Oxford Cambridge and RSA

Monday 20 May 2019 – Morning

A Level Economics
H460/01 Microeconomics
Time allowed: 2 hours

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Centre number Candidate number

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INSTRUCTIONS
• Use black ink. You may use an HB pencil for graphs and diagrams.
• Read each question carefully before you start to write your answer.
• Section A: Answer all questions in this section.
• Sections B and C: Answer one question in each of these sections.
• Write your answer to each question in the space provided. If additional space is
required, you should use the lined page(s) at the end of this booklet. The question
number(s) must be clearly shown.

INFORMATION
• The total mark for this paper is 80.
• The marks for each question are shown in brackets [ ].
• Quality of extended responses will be assessed in questions marked with an
asterisk (*).
• This document consists of 20 pages.

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SECTION A

Read the following stimulus material and answer all parts of question 1 which follow in this section.

The UK labour market in the 21st century

The UK labour market has experienced both a large increase and significant changes in the past
20 years. Data published in the UK’s Labour Force Survey in October 2017 shows employment
continuing to rise and unemployment falling, as seen in Fig. 1.

Fig. 1 – UK labour market statistics for June to August 2017

Change on Change on
Number
previous quarter previous year
(’000)
(’000) (’000)
Employed 30 923 109 363
Unemployed 1 418 −63 −224
Economically Inactive
8 812 −17   −13
(Aged 16–64)
Source: ONS

The unemployment rate was at a 42-year low, although there was still some slack in the labour
5 market. Other evidence in the October 2017 data included:
• average weekly earnings for employees increased by 2.2% in nominal terms, compared
with a year earlier.
• average weekly earnings for employees decreased by 0.3% in real terms, compared
with a year earlier.
10 • employment growth was strongest for those aged 25–34 years and 50–64 years.
• employment fell among young people aged 16–24 years.
• growth in employment over the year was greater for women (up by 246 000) than for
men (up by 71 000).
• employment growth was not equal across the country, with the biggest increases in the
15 West Midlands, London, Scotland and the South East but large falls in the South West,
East Midlands and Wales.
• the proportion of workers in temporary jobs because a permanent one was not available
was 27.6%.
• the proportion of people working part-time because they could not find a full-time job
20 was 12.3%.

The UK economy has created nearly 6 million new jobs in the last 20 years which was necessary
given the increase in the UK population over this period (see Fig. 2). Many of these extra jobs
were primarily due to an increase in self-employment and employees in part-time work.

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Fig. 2 – UK population estimates 1995–2045

50 000 000
45 000 000
Aged 16–64
40 000 000
35 000 000
Aged 0–15 & over 64
30 000 000
25 000 000
20 000 000
15 000 000
10 000 000
5 000 000
0
1995 2005 2015 2025 2035 2045

Source: ONS

The ‘gig economy’

Each day, just before lunch, couriers dressed in the distinctive green and black uniform of
25 Deliveroo, the online food delivery company, arrive at the end of the street, park their bikes next
to a bench and wait. Holding their smartphones, they wait for someone, somewhere in the city, to
place an order with one of the nearby restaurants and cafés. When an order comes through, one
of the couriers will pick it up and deliver it in exchange for a small fee. They will then return to the
bench to wait for another call.

30 Welcome to the ‘gig economy’ which can be defined as, “a labour market characterised by the
large number of short-term contracts or freelance work, as opposed to permanent jobs”.

Plenty of people in early 21st-century Britain can identify with the experience of working for
a company like Deliveroo. But even more people are employed on zero-hour contracts in a
wide variety of jobs, from stacking shelves to waiting tables to caring for the elderly. According
35 to the Office for National Statistics, around 900 000 workers rely on a job with a zero-hour
contract. These people start every week not knowing how much work they will get or how much
money they will earn. Informal or casual employment of this kind helps explain why the UK’s
unemployment rate has not grown out of control since the financial crash of 2008. This increased
labour market flexibility has made it easier and less risky to employ workers, especially for
40 monopolistically competitive firms who will expect to see a fall in their average costs.

