OCR A Level Economics: Demand for labour, productivity and unit labour costs (H460) – 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 cover the demand side of the topic Wage determination in Component 1, Microeconomics, of the OCR A Level Economics (H460) specification. Teaching is in the study guide and the revision notes. Course pages: the hub and checklist. All contexts and figures are invented.

Questions

1. Labour market concepts.

(a) Define derived demand for labour. [2] (b) Explain what is meant by sub-markets for labour. [2] (c) Explain why an unemployed warehouse packer cannot easily fill a vacancy for a qualified electrician. [2] (d) Explain one factor that would increase a bakery’s demand for bakers. [2]

2. A worker in Country C (illustrative) earns £640 a week in year 1 and £672 in year 2. Prices, measured by an index set at 100 in year 1, stand at 105 in year 2.

(a) Calculate the percentage change in the nominal wage. [1] (b) Calculate the year 2 real wage in year 1 prices. [2] (c) Explain what has happened to the worker’s real wage. [2]

3. A depot (illustrative) raises its hourly wage from £20 to £22. Employment falls from 120 to 114 workers.

(a) Calculate the wage elasticity of demand for labour. [3] (b) Is demand elastic or inelastic? [1] (c) Calculate the change in the weekly wage bill, assuming one hour per worker. [2] (d) Explain two factors that could make demand this inelastic. [4]

4. A small bakery (illustrative) has 15 workers, each working 40 hours a week, and makes 2,400 loaves. It pays £12 an hour.

(a) Calculate output per worker-hour. [2] (b) Calculate the unit labour cost. [2] (c) New ovens raise output to 3,000 loaves with the same hours and wage. Calculate the new unit labour cost. [2] (d) Explain why unit labour cost fell although the wage did not change. [2]

5. Firm X (illustrative) pays £18 an hour and makes 9 units an hour. Firm Y pays £14 an hour and makes 5 units an hour.

(a) Calculate each firm’s unit labour cost. [2] (b) Explain which firm is more cost-competitive. [3] (c) Explain one reason why productivity may differ between the firms. [2]

6. Between two years, Country A’s wage index rises from 100 to 106 and its productivity index from 100 to 110. Country B’s wage index rises from 100 to 104 and its productivity index falls from 100 to 98. Both are illustrative.

(a) Calculate each country’s unit labour cost index. [3] (b) Evaluate the implications for the price competitiveness of each country’s firms. [6]

7. A firm (illustrative) spends £2,400 training a worker. Output rises by 0.8 units an hour. The worker works 1,500 hours a year and each extra unit adds £2 to net revenue.

(a) Define human capital. [2] (b) Calculate how many months the training takes to pay back. [3] (c) Explain why a firm might invest less in training than is best for the economy. [3]

8. A workshop (illustrative) sells at £8 a unit. The marginal physical product of workers one to five is 9, 7, 5, 3 and 1 units.

(a) Calculate the marginal revenue product of each worker. [3] (b) The wage is £45. How many workers are hired? [2] (c) The wage falls to £29. How many workers are hired? [2] (d) With the wage at £45, the price falls to £6. How many workers are hired? [2]

9. Explain, with the aid of a diagram, how marginal revenue product theory determines a firm’s employment. [6]

10. A firm (illustrative) has total costs of £800,000, of which 25% is labour, and revenue of £880,000. Wages rise by 4%.

(a) Calculate the extra cost as a percentage of total costs. [2] (b) Calculate the percentage change in profit, assuming nothing else changes. [2] (c) Productivity rises by 1.5%. Calculate the percentage change in unit labour cost. [2] (d) Evaluate how much the wage rise matters to the firm. [4]

Answers

1. (a) Demand for labour arises from the demand for the good or service it helps to produce [1], so it depends on demand for that output [1]. (b) Labour is split into separate markets [1] by, for example, occupation, skill, industry or region, each with its own demand, supply and wage [1]. (c) An electrician needs specific qualifications and training [1]. The packer would need time and cost to retrain, so labour is immobile between the sub-markets [1]. (d) Demand for bread rises [1], so each baker brings in more revenue and the bakery wants more bakers at each wage (a shift right) [1]. Productivity or the product price rising are also valid factors. Examiner insight: Explanations that link the factor to revenue or output per worker, not only name it, are the ones that show reasoning.

2. (a) (672 - 640) ÷ 640 = 5% [1]. (b) 672 ÷ 105 × 100 [1] = £640 [1]. (c) The real wage is unchanged at £640 [1] because nominal pay rose by the same 5% as prices, so the weekly pay buys the same goods [1]. Examiner insight: Show the division by the index and the multiplication by 100 as separate steps, so a slip in one is visible.

3. (a) Wage change = 2 ÷ 20 = +10% [1]. Employment change = -6 ÷ 120 = -5% [1]. WED = -5 ÷ 10 = -0.5 [1]. (b) Inelastic, because the size is below 1 [1]. (c) Before: 20 × 120 = £2,400 [1]. After: 22 × 114 = £2,508, a rise of £108 [1]. (d) Any two factors, each with its explanation (two marks each). Few substitutes: machines cannot do the work, so employment barely falls [2]. Labour a small share of total costs: the rise changes costs little, so there is little pressure to cut staff [2]. Product demand inelastic: the cost can be passed on. Short time period: no chance to change methods. Examiner insight: A factor name alone gains little; the link to why employment responds little to the wage is what makes it an explanation.

