Use this review after studying all four topics. Try the seven questions without notes.
Big ideas of the unit
- The roles swap. Households sell labour, capital and land; firms buy them, paying wages, interest and rent. Factor prices are incentives and signals of scarcity. (Topic 5.1)
- Labour demand is derived demand. Hiring compares MRP (the benefit, from productivity and the output price) with MRC (the cost). Both are changes, never levels.
- Movements and shifts. The wage moves the market along the curves. Output price and productivity shift demand; the supply determinants (immigration, education, working conditions and others) shift supply. (Topic 5.2)
- Two shifts at once leave one result indeterminate unless you know their sizes.
- A wage taker hires where MRP = MRC = W, even if it has market power as a seller. (Topic 5.3)
- Output market power lowers MRP: MR < P, so MRP < VMP and fewer workers are hired.
- A monopsony’s MRC is above the wage. It hires where MRC = MRP and reads the wage from supply: fewer jobs, a lower wage, a deadweight loss. (Topic 5.4)
Key relationships and methods
| Idea | Rule or method | Topic |
|---|---|---|
| Marginal revenue product | MRP = ΔTR ÷ ΔL = MP × MR; price taker: MRP = MP × P = VMP | 5.1, 5.3 |
| Marginal resource cost | MRC = ΔTC ÷ ΔL (or Δ total labour cost ÷ ΔL) | 5.1 |
| Wage taker | MRC = W; hire where MRP = W | 5.3 |
| Least cost | MP_L ÷ W = MP_K ÷ r | 5.3 |
| Profit maximum with two inputs | MRP_L = W and MRP_K = r | 5.3 |
| Monopsony MRC | new wage + raise × existing workers; straight-line S: twice the slope | 5.4 |
| Monopsony outcome | L where MRC = MRP; wage from S; fewer jobs, lower wage than at S = MRP | 5.4 |
These are original Marlbridge practice questions, not past exam questions. The rubrics are a suggested Marlbridge rubric, not official scoring. All firms, places and data are fictional, and every employer pays the same wage to all its workers.
Question 1 (multiple choice · mixed)
The world price of copper rises. Copper mines sell copper and hire miners in perfectly competitive markets. Which sequence is correct?
- (A) Each mine’s MRC rises because copper is worth more, so each mine hires fewer miners.
- (B) Each mine’s MRP curve shifts right, market demand for miners increases, the market wage rises, and each mine hires where its new MRP equals the new wage.
- (C) The supply of miners increases because miners want a share of the higher price, so the market wage falls.
- (D) Each mine can now set its own wage, because the higher price gives it market power in the labour market.
Answer and explanation
Answer: (B). A higher copper price raises MRP = MP × P at every quantity (derived demand), so market demand for miners rises and so does the wage.
- (A) confuses revenue with cost: the output price changes MRP, not MRC.
- (C) puts the change on supply. Miners’ willingness to work at each wage has not changed.
- (D) There are still many employers, so each mine is still a wage taker.
Question 2 (multiple choice · mixed)
Fernvale Dairy is the only employer in an isolated valley. The price of milk rises; nothing else changes. What happens?
- (A) It hires more workers at the same wage, because a monopsony sets its own wage.
- (B) Its MRC curve shifts right, so it hires more workers at a lower wage.
- (C) Labour supply increases because workers expect higher pay, so the wage falls.
- (D) It hires more workers and pays a higher wage, read from the supply curve at the new quantity.
Answer and explanation
Answer: (D). MRP shifts right and meets the unchanged MRC at a larger quantity. More workers along the upward-sloping supply curve need a higher wage.
- (A) A monopsony must choose a point on the supply curve.
- (B) The milk price does not change the cost of hiring, so MRC does not move.
- (C) Workers’ willingness to work at each wage has not changed.
Question 3 (multiple choice · mixed)
A printing firm hires workers at a market wage. Its daily total revenue and total cost are:
| Workers | 0 | 1 | 2 | 3 | 4 | 5 | 6 |
|---|---|---|---|---|---|---|---|
| Total revenue ($) | 0 | 150 | 280 | 390 | 470 | 520 | 540 |
| Total cost ($) | 100 | 170 | 240 | 310 | 380 | 450 | 520 |
How many workers maximise profit?
- (A) 1
- (B) 3
- (C) 4
- (D) 6
Answer and explanation
Answer: (C). MRP = ΔTR: $150, $130, $110, $80, $50, $20. MRC = ΔTC = $70 (the wage). The 4th worker’s MRP ($80) is above $70; the 5th’s ($50) is below. Profit at 4 workers, 470 − 380 = $90, is the largest in the table.
- (A) picks the largest gap between MRP and MRC, throwing away workers 2 to 4.
- (B) maximises profit per worker ($80 ÷ 3 ≈ $26.67, against $90 ÷ 4 = $22.50). But the 4th worker still adds $10 to total profit.
- (D) keeps hiring while MRP is positive, as if workers cost nothing.
