OCR A Level Economics: Microeconomics — Practice Questions

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 — examination boards hold copyright in their own papers. Use these alongside the official past papers available free from your board.

Related: Microeconomics revision notes

The real paper has three sections: candidates answer the single compulsory data-response question in Section A (about 30 marks), then choose one essay from Section B and one essay from Section C (25 marks each). This paper follows that structure; only one essay option is given in each of Section B and Section C.

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Section A — Data response

The real Section A is a single compulsory data-response question with several lettered parts, ending on a higher-tariff evaluative part — this paper follows that structure rather than setting several free-standing questions.

Stimulus: A city has introduced a maximum rent below the free-market equilibrium rent in its private rental sector. At the same time, the national government is considering a subsidy for home insulation, which generates a positive externality through lower carbon emissions, and is separately reviewing whether its minimum wage should rise.

1(a) Distinguish between positive and normative economic statements, giving an example of each drawn from the stimulus. [4]

1(b) Explain what is meant by a merit good, and explain why home insulation might be regarded as one. [4]

1(c) Explain how a positive consumption externality leads to underconsumption of a good such as home insulation, and explain how a subsidy corrects it. [8]

1(d) Explain two factors determining the demand for labour in the context of the minimum wage review. [4]

1(e) Evaluate the likely effectiveness of the maximum rent policy described in the stimulus in achieving its aim of making rental housing more affordable. [12]

(This Section A totals 32 marks, close to the live paper’s 30.)

Section B — Essay (choose one; one option given here)

2. Evaluate the extent to which a national minimum wage is an effective policy for reducing poverty. [25]

Section C — Essay (choose one; one option given here)

3. Evaluate the extent to which government intervention can correct market failure caused by information failure, using adverse selection and moral hazard as examples. [25]

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Answers

1(a) A positive statement is objective and testable against evidence, e.g. “the maximum rent has reduced the number of properties available to let” [1] [1]. A normative statement is a value judgement containing an opinion about what ought to be, e.g. “the government should raise the minimum wage” [1] [1].

1(b) A merit good is one whose benefits to the individual and to society are greater than consumers realise, so it is likely to be underconsumed if left to the free market [1] [1]. Home insulation qualifies because consumers underestimate the long-run private benefit (lower energy bills) [1], and because it generates a positive externality (lower carbon emissions) that consumers do not take into account when deciding whether to install it [1].

1(c) With a positive consumption externality, the marginal social benefit exceeds the marginal private benefit [1] [1]. Consumers choose the quantity where MPB = MPC, which is below the social optimum where MSB = MSC [1], so the good is underconsumed and there is a welfare loss [1]. A subsidy reduces the price paid by the consumer [1], shifting supply to the right and increasing the quantity consumed towards the social optimum [1]; ideally the subsidy per unit equals the value of the external benefit at the optimum [1], though setting the correct rate in practice requires the government to have accurate information about the size of the external benefit [1].

1(d) Any two, 2 marks each: demand for labour is derived from the demand for the product the labour produces [1] [1]; it depends on the marginal revenue product of labour — its productivity multiplied by the price of the output [1] [1]; it depends on the wage rate relative to the cost of capital, since firms substitute machinery for labour when wages rise [1] [1].

1(e) Effect (4 marks): a maximum rent below equilibrium means quantity demanded exceeds quantity supplied, creating a shortage of rental housing [1] [1]. Tenants who obtain a tenancy pay less, gaining consumer surplus, but many others cannot find housing at all [1] [1]. Unintended consequences (4 marks): a black market develops, with illegal payments above the ceiling, so some tenants pay more than the free-market rent [1] [1]; landlords withdraw property from the rental market or allow it to deteriorate, since maintenance is no longer worthwhile at the controlled rent, so the long-run supply and quality of housing fall [1] [1]. Judgement (4 marks): the policy’s success depends on how far below the market-clearing level the ceiling is set — a modest ceiling creates a small shortage, a severe one a large black market and rapid disinvestment [1] [1]; it also depends on whether it is paired with measures that protect supply, such as exempting new-build properties from the ceiling, which softens the long-run fall in housing quality and quantity the policy would otherwise cause [1]; on balance, a maximum rent helps the tenants who obtain a tenancy at the lower price but is unlikely, on its own, to make rental housing more affordable for the city as a whole, since the resulting shortage and reduced landlord investment tend to work against that aim over time [1].

