The demand for labour is described as a derived demand because it

Depends on demand for the goods labour produces.

Derives from the wage rate workers are willing to accept.

Falls as the wage rate rises, like any other demand curve.

Is determined by the size of the working population.

The marginal revenue product of labour is calculated as

Marginal physical product multiplied by marginal revenue.

Marginal physical product divided by the wage rate.

Total output multiplied by the price of the product.

Total revenue divided by the number of workers employed.

A profit-maximising firm will continue to employ additional workers up to the point where

Marginal revenue product equals the wage rate.

Marginal physical product is at its maximum.

Marginal revenue product is at its maximum.

Total revenue product is at its maximum.

The demand curve for labour slopes downwards mainly because

Diminishing returns cause marginal physical product to fall.

Firms can substitute capital for labour when wages rise.

Higher wages reduce the number of workers willing to work.

Trade unions restrict the supply of labour to the market.

All other things being equal, which one of the following would shift the demand curve for labour in an industry to the right?

A rise in the productivity of workers in the industry.

A fall in the demand for the industry's final product.

A fall in the wage rate paid in the industry.

A rise in the number of workers seeking jobs in the industry.

The demand for labour in an occupation is most likely to be wage inelastic when

Workers have specialist skills that are hard to replace.

Labour costs are a large share of the firm's total costs.

Machines can easily be substituted for workers.

The demand for the final product is highly price elastic.

Marginal revenue product theory is criticised as an incomplete explanation of wages. The strongest reason is that

Firms cannot always measure an individual worker's output precisely.

Employers never consider how productive their workers are.

Wages are set entirely by trade unions in every labour market.

Workers are paid before their output is produced and sold.

1.6.1 The Demand for Labour — Practice Questions

Nine original multiple-choice questions on the demand for labour and marginal productivity theory, written to the style and difficulty of AQA Paper 3 Section A. Every question carries a full worked model answer.

9 questions AQA A-Level Multiple choice Model answers included

Not read the notes yet? Start with the 1.6.1 The Demand for Labour revision notes.

9 questions in this set

1. The demand for labour is described as a derived demand because it

Definition in context

Select one answer
A Depends on demand for the goods labour produces.

B Derives from the wage rate workers are willing to accept.

C Falls as the wage rate rises, like any other demand curve.

D Is determined by the size of the working population.
Show model answer
Answer: A (Depends on demand for the goods labour produces.). Firms do not want workers for their own sake — they want the output workers produce. Demand for labour is therefore derived from demand for the final product: if demand for new houses collapses, demand for bricklayers falls with it, however skilled or willing those bricklayers are.

Why the other options are wrong
- B — Wages are a price in this market, and price affects the quantity demanded rather than explaining where the demand comes from.
- C — The demand curve for labour does slope downwards, but that is a consequence of diminishing returns rather than the meaning of derived demand.
- D — The size of the working population affects the supply of labour, not the demand for it.
2. The marginal revenue product of labour is calculated as

Definition in context

Select one answer
A Marginal physical product divided by the wage rate.

B Marginal physical product multiplied by marginal revenue.

C Total output multiplied by the price of the product.

D Total revenue divided by the number of workers employed.
Show model answer
Answer: B (Marginal physical product multiplied by marginal revenue.). MRP = MPP × MR. The extra worker produces some extra output — the marginal physical product — and each unit of that output earns the firm some extra revenue, the marginal revenue. Multiplying the two gives the extra revenue the worker brings in, which is what the worker is worth to the firm and therefore what determines the demand for labour.

Why the other options are wrong
- A — The wage is what the worker costs, and it is compared with MRP rather than used to calculate it.
- C — Total output times price gives total revenue. MRP is a marginal figure, concerning only the extra worker.
- D — Total revenue divided by workers is an average revenue product. The demand for labour is based on the marginal figure.