4. (a) Hours = 15 × 40 = 600 [1]. Output per hour = 2,400 ÷ 600 = 4 loaves [1]. (b) Wage bill = 600 × 12 = £7,200 [1]. ULC = 7,200 ÷ 2,400 = £3.00 [1]. (c) 7,200 ÷ 3,000 = £2.40 [2]. (d) The same labour cost is spread over more output [1] because productivity rose from 4 to 5 loaves an hour [1]. Examiner insight: Check ULC by dividing the wage by output per hour (12 ÷ 4 = 3.00), which confirms the first method.

5. (a) X: 18 ÷ 9 = £2.00 [1]. Y: 14 ÷ 5 = £2.80 [1]. (b) Firm X [1] because its ULC is lower [1], even though it pays the higher wage, since ULC depends on both wage and productivity [1]. (c) More capital or better technology per worker, or a more skilled workforce [1], which raises output per hour [1]. Examiner insight: Comparing hourly wages alone is the common slip; a conclusion based on ULC is what the data supports.

6. (a) A: 106 ÷ 110 × 100 = 96.36 [1]. B: 104 ÷ 98 × 100 = 106.12 [1]. A’s ULC fell 3.64%; B’s rose 6.12% [1]. (b) A’s lower ULC cuts labour cost per unit [1], letting its firms cut prices or raise margins, which helps exports [1]. B’s higher ULC raises cost per unit [1], so its firms must raise prices or accept lower margins and risk losing sales [1]. Evaluation: an exchange-rate change could offset these effects [1]; quality and design matter as well as price, and national indices hide differences between sectors, so the effect is uncertain [1]. Examiner insight: Strong evaluation reaches a judgement, for example on how far exchange rates or quality change the conclusion, rather than listing caveats.

7. (a) The skills, knowledge and qualifications [1] embodied in workers (including health) [1]. (b) Extra output = 0.8 × 1,500 = 1,200 units [1]. Extra net revenue = 1,200 × 2 = £2,400 a year [1]. Payback = 2,400 ÷ 2,400 × 12 = 12 months [1]. (c) The firm pays the cost [1]. Trained workers can be hired by rivals who offer higher wages [1], so the firm loses some of the return and invests less than the benefits to workers and the economy justify [1]. Examiner insight: State the unit with the answer to a calculation of time, and tie the explanation to who bears the cost and who gains the return.

8. (a) MRP = MPP × £8 [1]: £72, £56, £40, £24, £8 [2]. (b) Hire while MRP exceeds the wage [1]. The second worker adds £56 but the third only £40, so 2 workers [1]. (c) The third adds £40, above £29, but the fourth adds £24, so 3 workers [2]. (d) New MRP is £54, £42, £30, £18, £6 [1]. Only the first exceeds £45, so 1 worker [1]. Examiner insight: Stating the comparison of MRP with the wage for the last worker hired and the next one shows why the cut-off is where it is.

9. Axes labelled: wage and MRP upwards, quantity of labour along the bottom [1]. MRP = MPP × marginal revenue, and diminishing returns make MPP fall, so the MRP curve slopes down and is the firm’s demand for labour [1] [1]. A horizontal wage line at the market wage shows the cost of each worker [1]. The firm hires up to the quantity where MRP equals the wage [1]. Beyond it, each extra worker adds less revenue than the wage, so profit would fall [1]. Examiner insight: A labelled diagram with named curves and the equilibrium employment, supported by the written chain, tends to be rewarded more than either alone.

10. (a) Labour cost = 0.25 × 800,000 = £200,000. Extra = 200,000 × 0.04 = £8,000 [1], which is 1.0% of total costs [1]. (b) Profit = 880,000 - 800,000 = £80,000 [1], falling to £72,000, a 10% fall [1]. (c) 1.04 ÷ 1.015 - 1 = +2.46% [2]. (d) The rise is only 1.0% of total costs [1] but cuts profit by 10%, a large share of profit [1]. Productivity gains can offset part of it (ULC rises only 2.46%) [1], and the firm may pass on the cost if product demand is inelastic; judgement: it matters more to profit than costs, so the firm should look to productivity first [1]. Examiner insight: Use your calculated figures in the evaluation; a judgement tied to the numbers is more convincing than general comments.

Where marks are usually lost

• Reading a nominal rise as a real rise.
• Leaving out the sign of WED or mixing up elastic and inelastic.
• Shifting the whole labour demand curve when the wage alone has changed.
• Judging cost competitiveness from the wage alone, without productivity.
• Forgetting to multiply by 100 when converting to real terms or building an index.
• Using price instead of marginal revenue, or comparing MRP with the wrong worker.
• Naming a factor without explaining how it changes labour demand or its elasticity.
• Evaluation that lists caveats with no judgement.

Next steps

• Review the revision notes and the study guide.
• Go to the OCR Economics hub and the checklist.
• Try all the free 10-minute diagnostics.
• Book a free trial class at /trial/.

Official syllabus

OCR, A Level in Economics (H460) specification. Component 1, Microeconomics: area of study Labour market, topic Wage determination (the demand-side outcomes and MRP theory).