setting. The other options do not accurately reflect the nature of wage determination in a monopsony. The assertion of having no influence over wages, being subject to market demand, or having multiple firms competing for workers contradicts the defining features of a monopsony. In essence, it is precisely this wage-making power that distinguishes monopsonistic conditions from those found in more competitive labor markets.