3. A firm sells its output at a constant £8 per unit, so its marginal revenue is £8. Table 1 shows how total output changes as it hires more workers.
Using Table 1, the marginal revenue product of the third worker is

Data interpretation

Table 1: Workers employed and total output (units per week)
Workers	Total output
1	15
2	35
3	51
4	63

Select one answer

A £96

B £128

C £160

D £408

Show model answer

Answer: B (£128). Work out the marginal physical product first, then multiply by marginal revenue.
MPP of the third worker = 51 − 35 = 16 units.
MRP = 16 × £8 = £128.
The full series of MPPs is 15, 20, 16, 12, so MRP runs £120, £160, £128, £96. MPP rises to the second worker and falls after it — diminishing returns setting in, which is what makes the labour demand curve slope downwards.

Why the other options are wrong

A — £96 is the MRP of the fourth worker (12 × £8), one row too far down the table.
C — £160 is the MRP of the second worker (20 × £8), one row too early.
D — £408 is 51 × £8, the total revenue produced by all three workers. MRP concerns only what the third worker adds.

4. A profit-maximising firm will continue to employ additional workers up to the point where

Applied reasoning

Select one answer
A Marginal physical product is at its maximum.

B Marginal revenue product is at its maximum.

C Marginal revenue product equals the wage rate.

D Total revenue product is at its maximum.
Show model answer
Answer: C (Marginal revenue product equals the wage rate.). Each extra worker adds their MRP to revenue and their wage to costs. While MRP is above the wage, hiring adds to profit; once MRP falls below the wage, hiring subtracts from it. The profit-maximising level of employment is therefore where MRP = W — the same marginal logic as MC = MR, applied to the labour market.

Why the other options are wrong
- A — Maximum MPP is where the productivity of the last worker peaks. Workers beyond that point are still worth hiring as long as they earn back more than they cost.
- B — Maximum MRP is the same point expressed in money. It marks where diminishing returns begin, not where hiring should stop.
- D — Maximising total revenue ignores the wage bill entirely. A firm chasing revenue alone would hire workers who cost more than they bring in.
5. A firm's marginal revenue product from successive workers is £120, £160, £128 and £96. The weekly wage rate is £110 and the firm maximises profit. It will employ

Calculation

Select one answer
A 1 worker.

B 2 workers.

C 3 workers.

D 4 workers.
Show model answer
Answer: C (3 workers.). Take the workers one at a time and compare each MRP with the £110 wage.
Worker 1: £120 > £110 → hire.
Worker 2: £160 > £110 → hire.
Worker 3: £128 > £110 → hire.
Worker 4: £96 < £110 → do not hire.
The firm employs 3 workers. Note that the third worker is worth less than the second and is still worth having — what matters is whether they cover their own wage, not whether they beat the worker before them.

Why the other options are wrong
- A — Stopping at one worker forgoes the second, who brings in £160 against a wage of £110 — the most profitable hire of all.
- B — Stopping at two treats the fall in MRP from £160 to £128 as the signal to stop. Falling MRP is not the test; falling below the wage is.
- D — The fourth worker earns the firm £96 but costs £110, so hiring them reduces profit by £14.
6. The demand curve for labour slopes downwards mainly because

Applied reasoning

Select one answer
A Firms can substitute capital for labour when wages rise.

B Higher wages reduce the number of workers willing to work.

C Diminishing returns cause marginal physical product to fall.

D Trade unions restrict the supply of labour to the market.
Show model answer
Answer: C (Diminishing returns cause marginal physical product to fall.). The labour demand curve is the MRP curve. As more workers are added to a fixed quantity of capital, the law of diminishing returns means each extra worker eventually adds less output than the last, so MPP falls and MRP falls with it. Firms will only pay a lower wage for those later workers, which is exactly what a downward-sloping demand curve says.

Why the other options are wrong
- A — Substituting capital for labour is a real response to higher wages and it reinforces the effect, but the shape of the curve comes from MRP falling as employment rises.
- B — This describes the supply side, and it has the relationship backwards — higher wages attract more workers, not fewer.
- D — Union activity can shift the supply curve of labour. It does not explain the slope of the demand curve.
7. All other things being equal, which one of the following would shift the demand curve for labour in an industry to the right?

Applied reasoning

Select one answer
A A fall in the demand for the industry's final product.

