4.1.6.3 Wage determination and employment in perfectly competitive labour markets Quiz: AQA Economics, Unit 1

The 20 questions

1. In a perfectly competitive labour market, the wage is determined by:

   • The interaction of market demand and market supply for labour
   • Government setting a fixed wage for every occupation in the economy, using the official pay scales that apply across all sectors
   • Trade unions negotiating one wage for the whole economy, with the agreed rate applying to every worker regardless of their occupation
   • A single employer setting the wage for all workers in the local area, based on the number of vacancies that it chooses to advertise

2. Firms in a perfectly competitive labour market are wage takers, meaning they:

   • Fix wages below the market rate to maximise profit regardless of supply
   • Can hire as many workers as they need at the market wage without affecting it
   • Can pay different wages to identical workers at will
   • Set wages above market rates to attract the best workers, since a higher offer is the only way to recruit skilled staff in the market

3. In a competitive labour market, a firm hires workers up to the point where:

   • The wage equals the average product of labour, which is the level of output per worker that the firm achieves over its whole workforce
   • Total labour costs equal average revenue, which means the firm's wage bill just matches the revenue that each sale brings in
   • The wage equals the marginal revenue product of labour
   • The marginal product of labour is maximised, since the firm continues to hire until each extra worker adds as much output as possible

4. The market wage is £12 per hour. A firm's MRP of its last worker is £10. What should it do?

   • Reduce employment, since the last worker adds less revenue than the wage
   • Increase employment, since an MRP below the wage makes workers cheap to hire and so adds to the firm's profit in the period
   • Raise wages to 14 to attract more workers, because a higher wage offer is the only way to recruit extra staff into the business
   • Keep employment unchanged, since the wage paid to each worker must equal the MRP of the last worker for the firm to make profit

5. Demand for workers in a sector rises while supply is unchanged. The effect is to:

   • Raise the equilibrium wage and increase employment in that sector
   • Leave the wage unchanged but reduce employment
   • Lower the equilibrium wage and reduce employment
   • Shift supply to the left and lower the wage, since employers' demand for workers makes existing workers accept lower pay in the market

6. Demand for accountants rises while supply is fixed. The effect on the wage differential between accountants and nurses is:

   • Relative wages reverse, with nurses earning more than accountants because the demand for nursing staff rises faster than the demand
   • The differential widens, since accountants' wage rises relative to nurses' wages
   • No change, since demand changes cannot affect relative wages
   • The differential narrows, as the accountants' wage falls when a larger number of graduates choose to train for the profession each year

7. Why do relative wage rates persist between occupations?

   • Relative wages are set by a single national pay scale
   • Differences in training, skills and non-monetary features mean supply conditions differ, so wages do not fully equalise
   • Wages are always equalised in competitive labour markets
   • Workers never move between occupations in response to wages

8. A single firm in a perfectly competitive labour market faces a labour supply curve that is:

   • Perfectly elastic at the market wage
   • Perfectly inelastic at its current employment
   • Downward sloping, so it must cut the wage to hire more
   • Upward sloping, since higher wages must be paid to all workers

9. The economists' model of wage determination in a perfectly competitive labour market assumes:

   • Government setting the wage for each occupation
   • Many buyers and sellers of labour, perfect information and free mobility of workers
   • A single employer and a single union that set the wage together
   • Workers who are unable to move between firms or regions

10. A government reduces the supply of qualified engineers by raising entry requirements. What is the predicted effect on the equilibrium wage and employment?

    • The wage falls and employment is unchanged, since the number of engineers employed depends only on the demand for their services
    • The wage rises and employment falls, all else equal
    • The wage falls and employment rises, since fewer engineers in the market means that firms can hire more of them at a lower wage
    • The wage and employment both rise, because higher entry requirements raise the status of the profession and so attract more firms

11. Why might real labour markets deviate from the perfectly competitive model?

    • Workers may lack information and face costs of moving, and firms may have some wage-setting power
    • Workers always have perfect information about all jobs
    • Firms never have any influence over the wages they pay
    • Perfectly competitive labour markets always produce abnormal wages

12. A firm's MRP is £30 per hour at 50 workers and £28 at 51. The wage is £29. The firm should employ:

    • 51 workers, since the 51st worker's MRP is above the wage
    • 49 workers, since MRP at 50 is below the wage
    • Any number of workers, since the wage equals MRP
    • 50 workers, since the 51st worker's MRP is below the wage

13. A perfectly competitive labour market is efficient in the sense that:

    • Workers are paid their marginal revenue product, so resources go to their highest-valued uses
    • Trade unions set wages above MRP for every worker, so that the pay of each worker is always higher than the value of what they produce
    • Wages are the same for all workers regardless of productivity
    • Firms hire workers without considering their productivity

14. Labour supply to a sector rises while demand is constant. The effect on employment and wages is:

    • Employment falls and wages rise
    • Employment rises and wages fall
    • Employment and wages both rise
    • Employment is unchanged and wages rise

15. Why can wages be relatively high in occupations with high training costs?

    • Training costs reduce the supply of goods
    • Training costs make wages fixed by government
    • High training costs make labour supply perfectly elastic
    • Restricted entry raises the wage needed to attract enough workers, since fewer people can supply the labour

16. A rise in the price of the product made by workers in a competitive labour market will:

    • Leave MRP and wages unchanged since product prices do not matter to the value that workers add to the output of the firm
    • Reduce the MRP of labour, shifting demand left and lowering wages
    • Shift labour supply to the left and reduce employment, because workers dislike the higher prices that the product now carries
    • Raise the MRP of labour, shifting labour demand right and raising employment and wages

17. Which is an assumption of perfect competition in the labour market?

    • Workers are bound by long-term contracts with one employer
    • Wages are set through national collective bargaining, with the agreed rate applying to every employer and every worker in the economy
    • Workers are free to move between employers with full information about wages
    • Only one firm hires labour in each region, which means that each worker has just one employer to choose from in the local area

18. A government sets a minimum wage above the competitive equilibrium in a perfectly competitive labour market. The likely effect is:

    • Labour supplied exceeds labour demanded, creating unemployment
    • The equilibrium wage falls as workers accept lower pay
    • Employment rises as firms hire more at the higher wage
    • Labour demanded exceeds labour supplied, creating a shortage of workers

19. Why does the wage in a perfectly competitive labour market tend to reflect productivity?

    • Government sets wages equal to average product for all workers
    • Firms compete for workers and pay up to the value their output adds, so wages tend towards MRP
    • Firms pay the same wage regardless of output, so productivity has no bearing on the pay that any worker receives in the market
    • Trade unions set wages independent of productivity

20. In a perfectly competitive labour market, two identical workers doing identical jobs will be paid:

    • Different wages, set by the trade union in each firm the workers join
    • Different wages, depending only on which firm each worker joined first
    • The same wage, since competition removes differences between firms that cannot be justified by productivity
    • Different wages, because firms with higher profits always pay more to every worker

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