Question 1

Empirical evidence suggests that firms' market power has been rising in the last few decades.

(a) Explain and illustrate using the labour market model, the effect of a rise in the markup on real wages, labour productivity, and employment.

[4 marks]

(b) In the context of the Gini coefficient and Lorenz curves, explain in words the effect of higher markups on inequality. [2 marks]

(c) Suppose that to improve living standards, a politician proposes to weaken the monopoly power of firms and make markets more competitive. Explain in words why such a policy may be potentially detrimental to long-run productivity growth and explain one alternative policy that could help to increase productivity. [4 marks]