1.6.4 Wages in Imperfect Labour Markets — Practice Questions

Eight original multiple-choice questions on wage determination in imperfectly 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 1.6.4 Wages in Imperfect Labour Markets revision notes.

1. 1. A monopsony in a labour market exists when there is

   Definition in context

   Select one answer

   A A single or dominant buyer of labour.

   B A single or dominant seller of labour.

   C A single firm selling the industry's output.

   D Only one trade union representing all workers.
   Show model answer

   Answer: A (A single or dominant buyer of labour.). A monopsony is a market with one dominant buyer. In a labour market that means one main employer of a particular kind of worker — the NHS for UK-trained nurses, for example. Because workers have few alternative employers, the monopsonist has wage-setting power and can pay below the competitive rate.

   Why the other options are wrong

   • B — A dominant seller of labour is a trade union with high union density, which is a different source of imperfect competition.
   • C — A single seller of the industry's output is a monopoly in the product market. A firm can be one without being a monopsony employer.
   • D — A single union is again a supply-side concentration. Monopsony is about the buying side.

2. 2. Compared with a perfectly competitive labour market, a profit-maximising monopsonist will employ

   Applied reasoning

   Select one answer

   A Fewer workers at a higher wage.

   B Fewer workers at a lower wage.

   C More workers at a higher wage.

   D More workers at a lower wage.
   Show model answer

   Answer: B (Fewer workers at a lower wage.). A monopsonist faces the whole upward-sloping market supply curve of labour, so hiring an extra worker means raising the wage for everyone. Its marginal cost of labour therefore lies above the supply curve. Profit maximisation at MCL = MRP gives a level of employment below the competitive one, and the wage is then read off the supply curve, which is below both MRP and the competitive wage.
   So the monopsonist restricts employment and pays less — the labour market equivalent of a monopolist restricting output and charging more.

   Why the other options are wrong

   • A — A higher wage would defeat the purpose. Monopsony power exists precisely to pay below the competitive rate.
   • C — Both figures move the wrong way. Employment falls rather than rises under monopsony.
   • D — The wage is correctly identified as lower, but employment falls too, because the monopsonist restricts hiring to keep the wage down.

3. 3. In a monopsony labour market, the marginal cost of labour lies above the supply curve of labour because

   Applied reasoning

   Select one answer

   A The higher wage must be paid to all workers, not just the new one.

   B The firm must pay a recruitment fee for every worker it hires.

   C Trade unions force the firm to raise wages as it expands.

   D Workers become less productive as more of them are employed.
   Show model answer

   Answer: A (The higher wage must be paid to all workers, not just the new one.). To attract one more worker the monopsonist must offer a higher wage — and it has to pay that higher wage to every worker already employed. The true cost of the extra worker is therefore their own wage plus the rise given to everyone else, which puts MCL above the supply curve.
   This is the exact mirror of marginal revenue lying below average revenue for a monopolist, and for the same reason: the price has to move for all units, not just the last one.

   Why the other options are wrong

   • B — Recruitment costs exist but they are not what creates the gap. It would appear even if hiring were costless.
   • C — Unions are a separate source of imperfect competition. Monopsony power exists whether or not a union is present.
   • D — Falling productivity affects the MRP curve, which is the demand side. The gap between MCL and supply is a cost-side effect.

4. 4. A trade union negotiates a wage above the competitive level in an otherwise competitive labour market. All other things being equal, the most likely consequence is

   Applied reasoning

   Select one answer

   A Higher wages and higher employment for its members.

   B Higher wages but lower employment in that market.

   C Lower wages and higher employment in that market.

   D No change, because firms simply absorb the extra cost.
   Show model answer

   Answer: B (Higher wages but lower employment in that market.). In a competitive labour market, forcing the wage above equilibrium acts like a price floor. Firms move up their labour demand curve and hire fewer workers, while more people want jobs at the higher wage, so an excess supply of labour appears. Those still employed gain; some lose their jobs. How large that trade-off is depends on the wage elasticity of labour demand.

