Ocr a 2 Economics Answers

8/3/2019 Ocr a 2 Economics Answers

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A2 Economics for OCR

Answers to activitiesChapter 1

ACTIVITY PAGE 5The employment rate is lower than the economic activity rate. The economic activity rate measures the

proportion o people aged 1665 who are employed or unemployed and seeking work; the employment rate,

as its name suggests, includes only those who are employed.

ACTIVITY PAGE 8 (ToP)a) There are a number o similarities between the Norwegian and the UK labour markets. In both countries,

average male pay is higher than average emale pay. Also, in both countries there are more emale workers

than male workers in the public sector and in part-time employment. The passage does, however, show

that the unemployment rate was lower in Norway than in the UK in February 2008.

b) The Nordic countries were acing a shortage o workers at the start o 2008. Such a shortage would

probably have encouraged rms to oer higher wages to attract scarce labour and encouraged unions to

press or pay rises. Both eects would have been likely to increase wage rates.

c) The table supports the view that the Nordic countries were acing not a shortage o jobs, but a shortage

o workers to a limited extent. Both Norway and Denmark had unemployment rates below what is usually

regarded to be ull employment. I unemployment alls below 3 per cent, rms wishing to expand may ndit dicult to recruit extra workers. This will place a supply constraint on the economy.

The unemployment rate in the other two countries, however, while being below the EU27 average, is not that

low and does not really indicate a shortage o workers.

ACTIVITY PAGE 8 (boTTom)a) There are a number o possible reasons, including dierences in the labour turnover o industries,

dierences in attitudes to older workers, and dierences in what is happening to the industries. An

industry, such as hotels and restaurants, in which many workers stay or only a short time tends to have a

relatively young labour orce. This contrasts with the eld o education. Most teachers join the proession in

their early twenties and a relatively high proportion continue to work as teachers until retirement.

Industries in which ageism is more prevalent are likely to employ ewer older workers than those that do

not discriminate. Age discrimination legislation, however, may reduce this dierence.

An industry that is expanding, such as nancial services, will be recruiting new workers, and this may

tend to reduce the average age o workers. In contrast, older workers may stay with declining industries,

but such industries are likely to nd it dicult to recruit new workers. In a number o countries shing, or

instance, is a declining industry.

b) A countrys rms are internationally competitive i they are producing what people at home and abroad

want and are willing to buy at attractive prices.

An ageing population may reduce the international competitiveness o a rm i, as workers get older, they

become less productive. This may occur i older workers are less fexible, less mobile and less up-to-date

with new developments. Some older workers may be reluctant to change the hours they work and the

tasks they do. With amily commitments and a house, some older workers may be reluctant to move to


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other parts o the country where there may be job opportunities with rms that are expanding. They may

also be unwilling to learn jobs and to undertake training in, or instance, new technology.

On the other hand, older workers may be more productive, given their experience. They may have been

very well trained and may still be prepared to update their skills. Their greater tendency to stay with an

employer may reduce rms costs and so help keep their prices competitive.

ACTIVITY PAGE 9a) Occupational downgrading means moving rom one job to a lower-paid and lower-skilled job.

b) When a woman gives up managerial responsibilities or a time, the break may mean that she misses out

on training, changes in working practices and advances in technology. This may make employers reluctant

to place her in higher managerial positions in the uture.

There is a chance, however, that having a break may increase the ambition o some women, and their

experience in lower positions may increase their understanding o how to motivate sta. I this is the case,

employers may be more willing to promote them.

ACTIVITY PAGE 14a) Groups who may have beneted are consumers o British Gas i the decision results in lower prices, shareholders

o British Gas i it increases prots, and workers in other countries who will have more job opportunities.

b) Oshoring has increased a number o companies prots, but there is no guarantee that it will always do

so. Oshoring can raise a companys prots by lowering its costs o production. A number o costs abroad

may be lower, including rent o premises, business taxes and, o course, wages. I productivity levels are

reasonably high, unit costs may be lower.

There is a risk, however, that prots may all i moving work abroad either increases costs or reduces

revenue. Productivity levels may not be as high as anticipated, and costs may start to rise, especially i

other rms start to move into the same area, competing or resources. As well as output levels possibly

being lower abroad, the quality produced may also be lower. I the goods or services produced are poor,the company may lose sales.

ACTIVITY PAGE 16a) The success o a tourist attraction can be judged by the number o visitors, by revenue and by prots.

b) The opening o other wheels, particularly within the UK, will increase competition or the London Eye.

Someone in Southampton, or instance, who would have gone to the London Eye may not do so i a

Southampton wheel is opened. I the increased competition does reduce visitors, revenue is likely to all.

The higher competition would also make it dicult or the London Eye to raise its price to oset the eect

o a all in sales demand will become more elastic.

There is, nevertheless, a chance that having more wheels will develop a taste or this type o attraction.

Someone who has enjoyed going on the Birmingham wheel may be encouraged to go on the London wheel

when visiting the capital.

ACTIVITY PAGE 21a) The passage mentions that revenue rose while the numbers o people going to the cinema ell. This means

each person, on average, must have been paying more per ticket.

b) The passage suggests that demand or a cinema ticket is relatively income-inelastic. It mentions that a

spokesperson or the cinema industry was unconcerned that a all in income would reduce demand.

c) It is dicult to predict what will happen to the cross elasticity o demand between cinema going and theprice o pay-TV in the uture. There will be a number o infuencing actors. One actor is changes in the

relative quality o the lms and programmes on pay-TV. Others include changes in the cost o transport to

and rom cinemas, the availability o parking spaces at cinemas, and how pay-TV can be received.


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ACTIVITY PAGE 23a) ITV a 41.38 per cent all.

b) In April 2008, the BBCs share was higher than 28 per cent because gures or only two o the BBCs

channels, albeit those with the largest audience share, are shown.

c) The ve-rm market concentration ratio, in terms o channels, ell rom 84 per cent in 2000 to 57 per cent

in 2008. This indicates a all in market power and so an increase in competition. To analyse the share o

the ve largest TV companies, however, it would be necessary to have inormation on the share o the otherchannels run by the companies.

Chapter 2

ACTIVITY PAGE 25a) Sta bonuses are a variable cost, as they are likely to be related to output and sales. A rm is likely to pay

out more in bonuses when workers are producing a higher output.

b) Business rates and insurance.

ACTIVITY PAGE 28a) The changes in the relative cost o producing television programmes are likely to encourage television

channels to produce ewer television dramas and more quizzes and reality shows. This suggests that the

changes in costs are reducing the quality o programmes being made.

b) The impact o oreign television programmes on the cost o producing UK programmes will depend on

price. I oreign programmes are being sold at a low price, this will put downward pressure on the cost

o producing television programmes in the UK. UK production rms will have to keep their costs down in

order to remain competitive.

ACTIVITY PAGE 36a) The need or a considerable amount o unding; and stars already being signed up by competitors.

b) There are a number o actors that could cause an increase in attendance at cricket matches. One is a

reduction in ticket prices. This will cause an extension in demand, with consumers being more willing

and able to buy tickets. Another actor is increased advertising. The Twenty20 tournament in India, or

instance, has been heavily advertised. A third actor is a rise in the ticket price o other sports events that

are a substitute or cricket. The second and third actors will cause an increase in demand.

ACTIVITY PAGE 40

a) One argument is to ensure high-quality programmes. Not relying on subscriptions or advertising revenuemeans the BBC can produce programmes that are not guaranteed to draw large audiences. Thus they can

cater or minority interests, and can develop programmes that might start with small audiences but then

grow in popularity. It should also mean, given a reasonable level o unding, that the BBC does not have to

rely on game shows and reality programmes.

b) Viewers may not necessarily experience disutility rom watching adverts. Some advertisements provide

useul inormation about both new and existing products, and some advertisements are amusing.

c) It is debatable whether the licence ee creates allocative ineciency. Some economists say that it does so

by switching resources rom popular to unpopular programmes. For instance, i people want to watch more

soaps, commercial channels may be more responsive to their demand.

Other economists argue that the licence ee can contribute towards correcting market ailure. Some

people may suer rom inormation ailure. They may be unaware o the pleasure that can be gained rom

watching opera. Coverage by BBC2 may bring this to their attention.


