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2281 · 3.3

Workers — practice questions

Practice and worked examples for 2281 Workers. 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 competitive firm produces widgets, which it sells for £5 each. The firm is a wage taker in the labour market, and the daily wage for a worker is £90. The firm's daily production schedule is as follows:

  • 1 worker: 30 widgets
  • 2 workers: 55 widgets
  • 3 workers: 75 widgets
  • 4 workers: 90 widgets
  • 5 workers: 100 widgets Calculate how many workers the firm should employ to maximise profit.
Show solution outline

Step 1: Identify the profit-maximising condition. A firm will hire workers up to the point where the Marginal Revenue Product of Labour (MRP) is equal to or greater than the Marginal Cost of Labour (MCL). Here, MCL is the daily wage.

  • MCL = £90 per worker.

Step 2: Calculate the Marginal Product (MP) of each worker. MP is the additional output from hiring one more worker.

  • MP of 1st worker = 30 widgets
  • MP of 2nd worker = 55 - 30 = 25 widgets
  • MP of 3rd worker = 75 - 55 = 20 widgets
  • MP of 4th worker = 90 - 75 = 15 widgets
  • MP of 5th worker = 100 - 90 = 10 widgets

Step 3: Calculate the Marginal Revenue Product (MRP) of each worker. MRP = MP × MR. In a competitive product market, MR is the price of the product.

  • MR = £5 per widget.
  • MRP of 1st worker = 30 × £5 = £150
  • MRP of 2nd worker = 25 × £5 = £125
  • MRP of 3rd worker = 20 × £5 = £100
  • MRP of 4th worker = 15 × £5 = £75
  • MRP of 5th worker = 10 × £5 = £50

Step 4: Compare MRP with MCL to decide how many workers to hire. The firm hires as long as MRP ≥ MCL.

  • Worker 1: MRP (£150) > MCL (£90). Hire.
  • Worker 2: MRP (£125) > MCL (£90). Hire.
  • Worker 3: MRP (£100) > MCL (£90). Hire.
  • Worker 4: MRP (£75) < MCL (£90). Do not hire.

Conclusion: The firm should employ 3 workers. The 4th worker would add less to revenue (£75) than to costs (£90), reducing overall profit.

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