   Why the other options are wrong

   • A — Employment cannot rise along an unchanged demand curve when the wage goes up.
   • C — This reverses the union's objective. Unions bargain for higher pay, not lower.
   • D — Firms respond to higher labour costs by employing fewer workers, substituting capital, or both. Absorbing the cost entirely would mean a permanently lower profit for no reason.

5. 5. A trade union negotiates a higher wage with a monopsony employer. Compared with the monopsony outcome, it is possible for this to result in

   Applied reasoning

   Select one answer

   A A higher wage and higher employment at the same time.

   B A higher wage and lower employment, as in a competitive market.

   C A lower wage and higher employment.

   D No change in either the wage or employment.
   Show model answer

   Answer: A (A higher wage and higher employment at the same time.). This is the striking result of the monopsony model. Because the monopsonist was restricting employment to hold the wage down, a union-imposed wage removes its incentive to do so: the firm now faces a flat cost of labour at the negotiated wage, so its marginal cost of labour no longer rises with hiring. Employment can therefore rise and the wage can rise, both moving towards the competitive outcome.
   The same logic explains why a minimum wage need not cost jobs in a monopsonistic labour market — the standard evaluation point in this topic.

   Why the other options are wrong

   • B — That is the outcome in a competitive labour market, where the wage was already at equilibrium and there was no restriction to remove.
   • C — Unions bargain for higher pay, so a lower wage is not the intended or likely result.
   • D — Union bargaining changes the firm's cost of labour, so it cannot leave the outcome untouched.

6. 6. A labour market in which a single dominant employer bargains with a single strong trade union is described as

   Definition in context

   Select one answer

   A A bilateral monopoly.

   B A competitive labour market.

   C A contestable labour market.

   D A natural monopoly.
   Show model answer

   Answer: A (A bilateral monopoly.). Bilateral monopoly is monopsony power on the buying side facing monopoly power on the selling side. Neither party can simply impose its preferred wage, so the outcome is settled by relative bargaining strength and lies somewhere between the low wage the employer would like and the high wage the union would like.

   Why the other options are wrong

   • B — A competitive labour market has many buyers and many sellers, and both sides are wage takers.
   • C — Contestability concerns ease of entry and exit. It is a product-market idea and does not describe this bargaining structure.
   • D — A natural monopoly is a product-market situation where one firm can supply the whole market at lowest average cost.

7. 7. Which one of the following is not a cause of imperfect competition in a labour market?

   Applied reasoning

   Select one answer

   A Imperfect information about wages and vacancies.

   B Many small firms competing to hire the same workers.

   C Monopsony power held by a dominant employer.

   D Trade unions bargaining collectively for their members.
   Show model answer

   Answer: B (Many small firms competing to hire the same workers.). Many small firms competing for the same workers is what makes a labour market competitive: no employer is large enough to set the wage, so all are wage takers. The three genuine causes of imperfection are monopsony power, trade unions, and imperfect information.

   Why the other options are wrong

   • A — Workers who do not know what other employers pay cannot move to the best offer, which weakens competitive pressure on wages.
   • C — A dominant buyer of labour can set the wage rather than accept it, which is the clearest departure from perfect competition.
   • D — Collective bargaining concentrates the selling side of the market, giving workers power they would not have individually.

8. 8. In a monopsony labour market, workers are typically paid

   Applied reasoning

   Select one answer

   A Exactly their marginal revenue product.

   B Less than their marginal revenue product.

   C More than their marginal revenue product.

   D More than the marginal cost of labour.
   Show model answer

   Answer: B (Less than their marginal revenue product.). The monopsonist hires where MCL = MRP, then pays the wage that the supply curve shows is needed to attract that many workers. Since MCL lies above the supply curve, the wage sits below MRP. The gap between what a worker adds to revenue and what they are paid is the monopsonist's gain from its buying power, and it is the main equity objection to monopsony.

   Why the other options are wrong

   • A — Payment equal to MRP is the competitive outcome, which is precisely what monopsony power departs from.
   • C — Being paid above MRP would mean the employer losing money on each worker. That can happen where a strong union bargains successfully, but not from monopsony power itself.
   • D — At the chosen level of employment the marginal cost of labour equals MRP and exceeds the wage, so the wage is below MCL rather than above it.