2. For (8 marks, 1 each): a minimum wage raises the incomes of the lowest-paid in work, directly lifting some households above the poverty line [1]; it may increase motivation and productivity (efficiency wage theory) [1]; the productivity gain means the employment cost is smaller than the simple competitive model predicts [1]; higher incomes for those with a high marginal propensity to consume raise aggregate demand [1]; the resulting demand effect can create jobs elsewhere in the economy [1]; it reduces in-work benefit spending, shifting the cost of topping up low pay from taxpayer to employer [1]; it can reduce the gender pay gap and wage inequality, since it raises the floor most for groups concentrated in low pay [1]; and it gives firms an incentive to invest in training to raise productivity to justify the higher wage [1]. Against (8 marks, 1 each): in a competitive labour market a minimum wage above equilibrium causes excess supply of labour [1], which is unemployment [1]; those who lose their jobs tend to be the least skilled, precisely the group the policy targets [1]; many poor households contain nobody in work at all, so a minimum wage does not reach them [1]; some low-paid workers are second earners in comfortable households, so the policy is poorly targeted at poverty specifically [1]; firms may respond by cutting hours, training or non-wage benefits [1]; firms may instead raise prices, which erodes the real value of the wage gain [1]; and firms facing higher wage costs may automate jobs away entirely, a longer-run effect a static supply-and-demand model misses [1]. Judgement (9 marks): the effect depends on how far above the equilibrium wage the minimum is set [1], on the elasticity of demand for labour in the affected occupations [1], and on whether employers have monopsony power [1]. In a monopsonistic labour market, a single or dominant buyer of labour holds the wage below the competitive level [1], so a minimum wage set between the monopsony wage and the competitive wage can raise both wages and employment simultaneously [1], though set above the competitive wage it reduces employment exactly as the competitive model predicts [1]. Because real labour markets vary in how monopsonistic they are, the same policy can raise employment in one market and destroy it in another [1]. It is best judged as one instrument among several: combined with tax credits and training it can meaningfully reduce in-work poverty [1], but on its own it cannot address poverty among households with nobody in work, so its overall effectiveness depends on the wider policy mix and the structure of the labour market it is applied to [1].

3. Mechanism (9 marks): Adverse selection occurs before a transaction, when one party holds information the other lacks and this affects who chooses to take part [1] [1] — for example, in a second-hand car market, sellers know more about a vehicle’s faults than buyers do, so buyers assume the worst and offer only an average price [1]; this pushes good-quality cars out of the market and leaves mostly poor-quality ones, the so-called “lemons problem” [1]. Moral hazard occurs after a transaction, when one party’s behaviour changes because they no longer bear the full consequences of it [1] [1] — for example, a driver with fully comprehensive insurance may take fewer precautions against theft or damage [1], since the insurer now bears most of the cost of anything going wrong [1]. Both are forms of asymmetric information [1]. Intervention (8 marks): compulsory disclosure requirements narrow the information gap before a transaction [1], for example vehicle history checks in a second-hand car market [1]; standardised product information or licensing lets buyers verify quality independently of the seller’s claims [1]; regulation can set a minimum quality standard below which trading is banned, removing the worst “lemons” from the market entirely [1]; no-claims discounts restore an incentive to take care after a transaction by making the driver bear some of the cost of a claim [1]; excess payments (a compulsory contribution to any claim) work the same way [1]; monitoring, such as telematics (“black box”) insurance, directly observes behaviour rather than relying on the incentive alone [1]; and government-mandated insurance in some markets ensures adverse selection does not cause the market to unravel completely [1]. Limits (4 marks): intervention itself has costs of enforcement and can be evaded [1]; some information asymmetries are very difficult to close entirely, since a buyer can never fully verify a used car’s complete history, so intervention reduces rather than eliminates the problem [1]; excessive regulation can raise costs for genuinely low-risk participants, who cross-subsidise higher-risk ones and may exit the market [1]; and monitoring technologies raise privacy concerns that can limit how far they are adopted [1]. Judgement (4 marks): intervention is generally most worthwhile where the market would otherwise unravel completely, as with severe adverse selection [1]; where the information gap is more moderate, the cost of intervention may exceed the benefit of a marginally better-informed market [1]; the design of an intervention matters more than its mere existence, since poorly targeted rules can create new distortions without closing the original information gap [1]; so intervention should be judged case by case against the severity of the underlying information failure [1].

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Where marks are usually lost

• Giving a normative statement that merely sounds factual.
• Not distinguishing MPB from MSB explicitly.
• Describing a price ceiling without unintended consequences.
• Ignoring monopsony in the minimum wage evaluation.
• Confusing adverse selection (an information problem before the transaction) with moral hazard (a behaviour change after it).
• Answering a Section B or C essay at only an “explain” level, without a clear judgement that weighs the evidence.