OxfordAQA International AS and A-level Economics: Wage determination (9640) – 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 OxfordAQA International AS and A-level Economics (9640), specification version 1.2, sections 3.3.4.3 and 3.3.4.4. Section 3.3 is extra International A2 content. All data are invented and illustrative; wages are in cu (currency units) per hour unless stated. Start with the study guide or the revision notes. Course pages: OxfordAQA A-level Economics hub and checklist.

Questions

1. Define monopsony power in a labour market and state two conditions that make it stronger. [3]

2. A sign-painting firm sells each finished job for 3 cu. The extra jobs completed per day by workers 1 to 5 are 30, 26, 20, 14 and 8.

(a) Work out the third worker’s marginal revenue product. [1] (b) The daily wage is 65 cu. How many workers does the firm hire? Show your comparison. [2] (c) The daily wage falls to 45 cu. How many does it now hire? [1]

3. In Country B, the market for kitchen assistants has demand Qd = 900 − 30W and supply Qs = 100 + 50W, where Q is workers and W is the wage.

(a) Find the equilibrium wage and employment. [2] (b) Demand rises to Qd = 1060 − 30W. Find the new equilibrium. [2] (c) Calculate the percentage change in the wage. [1]

4. A lone mill employs all workers in an isolated town. L is hundreds of workers. Supply of labour is W = 5 + L and marginal revenue product is MRP = 35 − L.

(a) Derive the marginal cost of labour. [1] (b) Find the wage and employment the mill chooses. [3] (c) Find the wage and employment in a perfectly competitive labour market. [2]

5. Describe how a diagram shows the wage, employment and monopsonistic exploitation for a profit-maximising monopsonist. [4]

6. Use the original market in question 3 (before demand rose). A union negotiates a wage of 14 cu.

(a) Calculate employment at 14 cu. [1] (b) Calculate the excess supply of labour. [1] (c) Calculate the elasticity of demand for labour over the change from the original wage. [2] (d) Calculate the percentage change in the total wage bill. [1]

7. In the mill of question 4, a union sets a wage for all workers.

(a) The union sets 20 cu. Find employment. [2] (b) What is the highest union wage that keeps employment at or above the level in 4(b)? [2] (c) State why this result differs from question 6. [1]

8. Explain two factors that affect a trade union’s ability to raise wages. [4]

9. Explain how imperfect information can lead two similar workers to be paid different wages. [3]

10. A union wins a nominal pay rise of 4.5% while the price index moves from 200 to 207.

(a) Calculate the percentage change in real pay. [2] (b) Occupation X pays 15 cu rising to 18.9 cu, and occupation Y pays 14 cu rising to 14.7 cu. Calculate each new wage as an index (old wage = 100). [2]

11. Evaluate the view that a trade union will always raise its members’ wages at the cost of fewer jobs. [8]

12. Assess how far the model of a perfectly competitive labour market explains differences in pay between occupations. [8]

Answers

1. Monopsony power is the ability of a single or dominant buyer of labour to influence the wage it pays [1]. Conditions: workers have skills specific to the employer [1]; workers are immobile or have few alternative employers [1]. [3] Examiner insight: Define the term before listing conditions, and make each condition a separate point rather than one blended phrase.

2. (a) MRP = 20 × 3 = 60 [1] (b) MRP of the second worker is 26 × 3 = 78, which is above 65 [1]. The third gives 60, which is below 65, so the firm hires 2 [1] (c) MRPs are 90, 78, 60, 42: the third (60) is above 45 and the fourth (42) is below, so 3 [1] [4] Examiner insight: Show each MRP beside the wage. A bare number of workers gives you less to be credited for if it is off by one.

3. (a) 900 − 30W = 100 + 50W, so 800 = 80W [1]. W = 10, Q = 600 [1] (b) 1060 − 30W = 100 + 50W, so 960 = 80W [1]. W = 12, Q = 700 [1] (c) (12 − 10) ÷ 10 = +20% [1] [5] Examiner insight: Substitute back into both equations to confirm they give the same quantity. It catches slips cheaply.

4. (a) Total cost = L(5 + L), so MCL = 5 + 2L [1] (b) 35 − L = 5 + 2L [1], so L = 10 (1,000 workers) [1]. Wage from supply: 5 + 10 = 15 [1] (c) 35 − L = 5 + L [1], so L = 15, W = 20 [1] [6] Examiner insight: A common slip is reading the wage from MCL (25) or MRP. State that the wage comes from the supply curve.

5. Axes: wage up the side, number of workers along the bottom [1]. A rising supply (average cost of labour) curve, a steeper MCL curve above it and a falling MRP curve [1]. Employment is where MCL cuts MRP; the wage is read from the supply curve at that employment [1]. The vertical gap between MRP and the wage at that employment is the monopsonistic exploitation [1]. [4] Examiner insight: Name every curve and the point where you read each variable. A description that skips the wage-reading step is incomplete.

