AQA A-level Economics: Monopsony and trade unions in labour markets (7136) – Practice Questions

These are original questions written for Marlbridge, for revision and practice on this content. They are not reproduced past-paper questions, and they do not replicate the exam’s exact structure, question count or mark tariffs – examination boards hold copyright in their own papers. Use these alongside the official past papers from your board or school.

These questions follow the AQA AS and A-level Economics specification (version 1.3, 29 June 2022), A-level sub-sections 3.1.6.4 and 3.1.6.5 on the AQA website (4.1.6.4 and 4.1.6.5 in the combined PDF): imperfectly competitive labour markets and the influence of trade unions. Use the study guide and revision notes. The course hub is AQA A-level Economics; the printable checklist tracks progress. All towns, firms and figures are invented.

Questions

1. (a) Define monopsony. [1] (b) State two other causes of labour market imperfection. [2]

2. A firm is the only employer in a village. It must pay 9.00 pounds per hour to attract 10 workers and 9.50 pounds per hour to attract 11 workers, paying the same wage to all. Explain, with a calculation, why the marginal cost of labour of the eleventh worker is greater than 9.50 pounds. [4]

3. Greenfield Packing is the only employer of packers in Town C. Every worker is paid the same wage. The table shows the wage it must pay to attract each number of workers and the marginal revenue product (MRP) of the last worker, both in pounds per hour. The total wage bill for 3 workers is 36 pounds per hour.

Workers	1	2	3	4	5	6	7
Wage	8	10	12	14	16	18	20
MRP	38	34	30	26	22	18	14

(a) Calculate the total wage bill and the marginal cost of labour (MCL) for 4, 5 and 6 workers. [2] (b) State the number of workers Greenfield will employ and the wage it will pay. Explain your answer. [3] (c) State the wage and employment if the market were perfectly competitive. [2] (d) Calculate the gap between MRP and the wage at Greenfield’s employment level, and the percentage by which the monopsony wage is below the competitive wage. [2]

4. Describe how a diagram shows that a monopsonist employs fewer workers and pays a lower wage than in a perfectly competitive labour market. [4]

5. Explain how imperfect information can give an employer some wage-setting power. [4]

6. Explain two factors that affect the ability of a trade union to raise wages. [6]

7. A union in a competitive labour market negotiates a 10% wage rise from 20 pounds per hour for its 500 members. The wage elasticity of demand for labour is −0.6.

(a) Calculate the new level of employment. [2] (b) Calculate the change in the total wage bill, as a percentage. [3] (c) Show how the result would differ if the elasticity were −1.5. [2]

8. Use the data in question 3. Suppose Town C’s packers instead work for many small firms, a perfectly competitive market, and a union negotiates a wage of 22 pounds per hour for all.

(a) Calculate employment, the surplus of labour and the total wage bill at the union wage. [4] (b) Explain why the wage bill rises even though jobs are lost, and who loses. [3]

9. Greenfield Packing is the only employer in Town C (data in question 3) and a union negotiates a wage for all packers.

(a) For a union wage of 20 pounds per hour, state employment and compare it with the monopsony outcome. [3] (b) Explain why employment can rise when a union is introduced into a monopsony. [3] (c) State employment if the union sets 28 pounds per hour, and explain the result. [2]

10. Assess whether a trade union is likely to raise both the wages and the employment of its members. [9]

11. Mill Works employs about 70% of workers in Town D, 40 kilometres from the next town. Many workers do not know what similar firms pay elsewhere. Wages in Town D are below those in nearby towns. Evaluate the view that low wages in Town D are caused by monopsony power. [10]

Answers

1. (a) A labour market with a single buyer (employer) of labour [1]. (b) Any two from: trade unions; imperfect information; immobility of labour [2]. [3] Examiner insight: Name the cause itself; a vague phrase such as “unfair pay” does not identify a cause of imperfection.

2. Total wage bill for 10 workers = 10 × 9.00 = 90 pounds [1]. Total for 11 workers = 11 × 9.50 = 104.50 pounds [1]. MCL = 104.50 − 90 = 14.50 pounds [1], which exceeds 9.50 because the firm pays the higher wage to all existing workers as well as to the new one [1]. [4] Examiner insight: Show both wage bills and subtract them.

3. (a) Wage bills: 4 × 14 = 56, 5 × 16 = 80, 6 × 18 = 108 [1]. MCL: 56 − 36 = 20, 80 − 56 = 24, 108 − 80 = 28 [1]. [2] (b) Hire while MRP is at least MCL [1]. At 4 workers MRP (26) exceeds MCL (20); at 5, MRP (22) is below MCL (24), so employment is 4 [1]. The wage comes from the supply curve at 4 workers: 14 pounds [1]. [3] (c) Competitive employment is where MRP = wage: both are 18 at 6 workers [1]. Wage 18, employment 6 [1]. [2] (d) Gap = 26 − 14 = 12 pounds [1]. The wage is (18 − 14) ÷ 18 = 22.2% below competitive [1]. [2] Examiner insight: The wage is the one needed to attract 4 workers, not an MCL or MRP figure.

4. Supply (AC of labour) slopes up, with MCL above it, and MRP slopes down [1]. The monopsonist hires where MCL meets MRP, below the competitive employment where supply meets MRP [1]. The wage is read from supply at that employment [1], and is below the competitive wage [1]. [4] Examiner insight: Name each curve and point; “the curves cross” does not say which.