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The licence ee may also mean that the BBC produces more programmes that are merit goods and ewer

that are demerit goods than the commercial channels produce. Watching documentaries, or example, may

increase students educational perormance and later their productivity, and so raise output or everyone. In

contrast, some people argue that making violent lms may encourage violent behaviour, and watching some

reality shows can coarsen behaviour. This is a controversial area: results rom studies on the connection

between the two are inconclusive. There is also some debate about whether watching quizzes and reality

shows can inorm people and, by providing relaxation and amusement, raise their productivity.

ACTIVITY PAGE 44a) The Australian cinema-operating industry is an oligopoly. The inormation in the passage indicates a high

three-rm concentration ratio, particularly in terms o national box oce takings. There are many small

operators and a ew medium-sized ones, but the industry is dominated by three large rms.

There is less inormation on the Australian lm-distribution industry, but what there is indicates that it

is more competitive than the cinema-operating industry. There is reerence to a higher number o lm

distributors. This may place the industry between oligopoly and monopolistic competition.

b) Other inormation that would be useul includes the extent o barriers to entry and exit into the market,

the amount o non-price competition, the degree o interdependency, and the type o prots earned inthe long run.

c) Film distributors vary their charges over time to take into account changes in demand or tickets. The

charges are highest during the period when it is expected that demand will be highest.

d) The merger activity among lm distributors will result in ewer, larger distributors. This will increase their

market power. Other things being equal, this will increase their bargaining power relative to cinema

operators, and may enable them to charge the operators more.

The distributors, however, may not be able to exploit their greater market power i demand or cinema

tickets is alling. Their bargaining power relative to cinema operators may not increase i there is also

merger activity among the operators.

ACTIVITY PAGE 45a) Television programmes run phone-ins and quizzes to raise revenue, and because they are relatively cheap

to make and can attract viewers.

b) The nes and adverse publicity have reduced the number o phone-ins and viewer quizzes. Television

companies are now more cautious in running phone-ins and quizzes because o their experience. They

are also aware that these have become less popular because o the adverse publicity surrounding them.

It remains to be seen whether, in the uture, phone-ins and quizzes will regain their popularity among

viewers and schedulers.

c) Regulation o television phone-ins and quizzes is necessary because there is asymmetric inormation in

their running. Viewers do not have the inormation or the time to check that they are being operated in a

air manner.

Chapter 3

ACTIVITY PAGE 49a) The employment o plasterers and bricklayers would have been expected to all. This is because their

labour is used to produce new houses, and house-building was declining. Labour, being a derived

demand, usually declines when demand or its product declines.b) The demand or plasterers and bricklayers may not have declined i it was thought that the downturn

would not last. I plasterers and bricklayers productivity and fexibility increased, they may have been

retained, while other building workers were sacked.


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ACTIVITY PAGE 52a)

Number o

workers

Total output MP MR = MRP

1 8 8 15 = 120

2 20 12 15 = 180

3 40 20 15 = 300

4 55 15 15 = 225

5 65 10 15 = 150

6 72 7 15 = 105

The rm should employ three workers, since this where MRP equals the wage rate (300).

b) I the wage rate were to halve to 150, the rm should employ ve workers. This means the rm should

recruit an additional two workers.

ACTIVITY PAGE 55a) i) The private costs o overworking include marriage break-ups, heart attacks and health problems.

ii) An external cost o overworking is lower potential living standards resulting rom lower potential output.

b) Workaholics Anonymous seeks to promote the income eect o a wage rate. It tries to encourage people

who tend to overwork to take more leisure time.

ACTIVITY PAGE 59a) The expansion o university education has reduced the value o some degrees, by increasing the supply o

graduates in some subjects by more than the demand or graduate labour in that eld.

b) There are two main reasons why some students undertake degrees in geography despite the relatively low

return. One is that students enjoy the subject and are prepared to seek a geography-related job even i it

is not very well paid. Another is that they may be planning to seek employment in a career that recruits

graduates, but is not concerned about what subject has been studied.

c) There are arguments or and against setting tuition ees on the basis o the marketability o degrees. One

is that this will encourage universities to respond to market orces by oering more o the degrees that are

likely to be in high demand. Another is that the private benet to those studying medicine will be higher

than the private benet to those studying geography, or instance, and so they should be paid more.

The arguments against are based on grounds o equity and market ailure. Poor people are more likelyto be discouraged rom studying by high tuition ees, in large part because the poor are more concerned

about debt. I this is the case, charging dierential tuition ees may increase inequality o income. There

may also be inormation ailure. Students and universities may incorrectly orecast which degrees will be

in high demand in the uture. In addition, all education can be regarded as a merit good, creating more

benets, not all o which are nancial, or the students themselves, and benets or third parties in the

orm o higher output and a more civilised society.

ACTIVITY PAGE 60a) Turkish teachers may be relatively well paid because they are in short supply. This would mean that a

relatively higher wage would have to be paid to attract their services. Turkish teachers may also havestrong bargaining power, which their union or unions may be prepared to exercise in search o higher

wages. In addition, Turkish teachers may be held in high esteem. This may infuence the amount that the

Turkish state and private sector schools are prepared to pay teachers.


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b) It is unlikely that many Norwegian teachers will seek to work in Turkey. Although the pay o Norwegian

teachers is less than hal the average Norwegian wage, it may still be higher than that paid in Turkey.

Even i this is not the case, Norwegian teachers may not be able to migrate to Turkey because o Turkish

controls on immigration, and because o an inability to speak the language. Norwegian teachers may also

be reluctant to leave amily and riends behind, and may not be aware o the high pay in Turkey.

I, however, the pay is noticeably higher in Turkey, and working conditions and job prospects are better,

some Norwegian teachers may seek to overcome the language and cultural barriers and move to Turkey.

ACTIVITY PAGE 61a) The earning dierential between lawyers and hairdressers in 2007 was 37,336 or 209.51 per cent.

b) The occupations shown that have above-average earnings are in high demand and have relatively limited

supply. The high demand arises rom high MRP. For instance, the services o accountants can be sold

or a high gure, and chie executives can add considerable value to a rm. The relatively long period o

training and qualications to be a medical consultant, or example, limit their supply.

c) Lawyers are paid more than hairdressers because demand or their labour relative to its supply is higher; both

its demand and supply are more inelastic; they have more bargaining power and are held in higher esteem.

Lawyers are in high demand because a considerable amount can be charged or their services. This

results in their MRP being high. This demand is also inelastic. It would not be possible to replace a lawyer

in a court case with an unqualied person. The supply o lawyers is relatively low and inelastic, as they

have to undertake a long period o training and be well qualied. The high, inelastic demand and low,

inelastic supply results in lawyers being highly paid, as shown in Figure A3.1.

In contrast, hairdressers have relatively low MRP and are in relatively high supply. Demand or and supply

o their services is also relatively elastic. There are some celebrity hairdressers who can charge high

prices or their services, but most cannot. It also does not have to take long or someone to be trained as a

hairdresser, and any qualications required are normally relatively easy to acquire. A small rise in the wage

rate may attract signicantly more workers into the industry. Figure A3.2 shows a low wage arising rom the

low demand and high supply o hairdressers.

Wages of lawyers

Quantity of lawyers labour

D S

D S

0

W

Q

Fige A3.1 Fige A3.2

Lawyers also belong to a strong proessional body, while hairdressers, partly because they are widely dispersed

throughout the country, are not highly unionised. In addition, most people believe that lawyers should be paid

more than hairdressers, and this infuences how much the two groups ask to be paid.

Wages of hairdressers

Quantity of hairdressers labour

D

D

S

S

0

W

Q


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ACTIVITY PAGE 64a) The wage dierential between GP partners and salaried GPs was 26,500 or 58.2 per cent in 2003. It rose

to 67,000 or 142.55 per cent in 2006.

b) The next best paid job or most GP partners is likely to be that o a salaried GP. This would mean the

probable economic rent earned by the average GP partner was 67,000 in 2006. This is because, as noted

above, this is the gap between what a GP is earning as a partner and what they can earn as a salaried GP.

The transer earnings were probably 47,000. I the pay to a GP partner ell below this level, s/he wouldprobably have switched to being a salaried GP.

c) i) The elasticity o supply o labour is the percentage change in quantity o labour supplied divided by the

percentage change in wages. In this case, the number o GP partners rose rom 18,000 to 22,000. This

is a percentage change o 22.22 per cent. Their pay rose by 24, which was a 58.33 per cent increase.