6. (a) Qd = 900 − 30 × 14 = 480 [1] (b) Qs = 100 + 50 × 14 = 800, so excess supply = 800 − 480 = 320 [1] (c) Employment: (480 − 600) ÷ 600 = −20% [1]. Wage: (14 − 10) ÷ 10 = +40%, so elasticity = −20 ÷ 40 = −0.5 [1] (d) Before: 600 × 10 = 6,000. After: 480 × 14 = 6,720. Change = +12% [1] [5] Examiner insight: Use the demand figure (480), not the supply figure, for employment. Quote the sign and say it is inelastic.

7. (a) At 20, supply gives 20 − 5 = 15 and demand gives 35 − 20 = 15 [1]. Employment = 15 (hundred) [1] (b) Employment stays at 10 when MRP = wage at L = 10, so the wage is 35 − 10 = 25 [1]. Above this, demand falls below 10, so check that 25 is within supply (supply at 25 is 20, which is enough) [1] (c) The mill pays below MRP, so a wage rise toward MRP can raise employment; in a competitive market it cannot. [1] [5] Examiner insight: Employment equals the smaller of supply and demand at a fixed wage. Say so, rather than assuming one curve.

8. Any two, each with explanation: high union membership [1] makes strike threats credible because the employer cannot easily replace many workers [1]; inelastic demand for labour [1] means a wage rise costs few jobs because labour is a small share of cost or there are few substitutes [1]; also profitability, scarce skills, low unemployment or protective laws. [4] Examiner insight: A factor plus no explanation earns less. Link each factor to the employer’s costs or the union’s threat.

9. Workers may not know higher wages are available elsewhere [1], so they accept a lower offer [1]. Employers cannot observe productivity, so they may pay on weak signals; searching is costly, so wages do not equalise [1]. [3] Examiner insight: Say why the difference persists. “Information is poor” alone does not explain the wage gap.

10. (a) 1.045 ÷ 1.035 = 1.0097 [1]. Real pay rises by about 1.0% [1] (b) X: 18.9 ÷ 15 × 100 = 126 [1]. Y: 14.7 ÷ 14 × 100 = 105 [1] [4] Examiner insight: Dividing growth factors is the exact method. Subtracting 3.5 from 4.5 happens to give the same 1.0 here, so show the division.

11. Competitive market: a wage set above equilibrium cuts employment along the demand curve and creates excess supply [1]. The effect is small when demand for labour is inelastic, so the wage bill can rise [1]. Monopsony: workers are paid below MRP, so a union wage can raise both wages and employment up to a ceiling [1], beyond which jobs fall [1]. The outcome depends on bargaining strength (bilateral monopoly) [1] and on union strength factors such as membership and ability to pay [1]. Other effects include insiders gaining at the expense of outsiders [1], and possible productivity gains from lower turnover. Judgement: “always” is wrong, because the outcome depends on market structure and where the wage is set [1]. [8] Examiner insight: The strongest answers contrast the two market structures and reach a conclusion about the word “always”. A list of union effects with no judgement does less well.

12. In the model, wages are set by demand and supply, so differences reflect productivity (MRP), skills and the supply of workers [1]. Higher pay in scarce skills signals entry [1], and training costs raise the wage needed to attract workers [1]. Strengths: it explains why differentials arise and narrow when workers move [1]. Limits: monopsony pays below MRP [1], unions raise wages for members [1], imperfect information and immobility let differences persist [1]. Judgement: it explains the direction of many differences but is incomplete, because every real labour market departs from it to some degree [1]. [8] Examiner insight: Apply the model to pay differences rather than reciting its assumptions. Choose one limit and develop it.

Where marks are usually lost

• Reading the monopsony wage from the MCL or MRP curve.
• Forgetting the 2 in MCL = a + 2bL when supply is linear.
• Stating employment from supply when a fixed wage is above equilibrium; it is the lower of supply and demand.
• Omitting excess supply or unemployment after a union raises the wage in a competitive market.
• Using percentage points where a percentage change is needed.
• Giving a factor, such as membership, with no link to the employer’s reaction.
• Describing a diagram but leaving the axes, curves or equilibrium points unnamed.
• Writing about unions in general without stating which market structure applies.

Next steps

• Revise with the revision notes and re-read the study guide.
• Go to the OxfordAQA A-level Economics hub and tick off topics on the checklist.
• Take the free 10-minute diagnostics.
• Book a free trial class.

Official syllabus

OxfordAQA International AS and A-level Economics (9640) specification, version 1.2, first teaching September 2020, first International A-level exams May/June 2022, published by OxfordAQA. Sections 3.3.4.3 and 3.3.4.4, with section 3.5 (quantitative skills).