Cambridge A Level Economics 9708 — 2007 Oct/Nov Paper 3 · Variant 1

This document consists of 12 printed pages. IB07 11_9708_03/4RP © UCLES 2007 [Turn over *1222444952* UNIVERSITY OF CAMBRIDGE INTERNATIONAL EXAMINATIONS General Certificate of Education Advanced Level ECONOMICS 9708/03 Paper 3 Multiple Choice (Supplement) October/November 2007 1 hour Additional Materials: Multiple Choice Answer Sheet Soft clean eraser Soft pencil (type B or HB is recommended) READ THESE INSTRUCTIONS FIRST Write in soft pencil. Do not use staples, paper clips, highlighters, glue or correction fluid. Write your name, Centre number and candidate number on the Answer Sheet in the spaces provided unless this has been done for you. There are thirty questions on this paper. Answer all questions. For each question there are four possible answers A, B, C and D. Choose the one you consider correct and record your choice in soft pencil on the separate Answer Sheet. Read the instructions on the Answer Sheet very carefully. Each correct answer will score one mark. A mark will not be deducted for a wrong answer. Any rough working should be done in this booklet.

2 © UCLES 2007 9708/03/O/N/07 1 In the diagram, a firm increases its output from OY to OZ. MC AR O Y Z costs and revenue output Which statement about the effect on economic efficiency is correct? A It will increase because a greater quantity will be produced and higher total revenue will be earned. B It will increase because the value that consumers place on the product comes closer to the cost of producing the last unit. C It will decline because both average and marginal revenue will fall. D It will decline because both total and marginal cost will rise. 2 A consumer allocates his expenditure between three goods, X, Y and Z. The table shows the consumer's marginal utilities for these goods and their prices. good X Y Z marginal utility (units) 50 30 25 price ($) 20 15 10 How should the consumer's expenditure be reallocated in order to maximise his utility? X Y Z A more more less B more less more C less more less D less less more

3 © UCLES 2007 9708/03/O/N/07 [Turn over 3 What is not held constant when calculating the substitution effect of a change in the price of a good? A the consumer’s expenditure on other goods B the consumer’s money income C the consumer’s tastes D the prices of other goods 4 The diagram shows the short-run relationship between the total output of a firm and the quantity of labour. total output quantity of labour 0 total output What can be concluded about the firm? A It is experiencing increasing returns to scale. B It is experiencing constant returns to scale. C The marginal physical product of capital is constant. D The marginal physical product of labour eventually diminishes. 5 The introduction of equal pay legislation in a country increases the wages of female workers. What will be the most likely effect of this increase? A a reduction of the rate of female unemployment B a reduction in the wages of male workers C an expansion in the supply of female workers D substitution of female workers for male workers

4 © UCLES 2007 9708/03/O/N/07 6 The diagram shows an industry’s demand for and supply of labour. D S L M O N employment W0 wage rate Initially the labour market is in equilibrium. The workers then form a trade union which negotiates a wage equal to OW0 with the employers. What will be the effect on the level of employment in the industry? A an increase equal to MN B an increase equal to LM C a decrease equal to LN D a decrease equal to LM 7 The table shows a firm’s total and marginal costs. output total cost ($) marginal cost ($) 1 200 20 2 215 15 3 225 10 4 240 15 5 260 20 What is the average fixed cost of producing 6 units? A $20 B $30 C $180 D $200 8 Which of the following costs of a firm is most likely to rise as it expands? A the rate of interest paid on borrowing B the price of components C the cost of monitoring workers’ inputs D energy costs per unit of output

5 © UCLES 2007 9708/03/O/N/07 [Turn over 9 A monopolist faces a downward-sloping straight-line demand curve. Which diagram shows his total revenue curve (TR)? output O A B output O total revenue total revenue TR TR C D output O output O total revenue total revenue TR TR 10 The diagram shows a firm’s cost and revenue curves. O cost / revenue output MR Q AR MC AC Which policy objective is consistent with a decision by the firm to produce output OQ? A maximising profit B maximising revenue subject to earning a normal profit C maximising sales revenue D satisficing profits

6 © UCLES 2007 9708/03/O/N/07 11 Which feature of oligopoly is being assumed when the demand curve for an individual firm is as shown in the diagram? quantity price D D O A price discrimination B price leadership by the dominant firm C interdependence between firms D collusion between firms 12 Instead of charging all its customers the same price, a firm decides to charge different prices in different markets. How is this likely to affect consumers' surplus and the firm's marketing costs? consumers' surplus marketing costs A decrease decrease B decrease increase C increase increase D increase decrease 13 At its current level of output a monopolist is on the price-inelastic part of its demand curve. Which changes should it make to price and output in order to maximise its profits? price output A increase increase B increase decrease C decrease decrease D decrease increase

7 © UCLES 2007 9708/03/O/N/07 [Turn over 14 What is not an example of ‘market failure’? A inequality in the distribution of income B a monopolist charging prices above marginal cost C the damage to common land due to overgrazing D aircraft noise affecting individuals living near airports 15 In the diagram, D is a country’s demand curve for an imported good which cannot be produced domestically. The world market price is OPw. D O price x y Pw Pc quantity Which area measures the deadweight loss to the country of imposing an import tariff equal to PwPc on the good? A x + y B x C y D x – y 16 What should an industry regulator control if it wishes to provide an incentive for a privatised firm to improve its productive efficiency? A dividends B output C prices D profits