This means that the elasticity o supply o labour was 22.22%/58.33% = 0.38.

ii) These gures indicate that the supply o GP partners is inelastic. This would be expected, as

it takes a long time to train as a GP, and high qualications have to be gained. The inelastic supply may

have been the reason why the pay rise had to be high in order to attract the extra 4,000 GP partners.

iii) It would have been more useul to have calculated the percentage change in the number o hoursGP partners worked. Figures were not given on hours, but the passage indicates that the number o

hours worked per GP partner ell, which suggests that overall, the number o hours worked may have

changed by only a small percentage.

The change in the number o hours worked is a more reliable source, as it gives a better indication o

how the ability o a rm or organisation to alter the output o the product has altered.

Chapter 4

ACTIVITY PAGE 67

a) The BBCs purchasing power in the market or the labour o television presenters has been reduced. Itused to be a monopsonist buyer, but now it is only one o a number o buyers. Its prestige and size, which

oer a good and varied career path, nevertheless make it a popular choice or employees.

b) The BBC would be overpaying Jonathan Ross i it could get his services or less and/or i the value

he provides to the BBC in attracting viewers is less than his pay. I, on the other hand, there is high

competition or the services o a presenter rom other channels, it may be necessary to pay a high salary

to recruit and keep him or her. Such a presenter may increase not only the audience gures, but also the

reputation o the channel, and so may attract other sta.

It could, however, be argued that such a large pay award takes up a noticeable amount o the BBCs

licence ee revenue, that it could be better spent (has a high opportunity cost), and that it may cause

discontent among other, less well paid BBC sta.

It is interesting to note that an inquiry carried out by the BBCs regulator, the BBC Trust, concluded that Rosss pay

deal was air because ITV and Channel 4 compete regularly or top entertainers. It did, however, argue that radio is

dierent, as the BBC dominates the commercial sector which is largely composed o local radio stations.

ACTIVITY PAGE 70 (lEFT)a) Most nurses belong to the Royal College o Nurses and most are employed by the NHS, although a number work

in the private sector. So in this case, a virtual monopsony bargains with a virtual monopoly. As well as the size o

membership o the union and the importance o the NHS as an employer, the relative bargaining power o the

two groups is infuenced by a number o other actors. One o these is the high regard the public have or nurses.

This increases their bargaining strength, but the reluctance o nurses to take industrial action weakens it.

b) The marginal revenue productivity o Formula 1 mechanics has risen in recent years largely because

their services can be sold or higher revenue. More and more money has gone into Formula 1 with extra

sponsorship and more revenue rom television deals.


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ACTIVITY PAGE 70 (rIGhT)a) Chinas economic development is resulting in its output moving up the value added chain. The countrys output

o medium-value manuacturing and services is increasing. This is causing a rise in demand or skilled workers.

b) The existence o skill shortages may result in costpush infation. Firms competing or the scarce labour

may bid up wages. I wages rise by more than productivity, unit labour costs will rise.

A lack o skilled workers may also result in Chinese rms not being able to meet domestic demand or a range

o products. This shortage, in turn, may result in a rise in imports and a reduction in the countrys trade surplus.c) Whether China will experience skill shortages in the uture will depend on whether the supply o skilled

workers keeps pace with the demand or skilled workers. This, in turn, will be infuenced by how much

investment the government, rms and workers put into education and training, and whether it is in the

right areas. Training tends to be under-consumed. This is partly because o inormation ailure workers

and rms oten ail to appreciate the benets that training can provide. It is also because training generates

positive externalities other, rival rms can take advantage o training carried out, by poaching sta.

ACTIVITY PAGE 71a) Among the barriers to work are an inability to speak English, limited numeracy and written skills, lack o

qualications, disability, a criminal record and a history o unemployment.b) One advantage to employers is that, while they have to support the workers, which is likely to involve some

cost, they do not have to pay those on the LEP scheme. This means they are likely to obtain some work at

a cheaper rate. Another advantage to employers is that they can assess peoples skills and reliability beore

deciding whether to oer them a job.

c) It is possible that the LEP may lead to a permanent reduction in unemployment and an increase in economic

activity. It may do this by developing the skills and work habits o people who have been unemployed or some

time and, by providing support, may encourage some with disabilities and extreme shyness into the labour orce.

There is a risk, however, that the all in unemployment and increase in economic activity may be only

temporary. This may be the case i training and support are not o a suciently high standard, or i

employers take advantage o the scheme to obtain cheap temporary labour.

ACTIVITY PAGE 73a) An employment rate o 70 per cent would mean that 70 per cent o those o working age are in employment.

b) The structural actors that could cause unemployment to all include supply-side reorms that make labour

markets more ecient by, or instance, increasing labour mobility, and the expansion o particular industries.

In contrast, the cyclical actor is an increase in aggregate demand that has the potential to reduce

unemployment in most areas o the economy.

c) Sockelarbeitslosigkeitis equivalent to the non-accelerating infation rate o unemployment (also called the

equilibrium level o unemployment). It is the unemployment that exists even when the aggregate demandor labour equals the aggregate supply o labour.

ACTIVITY PAGE 76a) The two key reasons are a urther all in membership and more merger activity. I membership alls to a low level,

a union may cease to exist. Merger activity, similarly, may reduce the number o trade unions in existence.

b) Members may gain a variety o benets rom the merger o Unite and the United Steelworkers Union. One

is that they will have greater bargaining strength in negotiating with multinational companies that operate

in both the UK and the USA. I, or example, a US-based pharmaceutical rm threatens to move to a

UK branch i US workers reuse to accept new working conditions, members in both countries can join

together to try and prevent this.

As well as the greater number o members and greater spread o membership, international unions are

also likely to have more unds than national unions. This may increase their bargaining power and may

enable them to provide more acilities and training or their members.


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ACTIVITY PAGE 79a) Low-quality jobs may not provide training and may not provide long holidays.

b) Temporary work may reduce productivity i it ails to provide training. In this case, workers may not be brought up

to date with the latest advances in technology and working practices, and may not be able to develop their skills.

The uncertain nature o temporary work may also reduce eort and enterprise. Workers may wonder whether it is

worth their while to work hard and to develop ideas and products i their employment will only be short term.

c) Reducing the number o days pay to which a dismissed or redundant worker is entitled may increaseemployment. This is because it may encourage some employers to take on more workers, knowing that,

should demand all, it would be cheaper to dismiss them.

There is a risk, however, that the cost o dismissing or making workers redundant, and so making

employers more willing to shed workers, may increase unemployment. This is because some workers who

lose their jobs may become discouraged, and those who are geographically and occupationally immobile

may nd it dicult to gain new jobs.

In addition, making it cheaper to re sta will not raise employment in the longer term i aggregate demand

remains low.

ACTIVITY PAGE 80a) Literacy and numeracy increase both the range o tasks workers can perorm, and the eciency with

which they can perorm those tasks. Being literate and numerate enables workers to ollow written

communications and interpret numerical data. It also enables them to communicate in writing, increases

the benets they gain rom training, and generally develops their thinking skills. All these actors should

lead to a higher output per worker hour.

b) The diploma may initially reduce the UK labour orce, as it will mean that some 1618-year-olds who

would have joined the labour orce will stay on at school. It should raise the quality o the labour orce,

as those who take the diploma should build up their skills beore they enter employment. There is

also a chance that the labour orce may increase in the longer term. This is because undertaking the

diplomas and so raising their employability may make it less likely that some teenagers will later becomediscouraged workers or recipients o employment and support allowance.

ACTIVITY PAGE 83a) Leanne Wilkinson was dismissed on the grounds that she was too young and too inexperienced or the job.

b) Young workers may be very up-to-date with advances in technology, may bring resh ideas to a rm, and

may be keen to work hard and undertake training in order to gain promotion.

c) Anti-discrimination legislation may initially reduce the fexibility o labour markets. Firms may have to set

in place procedures to ensure the recruitment and dismissal o workers are undertaken in a manner that

does not confict with the legislation. In the long run, however, such legislation may make employers aware

o the skills o a greater range o workers. I this is the case, it will increase labour market fexibility.