5. Workers who lack information on other pay or vacancies [1] are less likely to leave [1]. Searching costs time and money, so many stay despite lower pay [1]. The employer can pay less without losing most staff, as supply to the firm is less elastic [1]. [4] Examiner insight: Link missing information to workers’ behaviour and then to the pay decision.

6. Factor 1, for example membership density: a high share of workers in the union [1]; a strike then stops production and the firm cannot easily replace workers [1], so the union can bargain for higher wages [1]. Factor 2, for example inelastic demand for the product: consumers buy about the same amount at a higher price [1]; the firm can pass on higher wage costs without losing many sales [1], so there is less employment loss when the union asks for more [1]. [6] Examiner insight: Give each factor its own chain to bargaining power; a bare list identifies only.

7. (a) %ΔL = −0.6 × 10 = −6% [1]. Employment = 500 × 0.94 = 470 [1]. [2] (b) Before: 20 × 500 = 10,000 pounds per hour [1]. After: 22 × 470 = 10,340 [1]. Change = 340 ÷ 10,000 = +3.4% [1]. [3] (c) %ΔL = −1.5 × 10 = −15%, so employment is 500 × 0.85 = 425 and the bill is 22 × 425 = 9,350, a fall of 6.5% [1]. Demand is elastic, so the rise in wage is outweighed by the loss in jobs and members’ total pay falls [1]. [2] Examiner insight: State whether demand is elastic or inelastic and link it to the wage bill.

8. (a) Demand at 22: the fifth worker’s MRP is 22, so employment is 5 [1]. Supply: wage = 6 + 2 × workers, so workers = (22 − 6) ÷ 2 = 8 [1]. Surplus of labour = 8 − 5 = 3 [1]. Wage bill = 22 × 5 = 110 pounds per hour, against 18 × 6 = 108 in competition [1]. [4] (b) The wage rises 22.2% but employment falls only 16.7%, so elasticity is about −0.75, inelastic, and the bill rises [1]. One of six jobs is lost, and three more people who would work at that wage find none [1]. These outsiders and the member who loses the job lose; remaining members gain [1]. [3] Examiner insight: A rising wage bill does not mean every worker gains.

9. (a) At 20 pounds supply is 7 and demand is 5 (MRP of the fifth is 22, of the sixth 18), so employment is 5 [1]. Under monopsony it was 4, so employment rises by 25% [1], and the wage rises from 14 to 20, up 42.9% [1]. [3] (b) The union wage is paid to all, so hiring another worker no longer forces up pay for existing staff [1]. MCL is flat at the union wage, so MCL = MRP is reached at higher employment [1]. The wage is still below the MRP of the extra workers, so the firm takes them on [1]. [3] (c) At 28 pounds, demand is 3 (MRP of the third is 30, of the fourth 26), and supply is 11, so employment is 3 [1], less than the monopsony level of 4, because the wage exceeds the fourth worker’s MRP, as in a competitive market [1]. [2] Examiner insight: Compare with the monopsony figures; a bare employment figure shows no direction of change.

10. In a competitive market a union wage above equilibrium cuts employment along the demand curve [1], leaving a surplus of labour [1]. If demand is inelastic the wage bill still rises [1]. In a monopsony the union wage makes MCL flat, so the employer hires more [1]; wages and employment can both rise up to the competitive wage [1]. Above it employment falls, eventually below the monopsony level [1]. Union power depends on density, product demand and labour’s share of costs [1]. Members in work may gain while outsiders are priced out [1]. Judgement: both rise only in a monopsony with the wage near the competitive level; otherwise there is a trade-off [1]. [9] Examiner insight: Evaluation names the conditions for each outcome and reaches a judgement.

11. Mill Works is a dominant employer, so it may set wages [1], hiring where MCL = MRP and paying below MRP and the competitive wage [1]. Distance limits mobility, making supply inelastic and monopsony power stronger [1]. Imperfect information about wages elsewhere reduces the threat of workers leaving [1]. But 70% is not a single buyer, so wage-setting power may be partial [1]. Low wages may reflect low MRP or low skills, not monopsony [1]. A wage gap with nearby towns does not prove the cause without data on MRP [1]. Workers could commute or move over time, making supply more elastic [1]. A union might raise wages without cutting jobs if monopsony is the cause [1]. Judgement: monopsony is plausible given the share, distance and information, but evidence on MRP and elasticity of supply is needed [1]. [10] Examiner insight: Use the stem’s evidence (70%, 40 kilometres, lack of information) and weigh it against another explanation.

Where marks are usually lost

• Reading the monopsony wage off the MCL or MRP column or curve instead of the supply curve.
• Saying a union always (or never) causes unemployment, whatever the market type.
• Ignoring outsiders when judging who gains from a union wage.
• Closing an evaluation with a summary and no stated judgement.

Next steps

• Recap with the revision notes or the study guide.
• Go to the AQA A-level Economics hub and the checklist.
• Take all the free 10-minute diagnostics.
• Book a free trial class.

Official syllabus

AQA AS and A-level Economics specification, version 1.3 (29 June 2022), published by AQA: the A-level sub-sections 3.1.6.4 and 3.1.6.5 on the AQA website (4.1.6.4 and 4.1.6.5 in the combined PDF).