Question

Which of the following correctly describes a factor that will reduce a firm's monopsony power?

1) As the market supply curve becomes more elastic, the difference between marginal expenditure and average expenditure decreases.
2) If the market demand curve becomes more horizontal, the firm's marginal revenue curve will be more elastic.
3) As producers become more sensitive to price, the difference between marginal expenditure and average expenditure increases.
4) As the number of buyers decreases, no single buyer can have much influence over the price.
5) If the interaction among buyers results in aggressive competition, the firm's average expenditure curve will be more inelastic.

Answer 1

The factor that reduces a firm's monopsony power is when the market supply curve becomes more elastic, thereby decreasing the difference between a firm's marginal expenditure and average expenditure.

Step-by-step explanation:

The question at hand is asking about factors that would reduce a firm's monopsony power, which is the market power exerted by a single buyer in a market. Among the options provided, the correct statement that describes a factor leading to the reduction of a firm's monopsony power is: As the market supply curve becomes more elastic, the difference between marginal expenditure and average expenditure decreases. This means that when suppliers are more responsive to price changes (supply is more elastic), they are more willing to sell at various prices, which diminishes the control of the monopsonist over the market.

Firms within a monopolistically competitive market, face a downward-sloping demand curve, implying that they can raise prices with some loss of customers to competitors, as consumers have substitute goods available. This stands in contrast to monopsony, where a single buyer dominates. Strategic factors like competition among buyers and the number of buyers can directly impact a firm's price-setting ability and monopsony power.