ACTIVITY PAGE 85a) The income share o 99 per cent o income recipients ell rom 92 per cent to 84 per cent.

b) i) Globalisation has increased competition or chie executives, top sportspeople and entertainers.

Pearson Education, Manchester United and major concert venues will seek to recruit the best people,

wherever they come rom. Such high competition is pushing up the pay o the top earners.

In contrast, the pay o unskilled workers is being squeezed by rms increasing willingness and ability to

engage in outsourcing and oshoring.

ii) Advances in technology are enabling top executives to control larger rms that are spread out acrossthe world, and increasing the audiences top sportspeople and entertainers can reach. These eects

are raising the MRP o these groups and so pushing up their pay. At the same time, some advances

in technology are reducing demand or unskilled workers as machinery replaces workers. This lower

demand is placing downward pressure on the pay o this group o workers.


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ACTIVITY PAGE 86a) The percentage o women in the wealthiest 1,000 was 9.2 per cent in 2007. It is predicted that this will

rise to 60 per cent by 2020. This is a percentage point rise o 50.8.

b) Among the actors that will determine the proportion o wealth owned by women in the uture are the

patterns o womens employment; womens promotion success; and the pattern o ownership o shares

and property, or example the pattern o inheritance and divorce settlements. The more women move into

high-earning industries and the more successul they are in gaining promotion, the greater will be their

ability to accumulate wealth. Wealth generates wealth, so the more assets women own, the more income

they will earn rom them, and the more assets they will be able to accumulate. I rich, aristocratic amilies

move away rom leaving their wealth largely to the oldest son, this is likely to increase womens share o

wealth. Divorce settlements in recent years have tended to become more avourable to women, but it is

uncertain whether this trend will continue.

ACTIVITY PAGE 91a) Costs to the economy o a childs poverty include an increased burden on the NHS (as a number o these

children will suer poor health), and a loss o potential productivity.

b) The poverty line is usually taken to be an income level that is 60 per cent o average disposable income.People living on an income below this are regarded as poor.

c) One possible government policy measure to reduce poverty would be or the public sector to raise the

wages o its low-paid sta. The passage mentions that schools, hospitals and local government are among

the biggest employers o low-paid workers.

d) It is impossible to eliminate relative poverty unless there is complete income and wealth equality. In

every country o the world, some people are poorer than others. It should, however, be possible to

reduce absolute poverty. As an economy grows and develops, a higher proportion o the population

should be able to gain access to reasonably well-paid jobs, which would enable them to aord

more than the basic necessities o lie. A growing and developing economy should also increase agovernments tax revenue, which would enable it to ensure that vulnerable groups can aord good

nutrition, decent housing and other essentials. As, on average, people become richer and wealthier,

however, the idea o what constitutes basic necessities and what is needed to participate ully in society

changes. For example, is a washing machine now a necessity?

ACTIVITY PAGE 93a) Italys population may be ageing because o a all in its birth rate, a all in its death rate, and net emigration

o young people. In practice, it is the rst two actors.

b) One actor that would increase the power o a countrys trade unions is an increase in their

membership. Having more members would make the trade unions more powerul when bargaining with

employers and putting pressure on the government. Having a high proportion o workers as members

gives unions credibility to speak on behal o the workers. They would also know that their bargaining

positions, and any actions they may pursue or threaten to pursue in support o their claims, will not

be undermined by non-union labour. Having more members would also increase the unds o trade

unions, which would increase their ability to take industrial action and to provide benets or

their members.

Other actors include a rise in employment, the passing o legislation that increases the actions trade

unions can legally take, and the removal o legislation that restricts their activities.

c) Raising the retirement age is likely to reduce the amount the Italian government spends on pensions, atleast or a while. With people working longer, the Italian government should raise more tax revenue. This

may result in it spending more on the care o the elderly.


11/4211

d) One measure that the Italian government could take to reduce the costs o an ageing population is to

encourage net immigration o young workers by advertising job vacancies to countries inside the EU, giving

out more work permits to non-EU residents, and making it easier or people rom outside the EU to settle in

the country. I successul, this would increase the countrys labour orce and reduce its dependency ratio

there would be more workers per retired person.

Net immigration, however may put pressure on the countrys housing stock and, i the immigrants are

accompanied by their amilies, may also increase the costs aced by state schools. There is also the issue

o how long the immigrants will stay in the country. They are generally mobile and may be tempted to moveto another country i pay and conditions are ound to be better elsewhere.

ACTIVITY PAGE 95a) Net immigration into a country will increase both aggregate supply and aggregate demand. The increase

in the labour orce resulting rom a rise in people o working age will increase the countrys productive

capacity and so shit the AS curve to the right. The immigrants will also demand goods and services and

this will shit the AD curve to the right. Figure A4.1 shows these two movements.

Price level

Real GDP

AS AS1

AD

AD AD1

AD1

0

P1

Y Y1

Fige A4.1

As indicated in the diagram, the eect o net immigration will be to increase the countrys output, real GDP.

Whether real GDP per head rises will depend on whether the immigrants add more to AS than to AD.

b) A all in the value o the pound sterling against the Polish zloty will reduce the return that Polish workers

gain in the UK in terms o their own currency. For instance, i initially 1 = 5 zloty, a Polish worker earning

300 a week in the UK who sends 100 home would be sending 500 zloty. I the pound then ell in value

to 1 = 4 zloty, the person would then be sending back only 400 zloty to their relatives. It would also mean

that the purchasing power o incomes in Poland would increase in terms o sterling. Some Poles maydecide, in the light o this change, that the nancial return rom working in the UK is not high enough.

c) There are a number o actors that may lead to a greater convergence o wage rates between EU countries

than with wage rates outside the EU. These actors include greater mobility o labour and capital, the

adoption o similar labour policies and economic convergence. Most o the restrictions on the movement

o workers and rms between the member countries o the EU have been removed. Workers moving to

high-wage countries increase the supply o labour there, which can put downward pressure on wages (or

example, Polish workers moving to the UK). At the same time, rms move to low-wage countries, raising

demand or labour there and so placing upward pressure on wages (or instance, German rms moving to

Slovenia). The adoption o similar policies, including minimum wage legislation, as well as the tendency or

poorer economies o the EU to catch up with the richer ones, is also causing wage rates to converge.

d) Wage rates in the EU and in other parts o the world may move closer together in the uture with

globalisation, although wage dierentials between skilled and unskilled workers in some countries may

grow. There are, however, more barriers to the movement o labour between other countries and the EU

and greater dierences in labour policies.


12/4212

QuICk-FIrE QuIz PAGE 981. The groups o people o working age who are economically inactive include the retired, adults in ull-time

education and those too disabled or sick to work.

2. Work covers time when people are applying mental and/or physical eort in a job, whereas leisure is time

people can spend as they want.

3. The absence o barriers to entry and exit is likely to mean that only normal prots will be earned in the long

run. This is because, should supernormal prots arise, new rms will be attracted into the market. Thiswill increase supply, lower price and compete away the supernormal prots. I, on the other hand, losses

are being experienced, some rms will leave the industry. This will reduce supply, raise price and restore

normal prots.

4. A monopoly diers rom monopolistic competition in a number o ways. In a pure monopoly there is only one

seller, while in monopolistic competition there is a high number o sellers. This means that there is the highest

degree o market concentration possible in a monopoly, while the market concentration ratio is relatively low

in monopolistic competition. A monopoly has high barriers to entry and exit that enable the monopolist to

earn supernormal prots in the long run. In contrast, there are no or only low barriers in a monopolistically

competitive market and, as a result, the rms earn normal prots in the long run. The product produced by a

monopoly is unique, while those made by monopolistically competitive rms are slightly dierentiated.5. There are a number o actors that infuence the demand or television production crew. The key one is

demand or television programmes. The more television programmes the television production companies

can sell, and the higher the revenue they can get or them, the more television production workers they are

likely to employ. The other key infuencing actors are the productivity and wages o the crew, the cost o

capital equipment, and whether such equipment acts as a substitute or a complement to the crew. I the

wage rate paid to the crew grows at a more rapid rate than productivity, demand is likely to all. I cameras,

and other equipment that requires people to operate it, alls in price, demand or production crew is likely

to increase. I, however, new equipment is developed that can be operated with ewer workers, demand or

production crew will decrease.

