In a perfectly competitive labour market, firms and workers are both

Wage takers, accepting the market equilibrium wage.

Able to set the wage rate to suit themselves.

Protected from competition by barriers to entry.

Represented collectively in wage negotiations.

In a perfectly competitive labour market, the wage rate is currently above the equilibrium level. All other things being equal, this will result in

An excess supply of labour, and downward pressure on the wage.

An excess demand for labour, and upward pressure on the wage.

An excess supply of labour, and upward pressure on the wage.

No change, because wages are fixed in the short run.

Sketching a perfectly competitive labour market, the supply of labour curve facing an individual firm is

Perfectly elastic at the market wage, so the firm can hire any number at that wage.

Downward sloping, because the firm must offer less as it hires more.

Upward sloping, because the firm must raise the wage to attract more workers.

Vertical, because the number of workers available is fixed.

All other things being equal, an increase in the demand for a product will affect the labour market for the workers who make it by

Raising both the equilibrium wage and the level of employment.

Raising the equilibrium wage and reducing employment.

Reducing both the equilibrium wage and the level of employment.

Reducing the equilibrium wage and raising employment.

In a competitive labour market, the equilibrium wage is £13 an hour and 4,000 workers are employed. A firm in this market currently employs 20 workers whose marginal revenue product is £16 an hour. Acting rationally, the firm should

Employ more workers, because MRP exceeds the wage.

Employ fewer workers, because MRP exceeds the wage.

Make no change, because it is already at the market wage.

Offer a higher wage, because its workers are worth more.

Which one of the following best explains why surgeons are paid considerably more than cleaners in a competitive labour market?

Surgeons have a higher MRP and a more restricted supply.

Cleaners are less willing to work long hours than surgeons.

Surgeons work in the public sector, where wages are set centrally.

The demand for cleaning services is a derived demand, unlike surgery.

In a competitive labour market, a large increase in net migration of workers with the relevant skills will, all other things being equal,

Lower the equilibrium wage and raise employment.

Lower the equilibrium wage and reduce employment.

Raise the equilibrium wage and raise employment.

Raise the equilibrium wage and reduce employment.

The competitive model predicts that workers are paid their marginal revenue product. Real wages often differ from MRP mainly because

Labour markets contain monopsony, unions and poor information.

Firms in the real world do not aim to maximise their profits.

Labour demand is not a derived demand in practice.

Workers are always paid more than they are worth to the firm.

1.6.3 Wages in Competitive Labour Markets — Practice Questions

Eight original multiple-choice questions on wage determination in perfectly competitive labour markets, written to the style and difficulty of AQA Paper 3 Section A.

8 questions AQA A-Level Multiple choice Model answers included

Not read the notes yet? Start with the 1.6.3 Wages in Competitive Labour Markets revision notes.

8 questions in this set

1. In a perfectly competitive labour market, firms and workers are both

Definition in context

Select one answer
A Able to set the wage rate to suit themselves.

B Protected from competition by barriers to entry.

C Represented collectively in wage negotiations.

D Wage takers, accepting the market equilibrium wage.
Show model answer
Answer: D (Wage takers, accepting the market equilibrium wage.). With many firms demanding labour and many workers supplying it, no single participant is large enough to influence the going rate. Both sides are wage takers: the market wage is set where labour demand meets labour supply, and each firm can hire as many workers as it wants at that wage but none at all above it.

Why the other options are wrong
- A — Wage-setting power belongs to imperfectly competitive markets, such as a monopsony employer or a strong trade union.
- B — Perfect competition in the labour market means free entry and exit for workers and firms alike.
- C — Collective bargaining is what a trade union does, and unions are a source of imperfect competition in this market.
2. In a perfectly competitive labour market, the wage rate is currently above the equilibrium level. All other things being equal, this will result in

Applied reasoning

Select one answer
A An excess demand for labour, and upward pressure on the wage.

B An excess supply of labour, and downward pressure on the wage.

C An excess supply of labour, and upward pressure on the wage.

