Government microeconomic intervention (A Level) Banker

1. (a) A firm sells its product in a perfectly competitive market at $5 per unit and hires labour in a perfectly competitive labour market at a wage of $70 per day. Daily output for 1 to 5 workers is 20, 38, 54, 66 and 74 units. How many workers will a profit-maximising firm employ?A 2B 3C 4D 5 [1]

1. (a) Define marginal revenue product of labour. [2]
2. (b) Explain why a firm's demand curve for labour slopes downwards. [3]

A leading Pakistani cricketer earns Rs 80 million a year from playing and sponsorship. The best alternative job open to him is coaching, which would pay Rs 6 million a year.

1. (a) Calculate the cricketer's economic rent. [1]
2. (b) Explain why economic rent forms a large part of the earnings of top sports players. [3]
3. (c) State two factors that affect the elasticity of supply of labour to an occupation. [2]

1. (a) Explain why the demand for labour is a derived demand. [2]
2. (b) Explain two factors that affect the wage elasticity of demand for labour. [4]

1. (a) The supply of labour to an occupation is L = 20W − 200, where W is the hourly wage in $ and L the number of workers. The market wage is $30 per hour. What is the total economic rent earned by the workers per hour?A $4,000B $6,000C $8,000D $12,000 [1]

1. (a) Explain two reasons why software engineers in Lahore usually earn more than food delivery riders. [4]
2. (b) Consider whether a higher national minimum wage would reduce the wage differential between the two groups. [4]

1. (a) Explain, with the help of a diagram, how a trade union may raise the wage in a competitive labour market, and the effect on employment. [4]
2. (b) Consider whether the effect of a trade union on employment would be different if the employer were a monopsonist. [4]

Invented article. A food delivery platform in Karachi used 15,000 riders. It cut the payment per delivery from Rs 120 to Rs 100. Three months later 14,100 riders were still working for it. Two smaller platforms also operate in the city.

1. (a) Calculate the wage elasticity of supply of riders. Give your answer to two decimal places. [2]
2. (b) Explain two reasons why the supply of riders might be wage inelastic. [3]
3. (c) Consider whether the data suggest that the platform company has monopsony power. [3]

1. (a) Explain why an individual's supply curve of labour may bend backwards at high wage rates. [4]
2. (b) Consider the implications of a backward-bending supply curve for a government that cuts income tax rates to increase hours worked. [4]

1. (a) A monopsony employer faces the labour supply curve W = 4 + 0.5L, so its marginal cost of labour is MCL = 4 + L. The marginal revenue product of labour is MRP = 40 − 0.5L. (W in $ per hour, L in workers.) What wage will the monopsonist pay?A $16B $22C $28D $40 [1]

In the market for unskilled factory labour in an invented country, labour demand is Ld = 1000 − 20W and labour supply is Ls = −200 + 40W, where W is the daily wage in $ and L is in thousand workers.

1. (a) Calculate the equilibrium wage and level of employment. [2]
2. (b) A minimum wage of $24 per day is introduced. Calculate the change in employment and the excess supply of labour. [3]
3. (c) Explain why a minimum wage could raise both the wage and employment if the labour market were a monopsony. [3]

1. (a) Evaluate whether a national minimum wage is the best way to reduce poverty among low-paid workers. [20]

1. (a) Evaluate whether differences in labour productivity are the main reason why average wages in the information technology sector are much higher than average wages in agriculture. [20]

1. (a) A chemical factory's marginal private cost is MPC = 20 + 2Q and the marginal external cost of its pollution is a constant $10 per unit. Marginal social benefit equals marginal private benefit: MSB = 110 − 2Q. Which specific tax per unit would achieve the socially optimal output, and what is that output?A $10 per unit; output 20 unitsB $10 per unit; output 22.5 unitsC $5 per unit; output 20 unitsD $20 per unit; output 20 units [1]

1. (a) Explain what is meant by a 'nudge' in government policy. [2]
2. (b) Explain how automatic enrolment of employees into a workplace pension scheme is an example of a nudge. [2]
3. (c) Explain one limitation of using nudges to correct market failure. [2]

1. (a) Explain how extending property rights could reduce overfishing in a coastal fishery. [3]
2. (b) State two problems with using property rights to solve this problem. [2]

The weekly market for plastic shopping bags in a city has demand Qd = 900 − 100P and supply Qs = −100 + 100P, where P is the price in Rs per bag and Q is in thousand bags. To reduce litter, the government puts a specific tax of Rs 2 per bag on sellers.