6. The supply o teachers labour becoming more elastic would mean that it becomes more responsive tochanges in the wage rate. A reduction in the qualications and the skills needed to be a teacher would

make supply more elastic. A small rise in the wage rate would attract more people into the proession, as

more people would meet its entry requirements. A shorter period o training and rise in occupational and

geographical mobility would also increase the pool o potential teachers. Time, itsel, will also enable more

people to train as teachers in response to a rise in the wage rate.

7. The immobility o labour leads to market ailure, as it means that markets will not be able to respond ully

to changes in demand and supply conditions. For instance, demand or skiing holidays in France may

increase, but it may be dicult to recruit more skiing instructors because instructors rom other countries

are geographically immobile, and workers in France pursuing other occupations are occupationally

immobile. In this case there would be under-production o skiing holidays the output would be below theallocatively ecient level.

8. I a countrys Gini coecient increases, it means that its income has become more unevenly distributed.

The closer the gure gets to 100%/1, the more uneven it is. So i, or example, it rises rom 0.35 to 0.42,

income has become more unevenly distributed.

ExAm PrACTICE PAPEr PAGE 102

SECTIon A1 a) i) The our-rm market concentration ratio increased in 2007 compared with 2005. The our most

listened-to stations had a 40.8 per cent share o the market in 2005. This share had risen to 41.6per cent in 2007.

ii) Magic experienced the greatest percentage increase in reach between 2005 and 2007: 0.5/2.9

100 = 17.24 per cent.


13/4213

b) i) Three characteristics o monopolistic competition are a large number o small rms, product

dierentiation, and ease o entry and exit into the market.

ii) A market moving rom oligopoly towards monopolistic competition will be introducing more

competition. Having more rms competing or the custom o consumers may result in them enjoying

lower prices and higher quality. The ease o entry into and exit rom the market will mean that only

normal prots are earned in the long run, which should increase consumer surplus.

There is a chance, however, that consumers may lose as a result o this change in the marketstructure. Larger rms can take greater advantage o economies o scale and so unit costs and

prices may be higher under monopolistic competition, despite the greater level o competition. Some

o any supernormal prots enjoyed by oligopolists may be spent on research and development,

resulting in new and improved products. Consumers are likely to have a relatively wide range o

dierent brands to choose rom under oligopoly, and may enjoy some o the methods used by

oligopolists to attract customers, including ree gits and competitions.

c) A journalist may preer to work or the BBC because the pay is better. The wage rate received is a key

infuence on the job selected by a worker.

As well as the pecuniary reward, workers also take into account the non-pecuniary benets o a job.

The BBC may, or instance, oer better promotion chances. The BBC is a large organisation. Someonestarting as a journalist on, or example, Radio Solent may work their way up to be a presenter on a

BBC1 TV show. The relatively high prestige associated with working or the BBC may also make it easier

to gain a good job with another media organisation. Indeed, someone might be prepared to work as a

journalist on BBC radio or a lower wage than that available on commercial radio i they believe it will

enhance their uture earnings or generate extra work opportunities by raising their prole.

In addition, the BBC may provide better holidays, more sociable working hours and/or better pension

entitlements than commercial radio stations.

d) An increase in trade union membership among radio journalists may increase their pay, but it will

depend on a range o actors, including the extent o the rise in membership, the action they are

prepared to take in support o any pay claims, the extent to which they can be substituted by non-

unionised labour, prots earned by the radio stations, and the degree to which commercial radio

stations act together.

A small rise in trade union membership that means most journalists still do not belong to the trade

union is unlikely to increase that unions bargaining power. There is also the possibility that trade union

membership may increase, but may be ragmented among a number o unions, so that the commercial

radio stations can play one union o against another one.

Having more members may not be eective in raising pay i the members are not prepared to back up

their pay claims with industrial action. The increase may, however, be more successul i it is dicult

to replace unionised labour with non-unionised workers. This is because the commercial radio stationswould nd it hard to put out their news programmes i the unionised journalists went on strike and the

stations could not recruit non-unionised journalists.

I the commercial radio stations are experiencing losses or low prots, they will be unable to raise pay.

In such circumstances, a union is unlikely to press or higher pay.

A trade unions power to raise journalists pay would be weakened i commercial radio station bosses

get together to bargain as one. Given their commercial rivalry, however, it is unlikely that they will join

together.

So an increase in trade union membership is likely to be more eective in raising commercial radio

journalists pay i it results in most o the journalists belonging to the union, the members are preparedto support any action they are called upon to take, they cannot be replaced by non-unionised

journalists, the commercial stations are earning high prots, and they negotiate separately with one

trade union.


14/4214

SECTIon b2 a) Negative discrimination is one actor but other infuences should be considered, using demand (MRP)

and supply analysis. Female solicitors may work ewer hours, may have career breaks to have children,

and a smaller proportion o them may belong to the careers proessional body. The MRP o emale

solicitors may be lower than that o male solicitors i they have ewer qualications, less training, and

work in less lucrative areas o the law.

b) There should be a discussion o the actors that will infuence what will happen to the gap based on

demand (MRP) and supply analysis. Demand or emale solicitors relative to male solicitors may risei negative discrimination alls, the qualications and training gained by emale solicitors improve, the

hours worked by emale solicitors may increase, and they may enter higher paid areas o the law. The

reasons or, and the likelihood o, these changes should be examined.

3 a) The key actors that infuence the number o hours a day an individual works include the number

o hours on oer, the wage rate and the workers desire or leisure time. Use should be made o the

income and substitution eects. It would be benecial to include a diagram.

b) There should be a discussion o the actors that infuence the long-run supply o labour, that

geographical and occupational mobility o labour may be limited, and a recognition that pecuniary and

non-pecuniary advantages and disadvantages can change over time.Whether more people will move to France in the uture will be infuenced not only by the holidays

and working hours, but also by the availability o work in the country, the pay on oer, promotion

opportunities, job security, the qualications needed, etc. Some UK workers may wish to work in

France, but may be discouraged by the dierence in language, cultural dierences and amily ties.

They may, however, be encouraged by lower house prices in France and the relative ease o working

in another EU country. UK people are also likely to consider whether the relative advantages and

disadvantages o the jobs in the two countries will change over time.

4 a) The NMW should be explained (a diagram may be drawn). Then the arguments or maintaining

it should be explained, including reducing poverty, countering the power o monopsonists and

oligopsonists (and so correcting market ailure),and raising labour productivity.

b) There should be a discussion o arguments or and against paying the same NMW to all those aged 16

and over. The arguments or include avoiding age discrimination, reducing the costs o administrating

and operating the law, and improving the morale, training and productivity o young workers.

Arguments against include that it may discourage the employment o young workers and raise rms

costs o production. These arguments are based largely on the assumption that the MRP o young

workers is lower than that o older workers, and there will be more costs involved in employing young

workers in the orm o more training. The reasons why this may or may not be the case should be

explored.

Chapter 5

ACTIVITY PAGE 108a) There are no explicit answers to this activity. The ollowing tables rom Transport Statistics, Great Britain

contain some relevant statistics on the determinants o demand or private car transport:

19.19 Retail Price Index: transport components

3.3 Punctuality at UK airports

3.3 Petrol and diesel prices and duties per litre

6.6 National railways: passenger charter punctuality and reliability

14.14 Local bus services: local authority support by area14.15 Local bus services: are indices by area.

Most o the above tables cover a ten-year period.


15/4215

Transport Trendstables contain similar inormation, usually with a statistical commentary:

1.4 Congestion

2.6 Changes in relative costs o transport

3.2 Local bus reliability

3.3 Bus passenger satisaction

4.111 A range o data on travel by household income and car ownership, by age and gender, by trip

purpose and accessibility.

b) Using some o the above data, the main determinants o demand or transport by local bus include:

the cost o bus ares

the cost o substitutes such as private car travel

household income

trip purpose

age and gender

reliability.

These dier rom the determinants o demand or private car transport insoar as car ownership/availability

is usually the most important actor that determines whether a car is used or a particular journey.

ACTIVITY PAGE 110There are no particular answers to part a). In part b), the relationship between journey purpose and derived

demand should be understood. This should be ollowed by an evaluation o the extent to which household

travel demand is determined by the qualitative assessment o the comparative advantages o, say, the private

car and bus or particular types o journey.