D No change, because wages are fixed in the short run.
Show model answer
Answer: B (An excess supply of labour, and downward pressure on the wage.). Above the equilibrium wage, more workers want jobs than firms wish to hire, so there is an excess supply of labour — a surplus of workers. Competing for the available jobs, workers accept lower pay, so the wage is bid down towards equilibrium and employment rises. This is the same adjustment mechanism as a surplus in a goods market.

Why the other options are wrong
- A — Excess demand for labour — a shortage of workers — occurs below the equilibrium wage.
- C — The surplus is correctly identified but the pressure is the wrong way. A surplus of workers pushes wages down, not up.
- D — In a perfectly competitive market wages are flexible; it is the presence of minimum wages or union agreements that makes them rigid.
3. Sketching a perfectly competitive labour market, the supply of labour curve facing an individual firm is

Applied reasoning Sketch to solve

Select one answer
A Downward sloping, because the firm must offer less as it hires more.

B Perfectly elastic at the market wage, so the firm can hire any number at that wage.

C Upward sloping, because the firm must raise the wage to attract more workers.

D Vertical, because the number of workers available is fixed.
Show model answer
Answer: B (Perfectly elastic at the market wage, so the firm can hire any number at that wage.). Sketch two diagrams: the market, where an upward-sloping supply curve meets a downward-sloping demand curve to fix the wage, and the firm, which takes that wage as given.
Because the firm is one tiny employer among many, it can hire as many workers as it wishes at the ruling wage and none at all below it. Its labour supply curve is therefore horizontal at the market wage, which also makes it the firm's marginal cost of labour.
This is the exact parallel of the perfectly elastic demand curve facing a firm in a competitive product market.

Why the other options are wrong
- A — A downward-sloping labour supply curve would mean workers offering more labour as pay falls, which reverses the usual relationship.
- C — An upward-sloping supply curve facing the individual firm is the monopsony case, where one dominant buyer must raise the wage to attract extra workers.
- D — A vertical curve would mean a fixed number of workers whatever the wage. That may describe the market in the very short run, but not the supply facing one small firm.
4. All other things being equal, an increase in the demand for a product will affect the labour market for the workers who make it by

Applied reasoning

Select one answer
A Raising both the equilibrium wage and the level of employment.

B Raising the equilibrium wage and reducing employment.

C Reducing both the equilibrium wage and the level of employment.

D Reducing the equilibrium wage and raising employment.
Show model answer
Answer: A (Raising both the equilibrium wage and the level of employment.). Labour demand is derived, so stronger product demand raises the marginal revenue product of these workers and shifts the labour demand curve right. Against an unchanged supply curve, that raises both the wage and employment. It is the standard explanation for why pay rises in booming industries.

Why the other options are wrong
- B — A higher wage with lower employment would follow a leftward shift of labour supply, not a rightward shift of demand.
- C — Both falling is what happens when demand for the product collapses and labour demand shifts left.
- D — A lower wage with higher employment comes from an increase in labour supply, such as net migration into the occupation.
5. In a competitive labour market, the equilibrium wage is £13 an hour and 4,000 workers are employed. A firm in this market currently employs 20 workers whose marginal revenue product is £16 an hour. Acting rationally, the firm should

Calculation

Select one answer
A Employ fewer workers, because MRP exceeds the wage.

B Employ more workers, because MRP exceeds the wage.

C Make no change, because it is already at the market wage.

D Offer a higher wage, because its workers are worth more.
Show model answer
Answer: B (Employ more workers, because MRP exceeds the wage.). The rule is to hire while MRP is above the wage. Here each worker adds £16 to revenue and costs £13, a gain of £3 an hour per worker, so the firm should keep hiring. As it does so diminishing returns pull MRP down, and it stops when MRP has fallen to £13.

Why the other options are wrong
- A — Cutting employment when MRP exceeds the wage throws away profit on every worker released.
- C — Paying the market wage is required of a wage taker, but it says nothing about whether the firm has hired the right number of workers.
- D — A wage taker has no reason to pay above the market rate. It can already hire all the workers it wants at £13.
6. Which one of the following best explains why surgeons are paid considerably more than cleaners in a competitive labour market?