B A fall in the wage rate paid in the industry.

C A rise in the number of workers seeking jobs in the industry.

D A rise in the productivity of workers in the industry.
Show model answer
Answer: D (A rise in the productivity of workers in the industry.). Since demand for labour is the MRP curve, anything that raises MRP shifts it right. Higher productivity raises marginal physical product, so each worker is worth more to the firm at any given wage and more workers are demanded. A rise in the price of the final product would do the same, by raising marginal revenue.

Why the other options are wrong
- A — Because labour demand is derived, weaker demand for the product reduces demand for labour, shifting the curve left.
- B — A change in the wage rate is a movement along the labour demand curve, not a shift of it — the same distinction as price and demand in a goods market.
- C — More workers seeking jobs shifts the supply of labour, which is the other curve.
8. The demand for labour in an occupation is most likely to be wage inelastic when

Applied reasoning

Select one answer
A Labour costs are a large share of the firm's total costs.

B Machines can easily be substituted for workers.

C The demand for the final product is highly price elastic.

D Workers have specialist skills that are hard to replace.
Show model answer
Answer: D (Workers have specialist skills that are hard to replace.). Demand for labour is wage inelastic when firms have little scope to respond to a wage rise by cutting jobs. Highly specialist workers who cannot readily be replaced by machines or by other staff are the clearest case — a hospital cannot substitute equipment for surgeons. The main determinants run the other way too: demand is more elastic where labour is a large share of costs, where capital substitutes easily, and where the final product's demand is elastic.

Why the other options are wrong
- A — If wages are a large share of total costs, a wage rise hits the firm hard and it must cut employment sharply. That makes demand more elastic.
- B — Easy substitution of machines for workers means a wage rise triggers rapid automation, which again makes labour demand more elastic.
- C — Elastic product demand means the firm cannot pass higher wage costs on in its prices without losing many sales, so it cuts employment instead.
9. Marginal revenue product theory is criticised as an incomplete explanation of wages. The strongest reason is that

Applied reasoning

Select one answer
A Employers never consider how productive their workers are.

B Firms cannot always measure an individual worker's output precisely.

C Wages are set entirely by trade unions in every labour market.

D Workers are paid before their output is produced and sold.
Show model answer
Answer: B (Firms cannot always measure an individual worker's output precisely.). The theory requires the firm to know what each extra worker adds to output and revenue. In much of the modern economy that is very hard to establish: a nurse, a teacher or a member of a design team works jointly with others, and no single person's contribution can be separated out. Add imperfect information, monopsony power and union bargaining, and observed wages can depart a long way from MRP — though the theory remains a useful starting point.

Why the other options are wrong
- A — Employers care about productivity a great deal. The criticism is that it is hard to measure individually, not that it is ignored.
- C — Union density is low in many labour markets and unions are absent from others entirely, so this is far too strong a claim.
- D — Paying wages before output is sold is a cash-flow matter. Firms base hiring on expected MRP, which the theory allows for.

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Revision Notes: The Demand for Labour AQA Past Papers Book a Free Intro Call

1. The demand for labour is described as a derived demand because it

2. The marginal revenue product of labour is calculated as

3. A firm sells its output at a constant £8 per unit, so its marginal revenue is £8. Table 1 shows how total output changes as it hires more workers.Using Table 1, the marginal revenue product of the third worker is

4. A profit-maximising firm will continue to employ additional workers up to the point where

5. A firm's marginal revenue product from successive workers is £120, £160, £128 and £96. The weekly wage rate is £110 and the firm maximises profit. It will employ

6. The demand curve for labour slopes downwards mainly because

7. All other things being equal, which one of the following would shift the demand curve for labour in an industry to the right?

8. The demand for labour in an occupation is most likely to be wage inelastic when

9. Marginal revenue product theory is criticised as an incomplete explanation of wages. The strongest reason is that

Your score

3. A firm sells its output at a constant £8 per unit, so its marginal revenue is £8. Table 1 shows how total output changes as it hires more workers.
Using Table 1, the marginal revenue product of the third worker is