ACTIVITY PAGE 113a) The general determinants o demand are:

the price/cost o a mode o transport

the price o substitutes and complements

household income taste, ashion.

b) Some points to note are:

Increases in household income allow more amilies to purchase cars, hence greater use o private car transport.

The increase in bus and rail ares relative to motoring costs might be used to explain the decline in bus

transport over this period, and the decline in the use o rail transport up to 1995.

Qualitative actors such as reliability, convenience and fexibility tend to avour the car over most orms

o alternative transport.

ACTIVITY PAGE 115

a) The main problem is that there are many determinants o the demand or road passenger and reighttransport services. These are oten dicult to estimate. Particular problems arise with respect to

behavioural actors that govern travel behaviour.

b) The biggest benet is a reduction in congestion. The volume o trac alls just 7 per cent, but the

intensity o congestion alls much more. In all cases, the benets represent a very convincing case or the

introduction o some orm o road pricing.

c) Road trac orecasts provide a crude but essential estimate o uture demand into the decision-making

process or new roads. Historically, they have been the main reason why most new road schemes have

been constructed. In recent years, though, the predict and provide approach that underpins new road

development has been subject to increasing criticism. Consequently, some new roads have been built or

other valid reasons, such as providing environmental relie or to reduce accidents at a particular black spot.


16/4216

Chapter 6

ACTIVITY PAGE 120a) Table 6.1

No. o planes Average xed cost Average variable cost Average cost Marginal cost

0

1 1,000 1, 400 1,400 4002 1,500 1, 275 1,775 150

3 1,333.3 1, 216.7 1,550 100

4 1 250 1, 175 1 425 50

5 1,200 1, 200 1 400 300

6 1,166.7 1, 266.7 1,433.3 600

7 1,142.9 1, 342.8 1,485.7 800

b) See Figure A6.1.

Cost ()

Number of planes

0 1

MC

AC

AVC

AFC

2 3 4 5 6 7

200

400

600

800

1000

1200

1400

c) In general, the our curves ollow the same pattern as in Figure 6.1 (page 120 in the textbook). The shape

o the AC and AVC curves is less pronounced than in this gure, due to the high xed costs in relation to

total costs. The MC curve cuts AC at its lowest point, although its shape is not as smooth as the MC curve

in Figure 6.1.

ACTIVITY PAGE 129a) The our-rm concentration ratio is 0.89 in 2002 and 0.86 in 2006. This represents a small decrease

in the percentage o the total market o the our largest rms. British Airways market share has allen

signicantly, while two o the low-cost carriers, Ryanair and easyJet, have increased market share. The

overall size o the market has increased by around 45 per cent over the our-year period.

b) There are various reasons or these changes.

An increase in discretionary income has meant that more people are able to fy.

Fares are likely to have allen in real terms.

New routes, particularly rom low-cost carriers, have encouraged more people to fy.

Domestic rail are increases have led to more people fying in the UK.

c) This is a compound measure o supply. It takes into account the seat capacity o each aircrat in an

airlines feet and the total fights by distance made by that aircrat over a period o time, usually one year.

It does not measure whether seats have been sold to passengers.

Fige A6.1


17/4217

ACTIVITY PAGE 142a) i) The usual determinants o demand can be applied, namely:

the price o the are

the discretionary income o consumers

the price o substitutes (e.g. Channel Tunnel, other erry routes, airlines)

the price o complements such as uel

taste and ashion actors that might determine whether a amily wishes to travel by sea.

ii) P & O Ferries has about 30 per cent market share on the competitive short sea routes rom Dover. Datarom operators is not easy to obtain. On other longer routes, rms oten have a route monopoly as ar as

that route is concerned.

Evidence rom websites indicates intense price competition this is not a eature o oligopolistic

markets. There is also price variation depending on whether you look at the operators own website

or that o a travel broker. The market today seems ar removed rom when it was investigated by

the Competition Commission in 1996, the outcome o which was that conditions were made or the

proposed joint venture between P & O and Stena.

b) 0.72

c) Truronian has about 1.7 per cent o the buses owned by other bus operators. Its acquisition by FirstGroup would lead to a small increase in the ve-rm concentration ratio and First Groups share o the

national market. Overall, there would be a marginal impact, although locally First Group may hold route

monopolies.

ACTIVITY PAGE 146There are no explicit answers to this activity.

ACTIVITY PAGE 147

a) The ollowing data can be collected rom national sources such as Transport Trendsand TransportStatistics, Great Britain:

trend in payments or unremunerative services

number o passenger vehicle operators licences

trend in real are levels

average age o the bus feet

bus miles operated.

b) No explicit answer is available to this activity.

ACTIVITY PAGE 151a) The ollowing statistical inormation can be used to evaluate the impact o rail privatisation since 1995:

growth in passenger kilometres and goods tonne kilometres

private sector investment in rail vehicles

public sector investment in Railtrack

change in subsidy payments

reliability and punctuality statistics

increasing concentration o ownership

new types o rail reight carried.

b) A short essay is required here. There is no correct answer. The important consideration is that the

objective chosen is justied using appropriate evidence.


18/4218

Chapter 7

ACTIVITY PAGE 154Although total greenhouse gas emissions have been alling, the volume rom the transport sector has actually been

increasing in absolute and relative terms. From a modal standpoint, the largest increase has been rom air transport.

Rail and bus transport emissions are much lower in comparison and, given their passenger volumes, produce

signicantly lower carbon ootprints per head. However, Figure 7.2 (page 153 in the textbook) shows that, over the

past ew years, mainly through more ecient vehicles, there is a widening gap between car use and CO2 emissions.

A more environmentally acceptable transport policy would be one that encouraged the greater use o

those modes o transport that produce low levels o CO2. It is also debatable whether there should be new

constraints on the growth o air travel, particularly or non-essential reasons.

ACTIVITY PAGE 162a) i) See Figure A7.1.

Costs and priceMSC

MPC1

MPC

MXC

X

Y

Z

D= MSB

Q1 Q2 Q Quantity

tax

0

P

P1P2

Fige A7.1

ii) The introduction o the fat rate tax has led to some improvement in eciency the price paid has

increased to P2

and the quantity demanded has allen to Q2. The welare loss has also been reduced

the new triangle XYZis smaller than that shown in Figure 7.7 (page 158 in the textbook). It should be

stressed that this is still not an optimal outcome.

b) Although there is no explicit answer to this question, it is likely that a search will come up with some o the

ollowing: the LCC is not popular with certain businesses, particularly those located within the charging zone; loss

o trade is oten reerred to

the LCC leads to congestion around the edge o the cordon

there may be some change in direction o policy ollowing the change o mayor in May 2008.

ACTIVITY PAGE 163a) This is clearly a popular policy with the over-60s, and will generate some votes among this group. It may, in a

modest way, encourage some over-60s to switch rom using a car to the bus. I so, it would be a more sustainable

outcome. The cost to the government is the opportunity cost involved the 2bn could have been allocated to

other areas o government spending, such as health and social security, both o which would benet older people.

b) For the individual, i they use the bus, it means that their real income has increased. There is also the non-

quantiable benet to be gained through increased travel opportunities. The costs seem negligible.


19/4219

ACTIVITY PAGE 165Some possibilities are:

For:

reduced CO2

emissions rom air transport

boost to domestic tourism

enhances awareness o the negative externalities involved.

Against: dicult to control what about business travel?

direct intervention in working o the market mechanism

ewer fights will mean less employment in aviation and related industries

negative impact on recipient countries that rely on tourism

why only control fights why not ban gas-guzzler cars?

ACTIVITY PAGE 166The main trends are:

a reduction in numbers using the private car, especially since 2000

a 20 per cent increase in those travelling by surace rail an 80 per cent increase in those travelling by bus.

The main determinants are likely to be cost, and qualitative actors such as convenience, quality o service

and so on. The congestion charge appears to have had a particular eect in reducing private car travel.

ACTIVITY PAGE 167a) This inormation can be obtained rom various statistical publications, including Transport Statistics.

(i) In 2005/06, road users paid over 28bn in taxes (VED and uel tax). Due to increased uel prices,

it will be considerably more in 2007/08. (ii) Capital and current road expenditure in 2006/07 was

around 9bn.

b) On the surace, road users are getting a poor deal they are paying at least three times more to the

Exchequer than they are getting back in the orm o road maintenance and new roads. This well-worn

argument ails to acknowledge that the purpose o taxation is to und all types o government spending,

and that hypothecation has never been seriously suggested in this case.