1. (a) Calculate the new price paid by consumers and the new quantity. [2]
2. (b) Calculate the government's weekly tax revenue. [1]
3. (c) Calculate how much of the tax per bag is paid by consumers and how much by producers. [2]

1. (a) Two firms are in a tradable pollution permit scheme. Firm X can cut a tonne of emissions at a cost of $30 and Firm Y at a cost of $70. The permit price is $50 per tonne. What is likely to happen?A X buys permits from Y and pollutes more.B Y cuts its emissions and sells permits to X.C X cuts its emissions and sells permits to Y.D Neither firm trades because both costs differ from the permit price. [1]

In the market for household solar water heaters in an invented country, MPB = 80 − Q, MSB = 100 − Q and MPC = MSC = 20 + Q, where prices are in $ and Q is in thousand heaters per year.

1. (a) Calculate the free-market output and the socially optimal output. [2]
2. (b) The government pays a subsidy of $20 per unit to producers. Calculate the total cost of the subsidy. [2]
3. (c) Explain one reason why the government may set the subsidy at the wrong level. [2]

Invented data. To reduce winter smog and congestion, a city government introduces a daily charge of Rs 500 for cars entering the central business area of Lahore. Car trips into the area fall from 400,000 to 340,000 a day.

1. (a) Calculate the percentage fall in car trips and the daily revenue from the charge. [2]
2. (b) Explain how a road-user charge can correct the negative externalities of car use. [3]
3. (c) Consider one reason why the charge may not achieve the socially optimal number of trips. [3]

1. (a) Explain why a large tax on cigarettes may not reduce smoking by very much. [3]
2. (b) Consider whether such a tax is still worthwhile for the government. [4]

1. (a) A firm producing fertiliser has marginal private cost MPC = 10 + Q. Its production causes a constant marginal external cost of $12 per unit. Marginal social benefit equals marginal private benefit: MSB = 100 − 2Q (P in $, Q in units). What is the deadweight welfare loss if output is left to the free market?A $12B $24C $48D $360 [1]

1. (a) Evaluate whether tradable pollution permits are more effective than direct regulation in reducing carbon emissions from power stations. [20]

1. (a) Evaluate the view that providing information and using nudges are better ways to reduce the consumption of sugary drinks than placing a tax on them. [20]

1. (a) Evaluate whether privatisation is an effective way to correct market failure in the distribution of electricity in a developing economy. [20]

Invented income tax schedule:First Rs 600,000 of annual income: 0%Rs 600,001 to Rs 1,200,000: 10%Above Rs 1,200,000: 20%

1. (a) Calculate the income tax paid by a person with an annual taxable income of Rs 2,000,000. [2]
2. (b) Calculate this person's average rate of tax. [1]
3. (c) Explain why this tax system is progressive. [2]

1. (a) On a Lorenz curve diagram, the area between the line of perfect equality and the Lorenz curve is 0.18, and the area below the Lorenz curve is 0.32. What is the Gini coefficient?A 0.18B 0.36C 0.56D 0.64 [1]

1. (a) Explain what is meant by a universal basic income. [2]
2. (b) Consider whether a universal basic income would reduce inequality more effectively than means-tested benefits. [6]

1. (a) Evaluate whether progressive income taxes are the most effective way to reduce inequality of income and wealth in a developing economy. [20]

1. (a) Explain what is meant by government failure in microeconomic intervention. [2]
2. (b) Using the example of a maximum price set below the equilibrium price for wheat flour, consider how such intervention may lead to government failure. [6]