Principles of Microeconomics / Unit 17 MIC 1632 worked example, 60 to 90 seconds
Sample Question Six: Marginal Factor Cost
The idea
Marginal factor cost is what one more worker adds to total cost. In a competitive labor market the firm hires any number at the market wage, so marginal factor cost equals the wage and is constant; the exam's answer is that it is the market wage, the same for every worker hired. Under monopsony the single employer must raise the wage to attract another worker and pay the raise to all, so marginal factor cost exceeds the wage and rises. Compute both from a supply schedule.
In practice
Worked example: a competitive market's wage is one hundred twenty dollars a day. A car wash hiring its first, fourth or tenth worker pays one hundred twenty for each, and total cost rises by one hundred twenty each time: marginal factor cost equals the wage. Now a one-employer town where one worker comes at eighty, two at one hundred and three at one twenty: total cost eighty, two hundred, three sixty; marginal factor cost eighty, one twenty, one sixty. The third worker is paid one twenty and costs one sixty, since two others got a twenty-dollar raise.
Where people slip
The exam's competitive case is the constant one; a student who imports the monopsony logic, where marginal factor cost rises, answers a different question. And the anchor calls the same thing the marginal cost of labor; the exam's and the witness's term is marginal factor cost.
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