These are original Marlbridge practice questions, not past exam questions. The mark points are a suggested Marlbridge rubric to help you check your work; they are not an official scoring guideline. All firms, places and data are fictional. Every employer in these questions pays the same wage to all its workers. Only the four operations are needed.
Question 1 (multiple choice · foundation)
Why is a monopsony’s marginal resource cost of labour greater than the wage it pays?
- (A) To hire one more worker, it must raise the wage, and it pays the higher wage to all the workers it already employs.
- (B) Its workers are more productive, so each one adds more revenue than the wage.
- (C) It pays extra taxes on each worker that competitive firms do not pay.
- (D) It sells its output as a monopoly, so its marginal revenue is below price.
Answer and explanation
Answer: (A). The monopsony faces the upward-sloping market supply of labour. One more worker costs their own wage plus the raise given to every existing worker, so the addition to total labour cost is bigger than the wage.
- (B) describes MRP, the revenue side. MRC is about cost.
- (C) brings in a cost that is not part of the model.
- (D) confuses the output market with the labour market. MR < P affects MRP, not MRC.
Question 2 (multiple choice · core)
Compared with a perfectly competitive labour market with the same supply and MRP curves, a monopsony employer:
- (A) hires more workers and pays a higher wage.
- (B) hires fewer workers and pays a lower wage.
- (C) hires fewer workers and pays a higher wage.
- (D) hires the same number of workers and pays a lower wage.
Answer and explanation
Answer: (B). The monopsony stops where MRC = MRP. Because MRC lies above supply, this happens at a smaller quantity than where supply meets MRP. Fewer workers are willing to work for less, so the wage read from the supply curve is also lower.
- (A) reverses both effects.
- (C) gets the quantity right but forgets that the wage comes from the upward-sloping supply curve: fewer workers means a lower wage.
- (D) assumes only the wage changes. The quantity falls too, because MRC rises above the wage.
Question 3 (multiple choice · core)
Pinecrest Sawmill is the only employer in its town. 3 workers will work for $90 per day each; to hire a 4th worker it must pay $100 per day to everyone. What is the marginal resource cost of the 4th worker?
- (A) $10
- (B) $100
- (C) $130
- (D) $400
Answer and explanation
Answer: (C). Total labour cost rises from 3 × 90 = $270 to 4 × 100 = $400, so MRC = 400 − 270 = $130. Check: $100 for the new worker + 3 × $10 raises = $130.
- (A) is only the raise per worker.
- (B) is the new wage, which ignores the raises for the 3 existing workers. It would be the MRC for a wage taker.
- (D) is total labour cost, a level rather than a change.
Question 4 (multiple choice · core)
On a monopsony graph, the MRC and MRP curves cross at 30 workers, where both equal $24 per hour. At 30 workers, the labour supply curve is at $15 per hour. What wage does the monopsony pay?
- (A) $9 per hour
- (B) $15 per hour
- (C) $24 per hour
- (D) the wage where the supply curve crosses the MRP curve
Answer and explanation
Answer: (B). MRC = MRP gives the quantity, 30 workers. The supply curve shows that 30 workers will work for $15, so the monopsony pays $15.
- (A) is the gap between MRP and the wage ($24 − $15), not a wage.
- (C) reads the wage at the MRC = MRP point. That is the extra cost and extra revenue of the last worker, not the wage paid.
- (D) is the competitive outcome, which the monopsony does not choose.
Question 5 (calculation · core)
Fenridge Hospital is the only employer of nurses in a remote town.
| Nurses | 1 | 2 | 3 | 4 | 5 | 6 |
|---|---|---|---|---|---|---|
| Wage needed ($ per shift) | 100 | 110 | 120 | 130 | 140 | 150 |
| MRP ($ per shift) | 220 | 200 | 180 | 160 | 140 | 120 |
(a) Calculate total labour cost and MRC for each number of nurses. (b) How many nurses does Fenridge hire, and what wage does it pay? (c) Explain why Fenridge does not hire a 5th nurse, even though the 5th nurse’s MRP equals the wage they would accept. (d) State the employment and wage if the market for nurses were perfectly competitive.
Worked solution
(a)
| Nurses | 1 | 2 | 3 | 4 | 5 | 6 |
|---|---|---|---|---|---|---|
| TLC ($) | 100 | 220 | 360 | 520 | 700 | 900 |
| MRC ($) | 100 | 120 | 140 | 160 | 180 | 200 |
(b) MRP > MRC for nurses 1 to 3, and MRP = MRC = $160 for the 4th. Fenridge hires 4 nurses and pays the supply wage for 4: $130 per shift.
(c) The 5th nurse would accept $140, and her MRP is $140. But to hire her, Fenridge must raise the wage for the other 4 nurses by $10 each. Her MRC is 140 + 4 × 10 = $180, which is more than her MRP of $140. Hiring her would lower profit by $40 per shift.
(d) Competitive outcome where wage = MRP: 5 nurses at $140 per shift.
