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A-Level Economics · Monopsony labour market diagram question

EVALUATION: a minimum wage is set at Wc (£6). What happens in THIS market?

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The answer

Both the wage AND employment rise, to F — the floor turns the monopsonist into a wage taker, so MCL goes flat and it hires where MRPL meets the wage. Once the law fixes the wage, the next worker costs exactly £6 — no more raising everyone's pay. MCL is flat, the firm hires at F: wage up, employment up, triangle ACF recovered. This is the counter-intuitive result examiners wait for. A wage floor between Wm and Wc removes the firm's power to push the wage down, so the marginal cost of the next worker is simply the minimum wage — MCL becomes flat at £6. The firm then hires where MRPL meets it: point F. Wage rises £4 → £6 AND employment rises 4 → 6, recovering welfare loss ACF. A price control that IMPROVES the market, precisely because the market was uncompetitive to begin with. Card and Krueger's 1994 New Jersey study found exactly this.

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This is one of 6 questions on the monopsony labour market diagram — every corner lettered, every wrong answer diagnosed.

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