Cambridge A Level Economics 9708 — 2002 Oct/Nov Paper 2 · Variant 1

This question paper consists of 4 printed pages. SB (SLC/SLC) S08201/4 © CIE 2002 [Turn over CAMBRIDGE INTERNATIONAL EXAMINATIONS General Certificate of Education Advanced Subsidiary Level and Advanced Level ECONOMICS 9708/2 PAPER 2 Data Response and Essay (Core) OCTOBER/NOVEMBER SESSION 2002 1 hour 30 minutes Additional materials: Answer paper TIME 1 hour 30 minutes INSTRUCTIONS TO CANDIDATES Write your name, Centre number and candidate number in the spaces provided on the answer paper/ answer booklet. Answer two questions. Write your answers on the separate answer paper provided. If you use more than one sheet of paper, fasten the sheets together. Section A Answer this question. Section B Answer any one question. INFORMATION FOR CANDIDATES The questions in this paper carry equal marks. The number of marks is given in brackets [ ] at the end of each part question. You may answer with reference to your own economy or other economies that you have studied where relevant to the question.

2 9708/2/O/N/02 Section A Answer this question. 1 Cigarette Consumption For many years health campaigners have urged governments to act against smoking. In economic terms, one of their concerns is that the smoking of cigarettes generates negative externalities. Governments have responded in a number of ways: there are restrictions on who can buy cigarettes, where they can be consumed and how they can be advertised. Packs of cigarettes have health warnings printed on them and heavy indirect taxes have been imposed. (In the UK, 80 per cent of the price of a pack may go to the government.) It has been estimated that a 10 per cent increase in the price leads to a 4 per cent fall in consumption, and the weighting of tobacco in the UK Retail Price Index has been reduced from 60 in 1971 to 34 in 1998. Although smoking rates have fallen in the UK, health campaigners remain dissatisfied and call for still stronger action. Fig. 1 (a) (i) Sketch a normal demand curve for a good or service. [2] (ii) Explain whether Fig. 1 confirms that cigarettes would have a normal demand curve. [3] (b) (i) Using the data in the text, calculate the price elasticity of demand for cigarettes. [2] (ii) How might this value be explained? [3] (c) Explain, with examples, what is meant by the statement that the consumption of cigarettes generates negative externalities. [4] (d) Discuss whether high indirect taxes are the best way to discourage smoking. [6] 1989 1990 1991 1992 1993 1994 1995 0 0 10 20 30 40 50 60 70 80 90 1 2 3 4 5 6 7 Price per pack (US$) Annual consumption per capita (packs) Price and consumption of cigarettes in Canada 1989-1995 Real price Consumption

3 9708/2/O/N/02 Section B Answer one question. 2 (a) Explain the link between the basic economic problem of scarcity and opportunity cost. [8] (b) Discuss whether planning has any role to play in the allocation of resources in a modern, mixed economic system. [12] 3 (a) Explain how the international value of a currency is determined in a floating exchange rate system. [8] (b) Discuss whether an appreciation in the exchange rate is to the advantage of an economy. [12] 4 (a) Explain, with examples, the meaning of the terms public good and merit good. [8] (b) Discuss how a government might increase the provision of public and merit goods. [12]

4 9708/2/O/N/02 Copyright Acknowledgements: Question 1 Graph: Price and Consumption of cigarettes in Canada. The Guardian, 7 November, 2000.

CAMBRIDGE INTERNATIONAL EXAMINATIONS NOVEMBER 2002 GCE Advanced Subsidiary Level UNtversiTY of CAMBRIDGE Local Examinations Syndicate

Page 1 Mark Scheme Syltabus | Paper | AS Level Examinations —- November 2002 9708 2 | 1 a) i) Downward sloping demand curve (1), correct labels (1) [2] ii) Price and quantity demanded have an inverse relationship (1) normal 1989-93 or 1993-4 (1) not normal 1994-5 (1) [3] b) i) Formula or 4%/10% (1), (-).4(2) [2] ii) Inelastic (1), lack of substitutes (1), habit (1) or 1 reason explained fully (2) [3] c) Negative externalities meaning- general (1), precise (2) examples e.g. pollution, passive smoking, healthcare costs, fire costs (1) or alternatives 1 per identification [4] d) Operation of tax (1) Leaves choice to consumer, raises revenue, targeted but is regressive, ineffective and encourages evasion,(up to 4 per side). Comparison may be made against alternatives e.g. a ban or education. Both sides needed for maximum. [6] Section B 2 a) Explain the link between the basic economic problem and opportunity cost. [8] Limited resources and unlimited wants mean that scarcity will always exist. Scarcity involves choice which means the sacrifice of the next best alternative where opportunity cost comes in. Knowledge of the terms up to 3 marks Explanation of the terms up to 3 marks Explanation of the linkage up to 2 marks

Page 2 Mark Scheme Syllabus Paper AS Level Examinations - November 2002 9708 2 b) Discuss whether planning has any role to play in the allocation of resources in a modern, mixed economic system. [12] Modern economies are to varying extents mixed in nature. Resource allocation is influenced both by the private and public sectors. Recent developments suggest the superiority of market over planned economies. The demise of planning may be explained in terms of ineffective resource allocation because of planning failures and inefficiencies. Mixed systems however employ some degree of regulation or planning to correct market failures and improve social welfare. Knowledge of mixed economy and resource allocation up to 3 marks Explanation of the nature of a mixed economy up to 3 marks Analysis of the role of planning in a mixed economy up to 3 marks Discussion of the role of planning in a mixed economy up to 3 marks 3 a) Explain how the international value of a currency is determined in a floating exchange rate system. [8] The price will be set by the operation of demand and supply forces in forex markets. These forces are influenced by trade performance, capital flows, speculative flows and possible government action. Changes linked to relative interest rates, confidence, competitiveness etc will shift the curves and affect price. Recognition of price determination by demand and supply _up to 3 marks Understanding of the influences on demand and supply up to 3 marks Explanation of changes in exchange rate up to 2 marks b) Discuss whether an appreciation in its exchange rate is to the advantage of an economy. [12] An appreciation will mean more expensive exports and cheaper imports. This will affect the balance of payments, terms of trade, employment levels, cost levels and confidence in the currency. The effect will depend on the elasticities and time period involved. The links need to be explained and the benefit or drawback of the outcome examined. This might include effects on inflation, living standard growth and the need for government intervention. Recognition of the price effects of an appreciation up to 3 marks Explanation of the results of an appreciation up to 3 marks Analysis of the benefits of an appreciation up to 3 marks Discussion of the drawbacks of an appreciation up to 3 marks

Page 3 Mark Scheme ; Syllabus Paper AS Level Examinations — November 2002 9708 2 4 a) Explain, with examples, the terms public good and merit good. [8] Public goods when provided for one person are available to others. They have the properties of non rivalry and non excludability. Examples are defence, street lighting and law and order. They are not supplied by the market system. Merit goods are those which provide society with a greater benefit than enjoyed by the individual consumer. They are under-consumed through imperfect knowledge. They usually provide positive externalities and include education and health. General statement 1 mark Example 1 mark (X2) Explanation of the nature up to 2 marks b) Discuss how a government might increase the provision of public and merit goods. [12] Public goods might be provided directly by the government and financed through the tax system or borrowing. Issues to be considered include the level of provision and the effects of financing e.g. equity and efficiency issues. Merit goods might be subsidised or supplied directly. Information might be provided or compulsion introduced. Issues might include opportunity cost and effectiveness. Recognition of methods up to 3 marks Explanation of the operation of methods up to 3 marks Analysis of the impact of the methods up to 3 marks Discussion of the methods up to 3 marks