Labour Markets and Wage Determination: practice questions

Question 1

Silver Oak Hospital employs nurses and pays them an hourly wage. Which of the following would cause a movement along the supply curve of labour for nurses at Silver Oak Hospital, rather than a shift of the supply curve?

Accepted Answer

A

Question 2

Bramble Furniture Co. makes wooden chairs. It sells every chair it produces for a constant price of $60 in a perfectly competitive product market, and it can hire as many workers as it wants at the going wage rate in a perfectly competitive labour market. The table below shows t…

Accepted Answer

((a)) MPP for workers 1 to 7 is 20, 18, 16, 14, 12, 10 and 8 chairs; the corresponding MRP is $1200, $1080, $960, $840, $720, $600 and $480 per week  ((b)) The MRP of a worker is the extra revenue that worker adds to the firm, which is exactly the most a profit-maximising firm is willing to pay to employ them, so the MRP curve traces out how many workers the firm demands at every possible wage rate  ((c)) Bramble Furniture should employ 5 workers, since the 5th worker's MRP of $720 exceeds the $700 wage, while a 6th worker's MRP of only $600 would be less than the $700 wage  ((d)) A rise in the price of chairs from $60 to $75 raises the MRP of every worker, since MRP equals MPP multiplied by price, shifting the whole demand for labour curve to the right rather than causing a movement along it, because the change comes from a rise in the marginal revenue e…

Question 3

In the city of Larkspur, the market for food-delivery riders can be treated as perfectly competitive: many small delivery firms compete to hire riders, and many people are able to work as riders. Over the relevant range, the demand for and supply of delivery riders are given by:…

Accepted Answer

((a)) Setting quantity demanded equal to quantity supplied gives an equilibrium wage rate of $14 per hour and equilibrium employment of 480 riders per week  ((b)) At a wage of $18 per hour, the quantity of labour demanded is 360 riders and the quantity supplied is 560 riders, leaving 200 riders per week unable to find work  ((c)) The union's action raises the wage from $14 to $18 per hour but reduces employment from 480 to 360 riders per week, while raising the quantity of labour supplied to 560 riders, creating unemployment of 200 riders among those wanting to work at the new wage  ((d)) Trade unions can bargain collectively and threaten industrial action such as a strike, giving them negotiating power that individual riders acting alone would not have

Question 4

Northfield Logistics is the only significant employer of warehouse packers in the small town of Northfield, making it a monopsony employer of this type of labour. To attract more packers, it must raise the wage rate paid to all its packers, not just the newest recruit. The table…

Accepted Answer

((a)) Total labour cost is $64 per hour when employing 4 packers and $90 per hour when employing 5 packers, giving a marginal cost of labour of $22 for the 4th packer and $26 for the 5th packer  ((b)) Northfield Logistics maximises profit by employing 4 packers, since this is where the marginal cost of labour of $22 equals the marginal revenue product of $22, and it pays these packers the wage rate of $16 per hour needed to attract exactly 4 workers rather than the higher mar…  ((c)) The wage paid of $16 is below the MRP of the last packer of $22 because Northfield Logistics, as the only buyer of this labour, must raise the wage of all existing packers to attract one more, making its marginal cost of labour rise faster than the wage rate it actually pays  ((d)) In a perfectly competitive market, 5 packers would be employed at a wage of $18 per hour, since this is where MRP equals the wage/supply schedule, so monopsony power results in one fewer packer employed and a wage $2 per hour lower than the competitive outcome, because the monop…

Question 5

In the country of Solandra, a professional airline pilot earns a far higher wage than a supermarket checkout assistant, even though supermarkets as a whole employ many more workers than airlines do. The government of Solandra is separately considering raising the national minimu…

Accepted Answer

((a)) Transfer earnings are the minimum payment needed to keep a worker in their current occupation, equal to what they could earn in their next-best alternative, while economic rent is any payment above this minimum; becoming a pilot requires long, costly and capacity-limited trainin…  ((b)) Whether employment falls depends on the wage elasticity of demand for checkout-assistant labour and on whether the market is genuinely competitive or subject to monopsony power; in a competitive market a minimum wage set above equilibrium is likely to reduce employment, more so…

Question 6

A bakery employs bakers only because customers want to buy bread; if demand for bread fell to zero, the bakery would need no bakers at all. Which of the following best explains why economists describe the demand for labour, such as the bakery's demand for bakers, as a derived de…

