A Level Economics: Government Microeconomic Intervention (A Level) — Practice Questions (Cambridge 9708)

These are original questions written for Marlbridge, for revision and practice on this content. They are not reproduced past-paper questions, and they do not replicate the exam’s exact structure, question count or mark tariffs — Cambridge International holds copyright in its own papers. Use these alongside the official past papers available from your board.

Each question practises a skill tested in the June 2024 Paper 42. After each answer there is an examiner insight, a mark-scheme insight or a tip, and, where one matches, the real question to try next.

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Questions

1. A furniture workshop sells chairs in a perfectly competitive market at $4 per unit of output. When it employs a fifth worker, daily output rises from 180 units to 200 units. The daily wage is $70. Calculate the marginal revenue product of the fifth worker and state whether the workshop should employ this worker. [3]

2. A region’s economy depends on coal mining. The country is rapidly replacing coal-fired power stations with wind and solar power. (a) Explain the likely effect on the wage and employment of coal miners in the region. (b) Identify the type of unemployment that results and state one government policy that could reduce it. [4]

3. Explain what is meant by a negative externality and how an indirect tax could be used to correct the resulting market failure. [3]

4. A government places a tax on sugary drinks to reduce their consumption. Demand for sugary drinks is price-inelastic. Explain why the tax may reduce consumption by only a small amount. [2]

5. Vaccinations against an infectious disease create external benefits. Explain why a free market would under-consume vaccinations, how a subsidy could correct this, and one drawback of using a subsidy. [3]

6. Country P has a Gini coefficient of 0.31 and Country Q has a Gini coefficient of 0.47. (a) State which country has the more unequal distribution of income. (b) Describe in words how the Gini coefficient is calculated from a Lorenz curve. [3]

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Answers

1. Marginal physical product of the fifth worker = 200 − 180 = 20 units [1]. MRP = MPP × price = 20 × $4 = $80 per day [1]. The MRP ($80) is greater than the wage ($70), so the workshop should employ the fifth worker, as it adds more to revenue than to cost [1].

Tip: in a perfectly competitive product market, MRP = marginal physical product × price. A profit-maximising firm employs workers up to the point where MRP equals the wage.

2. (a) The demand for labour is a derived demand: it depends on the demand for coal [1]. As demand for coal falls, the demand for coal miners falls (shifts to the left), so both the wage and the number of miners employed fall [1]. (b) Structural unemployment, because it is caused by a long-term decline in an industry [1]. Policy: government-funded retraining so that miners gain skills for growing industries (or grants to help workers move to areas with jobs) [1].

Examiner insight (Cambridge 9708 June 2024 examiner report, Paper 42, Question 1(c)): most candidates drew the diagram accurately, but comments were weaker: some spotted the fall in wages or that the unemployment was structural, and few recognised the need for training. Some wrongly labelled the labour-market diagram with aggregate demand and aggregate supply; use the demand for and supply of labour, the wage and the quantity of labour.

Source for the examiner insights on this page: Cambridge International AS & A Level Economics 9708 June 2024 Principal Examiner Report for Teachers, Paper 9708/42 section, paraphrased.

Try the real question next: Cambridge International AS & A Level Economics 9708, June 2024, Paper 42, Question 1(c).

3. A negative externality is a cost to a third party not involved in the transaction, so marginal social cost is greater than marginal private cost [1]. The market ignores this cost and over-produces the good [1]. An indirect tax equal to the marginal external cost raises producers’ costs, shifting supply to the left, so output falls towards the level where MSC = MSB [1].

Mark-scheme insight (Cambridge 9708 June 2024 mark scheme, Paper 42, Question 2): the mark scheme links a negative externality to over-production and includes an indirect tax on producers among the policies that can correct market failure.

Source for the mark-scheme insights on this page: Cambridge International AS & A Level Economics 9708 June 2024 mark scheme for Paper 42 (9708/42), paraphrased. Cambridge’s 9708 past papers page publishes the Paper 41 mark scheme from this series, not the Paper 42 one.

Try the real question next: Cambridge International AS & A Level Economics 9708, June 2024, Paper 42, Question 2.

4. When demand is price-inelastic, the quantity demanded is not very responsive to a change in price [1]. The tax raises the price, but the percentage fall in quantity is smaller than the percentage rise in price, so consumption falls only a little (though tax revenue is large) [1].

Examiner insight (Cambridge 9708 June 2024 examiner report, Paper 42, Question 2): just saying that a policy “depends on price elasticity” earned only the lower evaluation level; the higher level needed an explanation of how elasticity changes the outcome, as in this answer.

Try the real question next: Cambridge International AS & A Level Economics 9708, June 2024, Paper 42, Question 2.

5. Consumers consider only their private benefit, so marginal social benefit is greater than marginal private benefit and vaccinations are under-consumed [1]. A subsidy lowers the price, increasing consumption towards the level where MSB = MSC [1]. Drawback, any one of: it has an opportunity cost, as the money could be spent elsewhere; it is hard to measure the external benefit, so the subsidy may be set at the wrong level [1].

Mark-scheme insight (Cambridge 9708 June 2024 mark scheme, Paper 42, Question 2): the evaluation points in the mark scheme include the opportunity cost of a subsidy (the money could have been used elsewhere) and the difficulty of measuring the right size of a subsidy or tax.

Try the real question next: Cambridge International AS & A Level Economics 9708, June 2024, Paper 42, Question 2.

6. (a) Country Q (a higher Gini coefficient means greater inequality) [1]. (b) Take the area between the line of perfect equality and the Lorenz curve [1] and divide it by the total area below the line of perfect equality [1]. A value of 0 means perfect equality and 1 means complete inequality.

Tip: the further the Lorenz curve lies from the line of perfect equality, the larger the Gini coefficient.

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Where marks are usually lost

• Forgetting that the demand for labour is derived from the demand for the product.
• Labelling a labour market with AD and AS instead of the demand for and supply of labour.
• Stating that a policy “depends on elasticity” without explaining how.
• Describing a tax or subsidy without linking it to reaching the output where MSB = MSC.
• Reversing the Gini coefficient: a higher value means more inequality.