ACTIVITY PAGE 171a) All estimates or travel ater 8 a.m. are inelastic. Travel between 8.30 and 9 a.m. is more inelastic and

thereore likely to be more essential at this time. The estimate or travel between 9 a.m. and 9.30 is

unusual it means that as price increases, more travel occurs. This is probably due to car users delayingthe start o their trip to wait or a lower charge to be in place. The zero estimate indicates that there is

perect inelasticity those travelling between 7.30 and 8 a.m. have to do so.

b) i) It seems logical to set the highest charges where the price elasticity estimates are most inelastic, namely

between 7.30 and 8 a.m., and between 8.30 and 9 a.m. The positive estimate or 9 to 9.30 a.m. might

result in congestion during this period. There may be a case or increasing the charge urther during this

period in an attempt to persuade some motorists to vary their journey time period.

ii) Maximum revenue will be generated by increasing charges in time periods with the lowest inelastic

price elasticity o demand, e.g. 8.30 to 9 a.m.


20/4220

Chapter 8

ACTIVITY PAGE 176Private costs:

construction costs

annual maintenance costs

annual subsidy to operator.

Private benets:

reduced journey times or users

reduced costs or some users

less congestion or those not using new acility.

External costs:

loss o buildings to make way or construction

some blight and noise in city centre.

External benets:

less trac noise and air pollution

improved work opportunities.Indirect costs:

less spending available or other projects.

Indirect benets:

wider benets o new investment opportunities in the local economy.

Some o the eects do not t easily into the discrete categories above.

ACTIVITY PAGE 182a) i) Time savings are invariably the biggest benet in most cost-benet studies time is money. As time

does not command a market price, a value has to be imputed.

ii) This is because any time savings can be put to an alternative use that will be more productive than idle

time in congested trac.

b) The wider-impact eects o a huge project like Crossrail are very dicult to measure. This is because, rom

a scientic standpoint, it is dicult to establish which eects have come about just rom, say, Crossrail and

which would have come about in any case, irrespective o the project going ahead.

QuICk-FIrE QuIz PAGE 1901 Billion passenger kilometres, billion tonne kilometres.

2 A ew large rms; high barriers to entry; non-price competition; price rigidity; interdependence.

3 Removal o regulations, or example barriers to entry into a market.

4 Because it internalises the cost o the negative externality onto the road user.

5 Meeting present needs without compromising the ability o uture generations to meet their own needs.

It can apply to transport policies that encourage greater use o more sustainable modes o transport and

promote a reduction in the demand or less sustainable modes.

6 A method or assessing whether a project should go ahead where the market mechanism cannot be used,

or example in the case o public goods.


21/4221

ExAm PrACTICE PAPEr PAGE 194

Section A

1 a) i) Rail

ii) Cars

b) Various possibilities, including:

an increase in car availability a all in the real cost o car use

an increase in the price o substitutes, e.g. bus, rail

a deterioration in the reliability and punctuality o rail transport

non-transport actors, such as an increase in out-o-town shopping centres, changing work locations.

For ull marks, the answers should explain why the particular determinant has actually resulted in an

increase in passenger transport by car.

c) i) Passenger transport is a derived demand because it ulls some particular purpose, e.g. journey to

work, school or shopping.

ii) In theory, it is expected that there is a positive relationship between the annual change in real GDPand the annual change in demand or passenger transport. This is indicative o transport being a

derived demand. When the economy is growing at a good rate, the demand or transport or work as

well as non-work reasons is likely to increase. There may, though, be a short time lag.

iii) There is no overwhelming evidence that this relationship applies to the data in Table 2 (page 195 in

the textbook). There seems to be a time lag o one year at some stages o the series, but this is not

consistent.

A reason or the above is likely to be that the change in demand or passenger transport depends on

a whole range o determinants, only one o which is the change in real GDP.

d) There appears to be some evidence in the two tables to suggest that the demand or passenger transport

is becoming more sustainable. In Table 1 (page 194 in the textbook), there has been a relatively small

increase in demand or car transport compared with rail, which is a more sustainable mode. The demand

or bus and coach transport has also increased. Table 2 seems to indicate a decoupling o the relationship

between the change in real growth and the change in demand or passenger transport. However, the

transport data are very crude, and not as accurate as those or real GDP growth. Also, a decline in the

annual rate o increase in demand or private car transport could be due to growing congestion problems.

The data or bus and coach transport are also misleading the increase in demand is mainly conned to

London; elsewhere demand has continued to all or, at best, has been stable.

2 a) Oligopolistic markets are characterised by having high barriers to entry or new rms. Additionally, there

are typically a small number o large rms and dierentiated products, with branding prevalent. In these

circumstances, thereore, rms invariably compete through non-price competition; the brand image, customer

service, ashion and other non-price actors are predominant. Reasons or this can be explained through price

rigidity and the kinked demand curve. An explanation using simple game theory is equally relevant.

b) Most transport markets do tend to be oligopolistic. This is particularly so when considering the total

markets or local bus transport, rail passenger transport, rail reight, air transport in the EU and cross-

channel erries. Evidence o oligopoly can be shown through a three- or our-rm concentration ratio.

An example o this will enhance the evidence base o the answer.

The extent to which rms compete is variable. To some degree, it depends on how the market is

dened. For example, a rail operating company may have a local monopoly, but may be an operating

company o one o the main groups when looking at the whole market.

Air transport is a good example o where alliances have been ormed. It is these alliances, as well as

individual operations, that actually compete with each other. In most markets, though, there is likely to

be some limited competition.


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3 a) A negative externality occurs when the marginal social cost o an activity is greater than the marginal

private cost. This results in market ailure, since the price that is paid by users does not refect the true

cost o that activity. (This can be shown on a diagram.)

Various negative externalities arise rom the increased use o air transport, including:

an increase in CO2

emissions and contribution to global warming and climate change

noise disturbance to people who live in the vicinity and on the fight paths o airports that have

experienced increased trac levels

various orms o environmental pollution and visual intrusion around airports possible health risks to air passengers and crew arising rom increased air travel.

b) In theory, this type o negative externality could be resolved through a green tax that, i accurate, would

be equal to the dierence between marginal social cost and marginal private cost. Such a tax would be

particularly ecient i it were hypothecated to oset the negative externalities reerred to above.

The Air Passenger Duty is a fat rate indirect tax on short- and long-haul air passengers. At present it

is not related to the cost o externalities, although rom 2010 it will be calculated per fight rather than

per passenger. It is not hypothecated to provide or those aected by negative externalities revenue is

collected by airlines and goes straight to the Exchequer.

4 a) Most major new transport projects are publicly unded or involve PPPs. As a consequence, the use o themarket mechanism and raising investment unds on the open market is not appropriate. A second issue

concerns the availability o public unding resources are invariably scarce in relation to demand, so some

means has to be established in order to determine unding priorities. Cost-benet analysis seeks to achieve

these objectives by taking a long view and a wide view o all o the various costs and benets involved.

b) The underlying principles o the Crossrail cost-benet study are in some respects well established. They

involve projecting the volume o trac that would use the extended acility, and the benets in terms

o travel time and cost savings to such users. Estimates are also made or the benets that will apply

to those travellers remaining on other modes o transport ater some trac transers to Crossrail. This

approach is not new, and the methodology that is used is relatively robust.

What is new, though, is the estimation o the indirect costs and benets o Crossrail, or example,the eects o its construction on employment in the City and the wider economic benets on the

community. Such costs and benets are ar rom easy to calculate. They are, though, very important in

the overall justication o the Crossrail project rom a public unding standpoint.

Chapter 9

ACTIVITY PAGE 201 (lEFT)a) Economic growth and the rate o infation

might be expected to be positively related.

As the rate o economic growth alls, the

rate o infation might be expected to all.