Question 4 (constructed response · mixed)
Marrowdale’s market for fruit pickers is perfectly competitive (Q in hundreds of pickers, W in dollars per hour):
- Demand: Qd = 900 − 20W
- Supply: Qs = 30W − 600
Ashgrove Orchard, one of many orchards, sells plums in a perfectly competitive market at $3 per crate.
| Picker | 1st | 2nd | 3rd | 4th | 5th | 6th |
|---|---|---|---|---|---|---|
| MP (crates per hour) | 20 | 16 | 13 | 10 | 8 | 6 |
(a) Find the market wage and the number of pickers employed. (b) Draw correctly labelled side-by-side graphs of the market and of Ashgrove. Show Ashgrove’s labour supply and MRC. (c) Calculate Ashgrove’s MRP for each picker and the number it hires. (d) The price of plums rises to $4 per crate at every orchard, and market demand becomes Qd = 1,000 − 20W. Explain why demand shifts, and find the new market wage and employment. (e) How many pickers does Ashgrove hire now? Explain using its new MRP.
Worked solution and suggested Marlbridge rubric
(a) 900 − 20W = 30W − 600, so 1,500 = 50W, W = $30 per hour, and Q = 900 − 600 = 300 hundred (30,000) pickers.
(b) Both graphs: “Wage ($ per hour)” on the vertical axis. Market: D and S crossing at $30. Ashgrove: a horizontal line at $30 labelled S = MRC = W, crossing a downward-sloping MRP (= D) at 4 pickers.
(c) MRP = MP × $3: $60, $48, $39, $30, $24, $18. MRP = W at the 4th picker: Ashgrove hires 4 pickers.
(d) Demand for pickers is derived: a higher plum price raises every picker’s MRP (MP × P), so orchards want more pickers at each wage. New equilibrium: 1,000 − 20W = 30W − 600, so 1,600 = 50W, W = $32, and Q = 1,000 − 640 = 360 hundred pickers.
(e) New MRP = MP × $4: $80, $64, $52, $40, $32, $24. At $32, the 5th picker’s MRP equals the wage: Ashgrove hires 5 pickers. Its MRP shifted right and its wage line rose.
| Point | What earns it |
|---|---|
| 1 | $30 and 300 hundred pickers |
| 1 | Side-by-side graphs: wage set by market S and D; firm’s S = MRC horizontal at it |
| 1 | MRP column and 4 pickers where MRP = W |
| 1 | Demand shift explained by derived demand or MRP = MP × P |
| 1 | $32 and 360 hundred pickers |
| 1 | 5 pickers, using the new MRP and the new wage |
Total: 6 points.
Question 5 (constructed response · mixed)
Corriemuir Mine is the only employer in an isolated town (W and MRP in dollars per hour, L workers):
- Labour supply: W = 8 + 0.5L
- MRP of labour: MRP = 44 − L
(a) Write the MRC equation and explain why MRC is above the supply curve. (b) Find the number of workers Corriemuir hires, the wage it pays, and the MRP of the last worker. (c) Find the employment and wage where supply meets MRP, and the deadweight loss of the monopsony outcome. (d) A new road lets people from a neighbouring town commute to the mine, and supply becomes W = 2 + 0.5L. Is this a shift or a movement? Find the new employment and wage.
Worked solution and suggested Marlbridge rubric
(a) MRC = 8 + L: the same intercept as supply and twice the slope. To hire one more worker, Corriemuir must also raise the wage of every worker it already employs, so the extra cost is the new wage plus those raises.
(b) MRC = MRP: 8 + L = 44 − L, so L = 18 workers. Wage from supply: 8 + 0.5 × 18 = $17 per hour. MRP of the last worker = 44 − 18 = $26, which is $9 above the wage.
(c) S = MRP: 8 + 0.5L = 44 − L, so 1.5L = 36, L = 24 and W = $20. DWL = ½ × (26 − 17) × (24 − 18) = $27 per hour.
(d) A shift right of supply: more people are able and willing to work at the mine at every wage (at $17, 30 instead of 18). MRC becomes 2 + L. Then 2 + L = 44 − L gives L = 21 and W = 2 + 10.5 = $12.50 per hour. Employment rises and the wage falls.
| Point | What earns it |
|---|---|
| 1 | MRC = 8 + L |
| 1 | MRC above S explained by raising the wage of existing workers |
| 1 | 18 workers and $17 read from supply |
| 1 | 24 workers at $20, and DWL of $27 |
| 1 | Supply shift right, with the reason |
| 1 | 21 workers at $12.50 |
Total: 6 points.
Question 6 (constructed response · mixed)
Lornhill Boatworks is the only boat builder, and the only employer of boat-builders, on a remote island. To sell Q boats a month it must charge P = 1,000 − 20Q dollars.
| Workers | 0 | 1 | 2 | 3 | 4 | 5 |
|---|---|---|---|---|---|---|
| Boats per month (Q) | 0 | 6 | 11 | 15 | 18 | 20 |
| Wage needed ($ per month) | – | 800 | 1,100 | 1,400 | 1,700 | 2,000 |
(a) Calculate the price, total revenue and MRP for each number of workers. (b) For the 3rd worker, calculate MP × P and explain why MRP is lower. (c) Calculate total labour cost and MRC, and find the number of workers Lornhill hires and the wage it pays. (d) Find the employment and wage where the supply schedule meets MRP. Explain why Lornhill does not hire the 3rd worker.