Suggested mark points (4): 1 for the TLC and MRC rows; 1 for 4 nurses and $130 from the supply schedule; 1 for MRC of $180 > MRP of $140 with the reason (raise for existing nurses); 1 for 5 nurses at $140.
Common error: answering $160 for the wage in (b). That is the MRC (and MRP) of the 4th nurse, not the wage.
Question 6 (graph · core)
Kelso Fisheries is the only fish-processing employer on an island, and processing workers cannot easily find other work.
(a) Draw a correctly labelled graph of the labour market Kelso faces. Show the labour supply curve, the MRC curve and the MRP curve. Label the quantity of workers Kelso hires as Lm and the wage it pays as Wm. (b) On the same graph, label the employment and wage that a perfectly competitive labour market would reach as Lc and Wc. (c) Shade the deadweight loss. (d) Explain why the MRC curve lies above the supply curve.
Model answer and suggested Marlbridge rubric
(a) Vertical axis “Wage ($ per hour)” (or $ per period); horizontal axis “Quantity of workers”. An upward-sloping S, a steeper upward-sloping MRC above S starting at the same point on the vertical axis, and a downward-sloping MRP (= D). Lm is below the point where MRC crosses MRP. Wm is on S at Lm, below the MRC = MRP point.
(b) Lc and Wc are where S crosses MRP. Lc is to the right of Lm and Wc is above Wm.
(c) The deadweight loss is the triangle bounded by MRP above, S below and the vertical line at Lm, with its point at the S = MRP intersection.
(d) Kelso faces the whole upward-sloping market supply, so to hire one more worker it must offer a higher wage. Because all workers are paid the same, it must also raise the wage of every worker it already employs. The extra cost of one more worker is therefore the new wage plus all those raises, which is more than the wage.
| Point | What earns it |
|---|---|
| 1 | Axes labelled; S upward and MRP downward |
| 1 | MRC above S and steeper |
| 1 | Lm where MRC = MRP, and Wm read from S at Lm |
| 1 | Lc and Wc at S = MRP, with Lc > Lm and Wc > Wm; deadweight loss shaded correctly |
| 1 | Explanation that hiring one more worker means raising the wage of all existing workers |
Do not award the third point if Wm is placed at the MRC = MRP point.
Question 7 (explanation · stretch)
Hollin Mine is the only employer in an isolated town. Labour supply is W = 6 + 0.25L, and the MRP of labour is MRP = 30 − 0.5L, where W and MRP are in dollars per hour and L is the number of workers.
(a) Write the equation for MRC and explain how you found it. (b) Calculate the number of workers Hollin hires, the wage it pays, and the gap between MRP and the wage at that quantity. (c) Calculate the competitive employment and wage, and the deadweight loss of the monopsony outcome. (d) Extension (background, beyond the topic’s core statements). The town sets a minimum wage of $14 per hour. How many workers does Hollin hire now? What if the minimum wage were $16?
Model answer and suggested Marlbridge rubric
(a) MRC = 6 + 0.5L. For a straight-line supply curve, total labour cost is W × L = 6L + 0.25L², and the MRC line has the same intercept (6) and twice the slope (0.5).
(b) MRC = MRP: 6 + 0.5L = 30 − 0.5L, so L = 24 workers. Wage from supply: 6 + 0.25 × 24 = $12 per hour. At L = 24, MRP = 30 − 12 = $18, so the gap is 18 − 12 = $6 per hour.
(c) S = MRP: 6 + 0.25L = 30 − 0.5L, so 0.75L = 24 and L = 32, W = 6 + 8 = $14 per hour. DWL = ½ × 6 × (32 − 24) = $24 per hour.
(d) At $14, up to 32 workers are willing to work, and Hollin can hire each one at $14, so MRC = $14 up to 32 workers. MRP = 14 at L = 32, so Hollin hires 32 workers: employment and the wage both rise to the competitive level. At $16, 40 workers are willing, but MRP = 16 at L = 28, so Hollin hires 28 workers: still more than 24, because $16 is below the MRP at the monopsony quantity ($18).
| Point | What earns it |
|---|---|
| 1 | MRC = 6 + 0.5L with a reason (twice the slope, or from TLC) |
| 1 | 24 workers and $12 from the supply curve |
| 1 | $6 gap, and 32 workers at $14 for the competitive outcome |
| 1 | DWL of $24 |
| 1 | (Extension) 32 workers at $14 and 28 workers at $16, with MRP = minimum wage as the reason |
The fifth point is an extension; score the question out of 4 if your course has not covered minimum wages in monopsony.
How did you do?
- Q1 or Q3 wrong: re-read “Why MRC is above the wage” in the study guide. Remember the raise for existing workers.
- Q4 or Q5(b) wrong: re-read “The hiring rule” and Worked example 1. Quantity first, then the wage from supply.
- Q2 or Q6 marked down: re-read “Reading a monopsony graph”, Figure 1 and the comparison table.
- Q7 incomplete: re-read Worked example 2 and the background section on minimum wages.
Then tick off the topic checklist.