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9708 · 8.3

Labour market forces and government intervention — practice questions

Practice and worked examples for 9708 Labour market forces and government intervention. Short previews only — attempt the full question in MarkScheme against the official scheme.

Worked example 1

In a town with one large employer, the competitive wage would be £9 per hour with 5 000 workers employed. The monopsonist pays £7 and employs 3 500 workers. The government sets a national minimum wage of £9.

Using labour market analysis, explain the likely effects on wages and employment. [8 marks]

Show solution outline

Before minimum wage (monopsony):

  • Single buyer sets wage where MRP = MC of labour — pays £7, employs 3 500.
  • Wage is below MRP — workers are paid less than their contribution to revenue.

Minimum wage at £9 (competitive wage):

  • Wage floor binds — firm must pay £9.
  • At £9, MRP = wage for up to 5 000 workers — employment can rise from 3 500 toward 5 000.
  • This contrasts with a competitive market where a minimum wage at £9 when equilibrium is £8 would cause unemployment.

Key point: In monopsony, minimum wage can correct market power — higher wages and higher employment — up to the competitive level. Beyond that, unemployment returns.

Worked example 2

A coffee shop sells each cup of coffee for $4. It operates in a competitive labour market where the daily wage for a barista is $120. The table below shows the number of coffees a team of baristas can make per day.

Number of BaristasTotal Coffees per day
140
------
275
3105
4125
5140

Calculate the profit-maximising number of baristas the coffee shop should hire. Show your working.

Show solution outline

To find the profit-maximising number of workers, we must calculate the Marginal Revenue Product (MRP) of each worker and compare it to their wage (Marginal Cost of Labour, MCL).

Step 1: Calculate the Marginal Product (MP) MP is the additional output from one more worker.

  • 1st barista: MP = 40 coffees
  • 2nd barista: MP = 75 - 40 = 35 coffees
  • 3rd barista: MP = 105 - 75 = 30 coffees
  • 4th barista: MP = 125 - 105 = 20 coffees
  • 5th barista: MP = 140 - 125 = 15 coffees

Step 2: Calculate the Marginal Revenue Product (MRP) MRP = MP × MR. In a competitive product market, MR equals the price of the product (4).4).

  • 1st barista: MRP = 40 × 4=4 = 160
  • 2nd barista: MRP = 35 × 4=4 = 140
  • 3rd barista: MRP = 30 × 4=4 = 120
  • 4th barista: MRP = 20 × 4=4 = 80
  • 5th barista: MRP = 15 × 4=4 = 60

Step 3: Compare MRP to the Wage (MCL) The firm hires workers as long as MRP ≥ MCL. The daily wage (MCL) is 120.120.

  • 1st barista: MRP ($160) > Wage ($120) → Hire.
  • 2nd barista: MRP ($140) > Wage ($120) → Hire.
  • 3rd barista: MRP ($120) = Wage ($120) → Hire. This is the profit-maximising point.
  • 4th barista: MRP ($80) < Wage ($120) → Do not hire.

Conclusion: The coffee shop should hire 3 baristas. The third barista adds exactly as much to revenue as they add to costs. Hiring a fourth barista would be unprofitable as their MRP ($80) is less than their wage ($120).

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