4.1.6.1 The demand for labour, marginal productivity theory Quiz: AQA Economics, Unit 1

The 20 questions

1. The demand for labour is a derived demand because it depends on:

   • The number of workers available in the labour pool
   • The government's minimum wage alone
   • The wage rate workers can earn in other industries, since firms must compete with those wages to hire labour for their own production
   • The demand for the good or service that the labour produces

2. Marginal productivity theory states that a profit-maximising firm will employ workers up to the point where:

   • The wage equals the average product of labour
   • Total revenue equals total labour costs
   • The wage equals the marginal revenue product of labour
   • The marginal product of labour is zero, since the firm stops hiring once an extra worker adds no output at all to the firm's production

3. The marginal revenue product of labour is:

   • Total revenue divided by total labour hours worked, which gives the average revenue that each hour of labour brings in for the business
   • Average product of labour multiplied by the wage rate
   • The extra revenue earned from employing one more worker, equal to marginal product times marginal revenue
   • The wage paid to the last worker employed

4. The demand curve for labour shows the relationship between:

   • The wage rate and the number of workers firms wish to employ
   • Total output and the number of hours worked per week, which shows how much each worker produces in a given period of time in the firm
   • The wage rate and the number of workers seeking jobs
   • The price of the product and the amount of labour supplied

5. Which factor causes a shift in the demand curve for labour?

   • A change in the number of workers willing to work at each wage
   • A change in the wage rate paid to workers
   • A movement along the labour supply curve
   • A change in the price of the product that the labour produces

6. The determinants of the elasticity of demand for labour include:

   • The age profile of the workforce in the country
   • The number of workers who belong to a trade union
   • The elasticity of demand for the final product and the share of labour in total costs
   • The level of government spending on education

7. Labour's marginal product is 5 units per hour and the product sells at £4, so MRP = £20. The wage is £15. In a perfectly competitive market, the firm should:

   • Hire more workers, since MRP exceeds the wage
   • Pay a wage of £20 to attract workers
   • Keep employment unchanged, since MRP equals the wage
   • Hire fewer workers, since MRP exceeds the wage

8. Demand for labour is derived from demand for the product. If the product price rises, what happens to labour demand?

   • It falls, since higher prices reduce the output that firms want to produce and so the workers they employ
   • It is unchanged, since labour demand depends only on the wage rate paid to workers and not on the price of the final product that they
   • It becomes perfectly inelastic
   • It rises, shifting the labour demand curve to the right, since MRP rises

9. A firm's labour demand becomes more elastic when:

   • Workers are highly specialised in one task
   • Labour costs are a very small share of total costs
   • Substitutes for labour are very expensive
   • The product it sells has a highly elastic demand, so higher wages lead to large output cuts

10. Labour costs are 10% of total costs and wages rise. Demand for labour is likely to be:

    • Perfectly elastic, since a small share of costs means high sensitivity
    • Relatively elastic, since labour is a large share of costs
    • Unit elastic at every wage
    • Relatively inelastic, since labour is a small share of costs

11. Marginal productivity theory assumes that:

    • Firms set wages without regard to productivity
    • Workers are paid according to need rather than output
    • Labour supply is perfectly inelastic in all markets
    • Each worker's contribution to output can be measured and the firm is a profit maximiser

12. A firm employs 10 workers producing 100 units and 11 workers producing 108 units. The marginal product of the 11th worker is:

    • 8 units
    • 100 units
    • 10 units
    • 108 units

13. If the marginal product of labour falls as more workers are hired, what does this imply for the labour demand curve?

    • It is horizontal, because firms accept any wage in the market and so the labour demand curve does not slope at all in any direction
    • It slopes upwards, because more workers raise output per worker, so each new hire adds more output than the one that came before
    • It is vertical, because labour supply is fixed and so the number of workers firms employ does not change with the wage they are offered
    • It slopes downwards, because each additional worker adds less revenue than the one before

14. A firm's labour demand shifts left when:

    • A fall in the demand for its product lowers the marginal revenue product of labour
    • The product price rises for all firms in the industry
    • The wage rate rises, moving along the labour demand curve
    • The firm invests in technology that raises labour productivity

15. Why does the labour demand curve slope downwards?

    • Because firms prefer to hire fewer workers at higher wages
    • Because labour supply is backward-bending
    • Because MRP falls as more workers are employed, due to diminishing marginal returns
    • Because workers accept lower wages when unemployment is high in every case

16. Which best describes the conditions for relatively inelastic labour demand?

    • Labour has few substitutes, makes up a small share of costs, and the final product's demand is inelastic
    • Labour is easily replaced by machines, with a large share of costs
    • Labour has many substitutes, makes up a large share of costs, and the product's demand is elastic
    • The product has many close substitutes and labour is a large share of costs

17. A firm's MRP at 5 workers is £400 and at 6 workers is £360. At a wage of £380, the firm should employ:

    • 6 workers, since MRP falls below the wage at the sixth worker, so the firm should add one more worker
    • 5 workers, since the sixth worker's MRP of 360 is below the wage
    • 6 workers, since MRP at six workers is higher than the wage and so each additional hire still brings in more revenue than it costs
    • 5 workers, since the sixth worker's MRP of £360 is below the wage

18. Explain why a rise in labour productivity can shift labour demand to the right.

    • Higher productivity shifts labour supply to the left
    • Higher productivity lowers MRP, so firms hire fewer workers at every wage, which causes labour demand to fall as productivity rises
    • Higher productivity raises the MRP of each worker, so firms demand more labour at each wage
    • Higher productivity only moves labour demand along the curve, with no shift

19. A firm's MRP is £20 per hour and the market wage is £18 in a perfectly competitive labour market. The firm should:

    • Keep hiring constant since MRP exceeds the wage by a fixed amount
    • Pay workers £20 to avoid losing them
    • Reduce hiring until MRP is zero
    • Hire more workers until MRP falls to £18

20. Which is the best definition of marginal product of labour?

    • Total output divided by the number of workers employed
    • The extra output produced by employing one more worker, holding other inputs constant
    • The wage paid to the last worker hired
    • The total revenue earned from employing all workers

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