Which market setup hires the most labor

A firm hires workers until the value of what the last worker produces equals what that worker adds to cost. Market power on either side pulls that number down.

On the output side, a monopolist must lower price to sell more, so the extra revenue from another worker's output, marginal revenue product, is MP × MR, which is smaller than MP × P. Its labor demand curve is lower, so it hires fewer workers.

On the labor side, a monopsonist must raise the wage for everyone to attract one more worker, so its marginal factor cost sits above the labor supply curve. It hires where MRP meets that higher MFC, again fewer workers than a competitive market would.

With both markets perfectly competitive there is neither restriction: the firm sells at a fixed price and hires at a fixed wage, so it hires where MRP = MP × P = W. With nothing holding hiring back on either side, this pairing hires the most labor.

Each choice

• A. The output side is fine here, but the monopsony still restricts hiring because MFC lies above the wage. Removing only one source of market power leaves the other in place.
• B. This has both restrictions at once: MRP is reduced by the monopoly and MFC is raised by the monopsony. It is likely the smallest quantity of labor of all the options.
• C. Hiring at the market wage helps, but a monopoly in the output market has MR < P, so its demand for labor is lower and it hires fewer workers.
• D (correct). Market power on either side, in selling the product or in hiring workers, cuts the number of workers hired.
• E. Workers acting together, like a union, usually push the wage above the competitive level, and a higher wage means firms hire fewer workers, not more.