However, opponents of the growth in casual employment, including the trade unions, claim that
there are underlying problems associated with this labour model. Millions of people are “just
about managing” and many are faring much worse. In the 12 months up to March 2017, the UK’s
largest food bank charity gave out more than one million emergency food parcels to people in
45 desperate need. At the same time, household debt has grown to 150% of income. This debt has
been fuelled by low wage growth and low interest rates which has made credit easily available.
But the main issue for the estimated 8.3 million people living with unmanageable debt is needing
to borrow money to survive.

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It is no more than a coincidence that these concerns are happening in a year which recognises
50 the 75th anniversary of the founding of the UK welfare state which was set up to focus on, among
other issues, a problem that had grown since the early 1800s: that many workers struggled to
earn regular and reliable wages throughout the entire year. However, some have come to regard
the welfare state simply as a cost to be kept down rather than part of an economic and social
strategy that aims to deliver security for all. Successive governments have cut benefits and
55 altered the tax system to move the burden away from more progressive direct taxation towards
more regressive indirect taxation.

Fig. 3 shows the effect on different groups of households by comparing their original income
earned from employment with their final disposable income after benefits and taxation have been
taken into account.

Fig. 3 – Average incomes, taxes and benefits of households by decile group, 2015/16

All
Bottom 2nd 3rd 4th 5th 6th 7th 8th 9th Top
households

Original income 6 286 13 988 17 410 25 754 31 424 39 293 47 963 59 622 68 968 117 960 42 867

+ Total cash benefits 6 387 7 748 8 313 6 319 4 494 3 729 2 368 2 283 2 004 1 544 4 519

Gross income 12 673 21 736 25 723 32 074 35 918 43 022 50 331 61 905 70 972 119 504 47 386

– Direct taxes 1 528 2 299 3 046 4 794 5 940 7 931 10 091 13 199 15 534 29 991 9 435

Disposable income 11 145 19 437 22 677 27 280 29 978 35 091 40 239 48 706 55 438 89 513 37 951

Source: ONS

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Answer all the questions.

1 (a) Calculate the participation rate in the UK labour market for the period from June to August
2017.

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(b) Refer to lines 6–9.

Identify and explain why the change in average weekly earnings in nominal terms is greater
than in real terms.

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(c) What does Fig. 2 suggest will happen to the dependency ratio in the UK between 2015 and
2045?

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(d) A firm in a monopolistically competitive market decides to introduce more casual employment
practices, such as zero-hour contracts.

Explain, using a diagram, the effect of this decision on the firm’s equilibrium position in the
short run.

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(e) Evaluate whether income inequality in the UK is a cause for concern. [8]

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(f)* Evaluate, using evidence from the stimulus material, the impact of an increase in labour
market flexibility in the UK. [12]

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SECTION B

Answer EITHER question 2 OR question 3.

EITHER

2* Price ceilings have been used in a number of different markets, ranging from rented housing in
New York to food in Venezuela and the cap on energy bills in the UK.

Evaluate, using an appropriate diagram(s), the impact a price ceiling may have on the level of
consumer and producer surplus in a market. [25]

OR

3* Netflix is the world’s largest online video subscription service. By 2018, after only 10 years in
existence, it had 137 million worldwide subscribers. 65% of online video viewers in the USA watch
Netflix at least once a month.

Evaluate, using an appropriate diagram(s), the advantages and disadvantages of a perfectly

contestable market. [25]

Question no. .................

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SECTION C

Answer EITHER question 4 OR question 5.

EITHER

4* Within any economy there is a great deal of specialisation by firms in the production of particular
products, such as manufacturing of cars by BMW, Nissan and Toyota in the UK. Each manufacturer
employs the division of labour. So some workers design cars, some test them, others market them
and the assembly itself is divided into many different tasks.

Evaluate the extent to which specialisation and the division of labour might help in addressing the
basic economic problem. [25]

OR

5* From 2007 to 2016, nearly 1000 international mergers took place involving a UK business. Many
of these were examples of horizontal integration. One of the largest was between British Airways
and the Spanish airline, Iberia.

Evaluate the potential economic consequences for economic agents of a horizontal merger. [25]

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ADDITIONAL ANSWER SPACE

If additional space is required, you should use the following lined page(s). The question number(s)
must be clearly shown in the margin(s).

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