BS3391 Further Topics in Microeconomics Mock Paper Questions 2026

2025/26 MOCK EXAMINATION PAPER

ANSWER 2 OUT OF 4 QUESTIONS

Question 1

To rebalance the UK economy, a report by the Inequality Commission called for the creation of a £250bn renewal fund to support UK’s poorest regions over the next 15 years. Using alternative economic welfare measures, explain under what circumstances this policy could be welfare improving and, therefore, should be undertaken by the UK government. Clearly highlight the assumptions and limitations of the measures you have selected.

Word limit 1,000 (do not exceed)

Question 2

A university degree is an important signal in the job market for employers. Assume that the government significantly increases the current student fees for University courses. Use Spence’s model of labour market signalling to critically evaluate the impact of this policy on high and low ability workers. Support your arguments with a numerical example and clearly highlight the assumptions you have made in your analysis.

Word limit 1,000 (do not exceed)

Question 3

1. Using a numerical example, critically discuss how a principal could design a linear compensation contract that fulfils both the incentive and participation constraint for a risk neutral employee.

(50 marks)

2. How would your answer of part a. above change when the employee is risk averse?

(50 marks)

(100 marks in total)

Word limit 1,000 (do not exceed)

Question 4

Use the incomplete-contracts model by Navaretti and Venables (2004) to explain under what circumstance firms will be better off outsourcing rather than producing intermediate inputs in-house. Evaluate the impact of a shift in bargaining power between two firms.

Word limit 1,000 (do not exceed)

END OF PAPER

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