8 © UCLES 2007 9708/03/O/N/07 17 The introduction of a congestion charge on private motorists entering a city centre results in a significant reduction in traffic congestion. What will be the net welfare effects on the following groups of car users? those who continue to use their cars those who no longer travel those who switch to public transport A uncertain lose uncertain B uncertain uncertain gain C lose lose gain D lose uncertain uncertain 18 What will directly result in an increase in China's Gross National Product? A increased wages earned in a Malaysian-owned factory in China B increased imports of goods and services C increased outflows of net property income D increased taxes on domestic expenditure 19 Over a given period, the nominal value of a country’s national income increased by 10 % and the average price level increased by 20 %. What can be deduced from this information? A The country’s money supply increased by 10 %. B There was an increase in the income velocity of circulation. C There was a reduction in the demand for money. D There was a reduction in the volume of output. 20 A country’s government runs a budget surplus of $10 billion. What must the country’s central bank do to prevent cash reserves of the commercial banks from falling? A buy bonds of a value at least equal to $10 billion B buy bonds of a value less than $10 billion C sell bonds of a value at least equal to $10 billion D sell bonds of a value less than $10 billion

9 © UCLES 2007 9708/03/O/N/07 [Turn over 21 The diagram shows a two-sector economy. Initially consumption is C, investment is I1 and the equilibrium level of income is Y1. Investment increases to I2 giving a new equilibrium level of income, Y2. consumption, investment R S T U O 45° Y1 Y2 real national income C + I2 C + I1 What is the value of the multiplier? A TU RS B RU RS C TU RU D RU TU 22 What is likely to cause a decrease in aggregate supply? A a decrease in consumption expenditure B an increase in labour productivity C a decrease in rates of unemployment benefit D an increase in wage costs per unit of output 23 The diagram shows the two main components (X and Y) of the liquidity preference curve. quantity of money rate of interest X Y O What can be concluded about component X? A It is an active balance and is interest-elastic. B It is an active balance and is interest-inelastic. C It is an idle balance and is interest-elastic. D It is an idle balance and is interest-inelastic.

10 © UCLES 2007 9708/03/O/N/07 24 Between 2000 and 2004 Botswana experienced economic growth but there was a fall in its Human Development Index. Which combination of events could explain this apparent paradox? aggregate demand productive capacity life expectancy A increase increase increase B increase increase decrease C decrease decrease increase D decrease decrease decrease 25 What would explain why the prices of the primary commodities produced by less developed countries fluctuate widely from year to year? A the development of artificial substitutes for natural products B the introduction of more capital-intensive methods of production by producers C inelasticity of both the supply and demand for these products D improvements in agricultural productivity 26 The diagram shows the relationship between the rate of increase in wages and the rate of unemployment. rate of increase in wages O rate of unemployment What would be likely to cause the curve in the diagram to shift upwards and to the right? A a reduction in regional differences in unemployment rates B a reduction in the proportion of the workforce belonging to trade unions C an increase in the unemployment rate D the expectation of a higher rate of inflation

11 © UCLES 2007 9708/03/O/N/07 [Turn over 27 What would be most likely in the short run to cause an increase in a country’s unemployment rate? A an increase in its potential output B an increase in its balance of trade surplus C an increase in the government’s budget deficit D an increase in the money supply 28 What is an example of an expansionary supply side policy? A an increase in tariffs B an increase in interest rates C an increase in spending on welfare D an increase in spending on training benefits 29 In which combination of circumstances is an increase in government expenditure likely to result in the largest increase in output? initial level of unemployment means of financing additional expenditure A high borrowing from the banking system B high increase in tax rates C low increase in tax rates D low issues of bonds to non-bank private sector

12 Permission to reproduce items where third-party owned material protected by copyright is included has been sought and cleared where possible. Every reasonable effort has been made by the publisher (UCLES) to trace copyright holders, but if any items requiring clearance have unwittingly been included, the publisher will be pleased to make amends at the earliest possible opportunity. University of Cambridge International Examinations is part of the Cambridge Assessment Group. Cambridge Assessment is the brand name of University of Cambridge Local Examinations Syndicate (UCLES), which is itself a department of the University of Cambridge. © UCLES 2007 9708/03/O/N/07 30 In the diagram, D1 is the initial demand curve for a country’s currency, S1 is the initial supply curve, and OE1 is the initial exchange rate. O quantity of currency exchange rate E2 D2 E1 S1 D1 The demand curve then shifts to D2 and the exchange rate moves to E2. What can be deduced from this? A Exchange rates are freely fluctuating. B The country’s authorities are operating a managed float. C At E2, the country’s foreign exchange reserves will fall. D Interest rates have fallen.

UNIVERSITY OF CAMBRIDGE INTERNATIONAL EXAMINATIONS GCE Advanced Level MARK SCHEME for the October/November 2007 question paper 9708 ECONOMICS 9708/03 Paper 3 (Multiple Choice (Supplement)), maximum raw mark 30 Mark schemes must be read in conjunction with the question papers and the report on the examination. • CIE will not enter into discussions or correspondence in connection with these mark schemes. CIE is publishing the mark schemes for the October/November 2007 question papers for most IGCSE, GCE Advanced Level and Advanced Subsidiary Level syllabuses and some Ordinary Level syllabuses.

Page 2 Mark Scheme Syllabus Paper GCE A LEVEL – October/November 2007 9708 03 © UCLES 2007 Question Number Key Question Number Key 1 B 16 C 2 B 17 A 3 A 18 A 4 D 19 D 5 C 20 A 6 D 21 A 7 B 22 D 8 C 23 B 9 C 24 B 10 D 25 C 11 C 26 D 12 B 27 A 13 B 28 D 14 A 29 A 15 C 30 B