Applied reasoning

Select one answer
A Cleaners are less willing to work long hours than surgeons.

B Surgeons have a higher MRP and a more restricted supply.

C Surgeons work in the public sector, where wages are set centrally.

D The demand for cleaning services is a derived demand, unlike surgery.
Show model answer
Answer: B (Surgeons have a higher MRP and a more restricted supply.). Relative wages come from the interaction of demand and supply in each market. Surgeons have a very high marginal revenue product, so demand for them is strong, and years of training keep their supply restricted and wage inelastic. Cleaning requires little formal training, so supply is large and elastic. High demand meeting restricted supply produces a high equilibrium wage.

Why the other options are wrong
- A — Willingness to work long hours affects individual choices but does not explain a systematic gap of this size between occupations.
- C — Public sector pay structures exist, but the underlying explanation is still the scarcity of the skill and the value of the output.
- D — All labour demand is derived, including demand for cleaners. That is common ground rather than a difference.
7. In a competitive labour market, a large increase in net migration of workers with the relevant skills will, all other things being equal,

Applied reasoning

Select one answer
A Lower the equilibrium wage and raise employment.

B Lower the equilibrium wage and reduce employment.

C Raise the equilibrium wage and raise employment.

D Raise the equilibrium wage and reduce employment.
Show model answer
Answer: A (Lower the equilibrium wage and raise employment.). More workers with the relevant skills shifts the supply of labour right. Reading down the unchanged demand curve, the equilibrium wage falls and the quantity of labour employed rises — firms take on more workers because they have become cheaper.

Why the other options are wrong
- B — Employment rises rather than falls: at a lower wage firms move down their demand curve and hire more.
- C — A higher wage would follow an increase in labour demand, not supply.
- D — A higher wage with lower employment comes from a leftward shift of supply, such as emigration or tougher entry requirements.
8. The competitive model predicts that workers are paid their marginal revenue product. Real wages often differ from MRP mainly because

Applied reasoning

Select one answer
A Firms in the real world do not aim to maximise their profits.

B Labour demand is not a derived demand in practice.

C Labour markets contain monopsony, unions and poor information.

D Workers are always paid more than they are worth to the firm.
Show model answer
Answer: C (Labour markets contain monopsony, unions and poor information.). The prediction depends on the market being genuinely competitive. In practice a monopsony employer can pay below MRP, a trade union can bargain pay above it, and imperfect information leaves workers unaware of what they could earn elsewhere. Immobility of labour compounds all three, since workers cannot easily move to where they would be paid more.

Why the other options are wrong
- A — Profit maximisation is a reasonable working assumption, and the alternatives are studied separately. It is not the main reason wages depart from MRP.
- B — Labour demand really is derived from product demand. That part of the theory holds up well.
- D — Wages can sit either side of MRP: below it where the employer has monopsony power, above it where a union bargains successfully.

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Revision Notes: Wages in Competitive Labour Markets AQA Past Papers Book a Free Intro Call

1.6.3 Wages in Competitive Labour Markets — Practice Questions

1. In a perfectly competitive labour market, firms and workers are both

2. In a perfectly competitive labour market, the wage rate is currently above the equilibrium level. All other things being equal, this will result in

3. Sketching a perfectly competitive labour market, the supply of labour curve facing an individual firm is

4. All other things being equal, an increase in the demand for a product will affect the labour market for the workers who make it by

5. In a competitive labour market, the equilibrium wage is £13 an hour and 4,000 workers are employed. A firm in this market currently employs 20 workers whose marginal revenue product is £16 an hour. Acting rationally, the firm should

6. Which one of the following best explains why surgeons are paid considerably more than cleaners in a competitive labour market?

7. In a competitive labour market, a large increase in net migration of workers with the relevant skills will, all other things being equal,

8. The competitive model predicts that workers are paid their marginal revenue product. Real wages often differ from MRP mainly because

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