Which of these is likely to be a monopsony?
a. Olive Garden, a chain restaurant
b. the only law firm in a small town hiring paralegals
c. Subway, a sandwich franchise
d. a large university in a small college town, which is by far the largest employer in the town
The correct answer and explanation is:
Correct Answer: d. a large university in a small college town, which is by far the largest employer in the town
A monopsony is a market condition in which there is only one buyer, or a dominant buyer, of a particular type of labor or good. This gives the buyer significant power over setting wages or prices because workers or suppliers have very few, if any, alternative employers or buyers. Unlike a monopoly, where there is one seller, a monopsony occurs on the demand side of the market.
Among the options provided, a large university in a small college town that is by far the largest employer is the best example of a monopsony. In this setting, most people who want to work in education, research, administration, or related fields would likely have to work for that university. Because of the lack of competing employers in that town, the university can exert significant control over wage levels and employment conditions. This creates a situation where employees have limited choices for alternative employment in their field without relocating.
In contrast, Olive Garden and Subway are both part of broader chains that operate in competitive food service markets. They compete with many other restaurants and franchises for both workers and customers, so they do not have monopsony power.
The only law firm in a small town might seem like a possible monopsony, but it is limited to one profession and a narrow segment of workers. While it may have some local influence, its overall impact is smaller than that of a large university employing a wide range of workers.
Therefore, the large university, being the main source of employment in the area, is the most fitting example of a monopsony due to its dominant position in the local labor market.