Higher economic growth would be expected

to generate higher rates o infation. This

relationship can be explained by increasing

AD (to AD1

in the gure opposite). As the

economy is operating closer to its ull capacity

output, the price level rises to P1. Increases

in AS, on the other hand, would allow the

economy to grow without any increase in

the rate o infation. However, rising infation

might coincide with alling economic growth ithere is a letward shit o AS

1(to AS

2) caused

by rising input prices. Real GDP in this case

would all to Y2

as the price level rises to P1. Fige A9.1

Price level

Real GDP

AD

AD1

AS1AS2

0

P

P1

Y2 Y1Y


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b) A deterioration o the UKs current account o the balance o payments might be a cause or concern i:

it results rom a lack o international competitiveness

it is not matched by a capital account surplus

it constrains the rate o economic growth in the long run.

However, a deterioration in the current account might not be a problem i:

it results rom imports o capital goods which raise the long-term rate o economic growth

it is sustainable because o long-term capital fows into the economy.

Whether a deterioration o the UKs current account o the balance o payments is a cause or concern

depends very much on the causes and consequences o the current account decit.

ACTIVITY PAGE 201 (rIGhT)a) Five indicators might include:

GDP per capita

doctors per 1,000 o the population

televisions per 1,000 o the population

lie expectancy at birth

adult literacy rate.b, c) There is no one answer to these questions.

d) The standard o living can be thought o as the quantity and quality o the goods and services available to

the population. Where income is equally distributed, comparisons o GDP per capita will provide meaningul

comparisons o the standard o living o the average person in two countries. However, income is not equally

distributed and average GDP can give misleading comparisons. GDP per capita could be the same in two

countries, but income inequality in one country might mean that the standard o living o the average person

diers markedly. Comparisons o the standard o living are made more dicult and less meaningul because o the

wide range o dierent indicators. These may give conficting pictures o the standard o living in two countries. To

some extent, comparisons are not meaningul because there is a degree o subjectivity in the interpretation o the

dierent indicators.

ACTIVITY PAGE 202a) Economic growth in China has led to an increase in average incomes in both urban and rural areas. As a

result o higher average incomes, there will be higher standards o living because people in China will be

able to consume more goods and services, as indicated by the increase in retail sales o consumer goods.

Material living standards will have increased.

b) Economic growth in China might have reduced the standard o living because some people in rural areas have

been displaced rom their homes by the building o reservoirs. For some, their ability to earn a living through

arming, or example, has been reduced by the need to increase the production o energy or industry.

c) Rapid economic growth in China has a positive impact on living standards in the UK through increasing

the supply o goods and services and reducing the price o imported goods. It may also have provided

a market or UK exporters, raising GDP and employment in the UK. On the other hand, increased

competition rom China may result in alling sales or UK rms, reducing output and employment. Chinese

economic growth may also be responsible or increases in the world price o energy and oil, which has a

negative impact on the standard o living in the UK.

ACTIVITY PAGE 203a) Infationary pressures might have been experienced in:

19731974 19851990

19992000.

These are periods in which the output gap narrowed.


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b) Estimates o the output gap are useul because they indicate when infationary pressures might be building

up in the economy. They might, thereore, give advance warning that the rate o infation is likely to rise,

and guide policy makers in the setting o scal and monetary policy. The diculty o measuring the output

gap, however, provides problems or policy makers. For example, interest rates may be increased because

the estimated output gap is narrowing and yet there are changes in the economy, such as immigration,

that are increasing the economys potential output. Basing economic policy on only one indicator is likely

to lead to inappropriate policy changes.

ACTIVITY PAGE 206 (ToP)a) Reasons or the slowdown in consumer spending in late 2007 include:

reduction in the availability o credit consumers may have ound it more dicult to nance

expenditure through borrowing, leading to a slowdown in spending

expectations the Bank o Englands warning o a slowdown in economic growth might have caused

some consumers to reduce their expenditure or ear o rising unemployment in the uture.

b) A reduction in interest rates reduces the cost o borrowing and the reward rom saving. For those with

mortgages, discretionary income is increased through a reduction in mortgage interest payments. As a result,

it is likely to increase consumer spending. It is also likely to raise investment by reducing the cost o borrowing

or rms. Increases in consumption and investment add to AD, creating short-run economic growth. There aresome circumstances in which economic growth will not be stimulated, however. These include:

market interest rates may not be reduced ollowing a reduction in the interest rate by the Bank o

England (as happened in the UK in 2008)

a lack o condence on the part o consumers and rms

osetting reductions in the other components o AD.

ACTIVITY PAGE 206 (boTTom)a) A stronger euro will raise the price o euro zone exports and reduce the price o euro zone imports. This

should lower the demand or euro zone exports and raise the euro zone demand or imports. Both o these

will contribute to a lower level o AD, which will reduce economic growth in the short run.

b) Two reasons why euro zone net exports have risen despite the euros appreciation against the dollar are as

ollows.

Productivity gains increases in output per person will reduce euro zone unit costs. This will allow rms

in the euro zone to lower prices to oset the impact o the appreciation o the euro on the price o goods

produced.

Growth in world demand an increase in world demand will increase the demand or euro zone

exports, particularly those with a high income elasticity o demand. This will oset the reduction in

demand caused by the appreciation o the euro.

c) The case or a managed appreciation o the exchange rate includes:

it reduces import prices, particularly important or an economy that is heavily dependent on imports or

raw materials and components

it helps to reduce infationary pressures

it orces domestic rms to be ecient and to strive to reduce costs in order to compete in international markets.

A managed appreciation o the exchange rate, however, might reduce economic growth by raising

the price o exports and reducing the price o imports, causing a reduction in AD. It may also lead to

reductions in employment in industries unable to reduce unit labour costs by either raising productivity or

reducing the growth o wages. Domestic monetary policy must be used to support the exchange rate policy

such that interest rates cannot be used to manage domestic demand.

The policy is more appropriate or an economy with a large exposure to international trade and capitalfows, such that an independent monetary policy is dicult.


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ACTIVITY PAGE 216a) Possible reasons or the projected decline in Bulgarias population o working age include:

a alling birth rate

emigration.

b) An increase in investment will increase AD, but will also raise the productivity capacity o the economy,

shiting the AS curve to the right. Increases in productivity improve the eciency with which resources are

used, also shiting AS to the right. Without either or both o these, Bulgarias long-term rate o economic

growth will be constrained by the projected decline in the population o working age. This is because asmaller working-age population will shit AS to the let.

c) Consequences might include:

potential output expanded

increased supply o labour

impact on wages rates, labour costs and price o output

reduction in labour shortages.

Commentary might include:

benets reduced by restrictions on immigration

benets or whom? impact on wage rates dependent on who migrates i.e. skills prole

consequences or social housing and benets

context o ageing population/population o working age

extent to which there is an optimal population size

distinction between the impact on GDP and GDP per capita e.g. making the economy larger as

opposed to making it richer.

ACTIVITY PAGE 217a) Generous unemployment benets available in Germany and France are likely to shit the long-run

aggregate supply curve to the let. This is because they may encourage workers to spend more time

seeking work once unemployed, reducing labour mobility and fexibility.

b) A lack o labour mobility and fexibility is likely to result in lower rates o economic growth or these

economies, compared with those o the UK and the USA. This is because changes in economic activity

are more likely to bring about prolonged periods o unemployment, which will limit the ability o rms to

respond to rising demand.

ACTIVITY PAGE 219a) According to the HarrodDomar model o economic growth:

Y/Y = s/k

Rearranging this equation or savings gives:

s= Y/Yk

The USA needs to devote 2.5 2.8 = 7 per cent o national income to savings to achieve a growth rate o

2.5 per cent.

Kenya needs to devote 2.5 6.8 = 17 per cent o national income to savings to achieve a growth rate o

2.5 per cent.

b) Low rates o savings due to low levels o income will constrain an economys long-run rate o economic

growth according to the HarrodDomar model. However, Kenya is not doomed to low rates o economic

growth i it can plug the savings gap. This might mean attracting investment rom oreign multinationalcompanies, aid rom oreign governments or international institutions, or borrowing rom abroad.


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ACTIVITY PAGE 220a) Market ailures that would justiy government intervention to raise the UKs productivity might include:

short-termism o banks and nancial institutions

positive externalities rom investment, including investment in training

inormation ailures constraining access to nance or training/retraining.

b) Appropriate policies might include:

investment grants to rms this would reduce the cost o investment or rms and make them less

reliant on external sources o nance or investment projects training

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Ocr a 2 Economics Answers