Worked solution and suggested Marlbridge rubric
(a)
| Workers | Q | P ($) | TR ($) | MP | MRP ($) |
|---|---|---|---|---|---|
| 1 | 6 | 880 | 5,280 | 6 | 5,280 |
| 2 | 11 | 780 | 8,580 | 5 | 3,300 |
| 3 | 15 | 700 | 10,500 | 4 | 1,920 |
| 4 | 18 | 640 | 11,520 | 3 | 1,020 |
| 5 | 20 | 600 | 12,000 | 2 | 480 |
(b) MP × P = 4 × $700 = $2,800. But Lornhill must also cut the price by $80 on its first 11 boats, losing $880, so MRP = $1,920: with market power, MR < P.
(c) Total labour cost: $800, $2,200, $4,200, $6,800, $10,000. MRC: $800, $1,400, $2,000, $2,600, $3,200 (for the 3rd worker: $1,400 + 2 × $300 = $2,000). MRP > MRC for the 2nd worker ($3,300 > $1,400) but not the 3rd ($1,920 < $2,000). Lornhill hires 2 workers at the supply wage of $1,100 a month.
(d) Wage equals MRP up to the 3rd worker ($1,920 > $1,400) but not the 4th ($1,020 < $1,700): 3 workers at $1,400. The 3rd worker would accept $1,400 and adds $1,920, but hiring them means raising 2 existing workers by $300 each: MRC ($2,000) > MRP ($1,920).
| Point | What earns it |
|---|---|
| 1 | Prices and total revenues |
| 1 | MRP as changes in TR |
| 1 | $2,800 with the price-cut explanation (MR < P) |
| 1 | MRC row correct |
| 1 | 2 workers and $1,100 from the supply schedule |
| 1 | 3 workers at $1,400, with MRC > MRP as the reason for stopping at 2 |
Total: 6 points.
Question 7 (constructed response · mixed)
Talvenia is a fictional farming country. The world price of lentils rises sharply.
(a) Explain why the demand for Talvenia’s farmland and the demand for its farm workers both increase. (b) Talvenia has a fixed 500 thousand hectares of farmland to rent. Demand for rented land is Q = 900 − 2R before and Q = 1,100 − 2R after, where R is the yearly rent in dollars per hectare. Find the rent before and after. (c) In the farm labour market (Q in thousands, W in dollars per day), Qd = 160 − 4W and Qs = 6W − 40. After the price rise, Qd = 180 − 4W; meanwhile new factory jobs in the towns attract farm workers, and Qs = 6W − 50. Find the wage and employment before and after. (d) Without numbers, which result in (c) could you predict? Explain. (e) Explain what the higher rent and wage signal to landowners and workers.
Worked solution and suggested Marlbridge rubric
(a) Both are derived demands: a higher lentil price raises MRP = MP × P for every hectare and every worker, so demand for both shifts right.
(b) Before: 500 = 900 − 2R, so R = $200. After: 500 = 1,100 − 2R, so R = $300. With land fixed, the demand increase shows up only as a higher rent.
(c) Before: 160 − 4W = 6W − 40, so W = $20 and Q = 80 thousand. After: 180 − 4W = 6W − 50, so 230 = 10W, W = $23 and Q = 88 thousand.
(d) The wage must rise: more demand and less supply both push it up. Employment is indeterminate without numbers: demand pushes it up and supply pushes it down. Here demand wins; a supply fall of more than 30 thousand would have cut employment.
(e) Factor prices are incentives and information: the higher rent and wage signal that land and farm labour are scarcer and more valuable in farming, drawing workers towards farms and telling farmers to use both carefully.
| Point | What earns it |
|---|---|
| 1 | Derived demand, with MRP = MP × P rising for both factors |
| 1 | Rent $200 then $300 |
| 1 | $20 and 80 thousand before |
| 1 | $23 and 88 thousand after |
| 1 | Wage up for certain, employment indeterminate, with reasons |
| 1 | Factor prices as incentives or signals, applied to land or labour |
Total: 6 points.
How did you do?
Questions 1 to 3 score 1 point each and Questions 4 to 7 score 6: 27 in all. Note which ideas cost you points.
- MRP, MRC and derived demand (Q3, Q4, Q6, Q7): the Topic 5.1 checklist.
- Shifts and two-shift results (Q1, Q2, Q4, Q5, Q7): the Topic 5.2 checklist.
- Wage takers, side-by-side graphs and MRP versus VMP (Q1, Q3, Q4, Q6): the Topic 5.3 checklist.
- Monopsony (Q2, Q5, Q6): the Topic 5.4 checklist.
Not taken the Unit 5 diagnostic? It shows which topic to revisit first.