Accepted Answer

A

Question 7

Meadowvale Veterinary Group employs qualified veterinary nurses across a rural region. Following a national pay review, the average hourly wage for veterinary nurses in the region rose from $16 to $20 per hour. In response, the number of people willing to work as veterinary nurs…

Accepted Answer

((a)) The percentage change in the wage rate is 20-16/16×100=+25% and the percentage change in the quantity of labour supplied is 880-800/800×100=+10%  ((b)) The wage elasticity of supply is 10/25=0.4, so the supply of labour for veterinary nurses is wage-inelastic since the value is less than 1  ((c)) Becoming a qualified veterinary nurse requires completing a specific multi-year training and certification programme, so even a large rise in the wage cannot quickly increase the number of qualified people able to enter the profession in the short run  ((d)) An increase in the net migration of qualified veterinary nurses into the region would raise the number of people willing and able to work as veterinary nurses at every wage rate, shifting the supply curve to the right rather than causing a movement along it

Question 8

SunBright Solar installs rooftop solar panels and hires installer-hours in a perfectly competitive local labour market. The table below shows the quantity of installer-hours demanded per week and the quantity of installer-hours supplied per week at different wage rates, both bef…

Accepted Answer

((a)) Before the new tool, the equilibrium wage rate is $16 per hour, where quantity demanded and quantity supplied are both equal to 680 installer-hours per week  ((b)) After the new tool, the equilibrium wage rate is $22 per hour, where quantity demanded and quantity supplied are both equal to 860 installer-hours per week  ((c)) The change is a shift of the demand curve because it is caused by a rise in marginal physical product from the new tool, a non-wage factor, which raises marginal revenue product at every wage rate rather than only at one wage rate as a movement along the curve would  ((d)) The percentage change in the equilibrium wage rate is 22-16/16×100=+37.5%

Question 9

Solent Ferry Co. is the only significant employer of deckhands in a small coastal town, making it a monopsony employer of this type of labour. To attract more deckhands, it must raise the wage rate paid to all its deckhands, not just the newest recruit. The table below shows the…

Accepted Answer

((a)) Total cost of labour is $63 for 3 deckhands and $96 for 4 deckhands, giving a marginal cost of labour of $27 for the 3rd deckhand and $33 for the 4th deckhand  ((b)) Solent Ferry Co. maximises profit by employing 3 deckhands, since the 3rd deckhand's MCL of $27 is below their MRP of $32, while the 4th deckhand's MCL of $33 would exceed their MRP of $31, and it pays these 3 deckhands the wage rate of $21 per hour needed to attract exactly 3 w…  ((c)) Because deckhands 1 to 4 were already willing to work for $24 or less under the original schedule, a binding $24 minimum wage lets Solent Ferry Co. attract each of them without bidding the wage up further, so hiring the 2nd, 3rd or 4th deckhand costs a flat $24 at the margin; co…  ((d)) Once the $24 minimum wage applies, 4 deckhands are employed at $24 per hour, more workers at a higher wage than the unconstrained monopsony outcome of 3 deckhands at $21 per hour, because the wage floor removes the monopsonist's incentive to restrict hiring purely to avoid raisi…

Question 10

Harbourline Terminals is a container port operating in what is currently a competitive labour market for crane operators. Many port operators compete to hire similarly skilled crane operators, and the going wage is set by the ordinary forces of demand and supply. The Register of…

Accepted Answer

((a)) By operating a closed shop agreement, or by controlling the number of apprenticeship or training places available to become a crane operator, the RCO can reduce the number of people willing and able to supply their labour as crane operators at every wage rate, shifting the labou…  ((b)) The fall in employment depends on the price elasticity of demand for crane-operator labour, which is greater, and so job losses are greater, the easier it is for Harbourline to substitute automated cranes for labour, the more elastic is demand for the port's own services from sh…

Workers employed	Total product (chairs per week)
0	0
1	20
2	38
3	54
4	68
5	80
6	90
7	98

Labour Markets and Wage Determination: Economics 9708 (Cambridge International AS & A Level)

Syllabus coverage

Question 1

Question 2

Question 3

Question 4

Question 5

Question 6

Question 7

Question 8

Question 9

Question 10

Wage rate ($ per hour)	$Q_d$ before new tool (installer-hours/week)	$Q_d$ after new tool (installer-hours/week)	$Q_s$ (installer-hours/week)
10	800	1100	500
12	760	1060	560
14	720	1020	620
16	680	980	680
18	640	940	740
20	600	900	800
22	560	860	860