Cambridge A Level Economics 9708 — 2009 Oct/Nov Paper 4 · Variant 2

This document consists of 3 printed pages and 1 blank page. IB09 11_9708_42/2RP © UCLES 2009 [Turn over *8942093443* UNIVERSITY OF CAMBRIDGE INTERNATIONAL EXAMINATIONS General Certificate of Education Advanced Subsidiary Level and Advanced Level ECONOMICS 9708/42 Paper 4 Data Response and Essays (Supplement) October/November 2009 2 hours 15 minutes Additional Materials: Answer Booklet/Paper READ THESE INSTRUCTIONS FIRST If you have been given an Answer Booklet, follow the instructions on the front cover of the Booklet. Write your Centre number, candidate number and name on all the work you hand in. Write in dark blue or black pen. You may use a soft pencil for any diagrams, graphs or rough working. Do not use staples, paper clips, highlighters, glue or correction fluid. Section A Answer Question 1. Section B Answer any two questions. You may answer with reference to your own economy or other economies that you have studied where relevant to the question. At the end of the examination, fasten all your work securely together. The number of marks is given in brackets [ ] at the end of each question or part question.

2 © UCLES 2009 9708/42/O/N/09 Section A Answer this question. 1 Resources wasted on bottled water In developed countries drinking bottled water has become fashionable; the practice of carrying a small bottle of water is very common. However, it costs much more than water from a tap but often cannot be distinguished from such tap water. Some brands contain the same chemicals as tap water which people think they have paid to avoid. There is now a campaign to stop selling bottled water in restaurants and supply only tap water. A spokesman said ‘in the UK, in 2006, 3 billion litres of bottled water were sold. They were advertised as ‘pure as a mountain stream’ or ‘cleansed for 2 million years beneath a Siberian glacier’. Buying such water is a vanity. It is flown around the world to the UK from Norway, France, Japan and Fiji. It is bottled in glass that is mostly thrown away and is very heavy to transport, or in plastic that never decomposes. From a restaurant’s point of view selling water is almost free money. The profit mark-up is higher than on wine. The New York Ritz-Carlton hotel even has a water list alongside the wine list. A UK government minister said ‘it is morally unacceptable to spend millions of pounds on imported bottled water when we have pure cheap drinking water and when one of the crises facing other countries is the supply of water’. By contrast, in developing countries there is often no tap water. 40% of the world’s population lack basic sanitation and 1 billion people do not have safe drinking water. It would, therefore, be better for everyone and a better use of resources if the developed world stopped spending money on bottled water, drank the safe tap water instead and used the money to improve water supplies in developing countries. Environmentalists believe that the packaging, transportation and disposal of bottled water products creates unnecessary carbon dioxide emissions. It has been proposed that the government should introduce taxes to pay for the damage to the environment, either directly on the sale of each bottle of water or on the disposal of the plastic bottle. A spokesperson for the bottled water industry said that critics were forgetting that the industry generated income and that an estimated 20 000 jobs depended on the sales of bottled water. In 2007, annual sales in the UK were worth £2 billion. (a) (i) Briefly explain how a rational consumer’s equilibrium may be achieved using marginal utility theory. [4] (ii) Use the article to consider whether consumers who purchase bottled water are acting rationally and maximising their satisfaction. [4] (b) Analyse the effects that restricting the sales of bottled water might have on the UK economy. [5] (c) Discuss whether the information provided is sufficiently factual and complete to justify government regulation of the bottled water industry. [7]

3 © UCLES 2009 9708/42/O/N/09 Section B Answer any two questions from this section. 2 In 2007 BHP Billiton, a large mining group, made a bid to take over Rio Tinto, the world’s third largest mining group. Such a takeover would create the largest producer of copper and aluminium in the world. (a) Explain whether increasing its scale of production will always reduce a company’s costs. [12] (b) BHP Billiton and Rio Tinto have monopoly powers and are mining a natural resource. Discuss why the governments of the countries in which these companies operate might become concerned about this. [13] 3 By 2007, the telecommunications business had become dominated by fewer organisations. One of them, Cable and Wireless, announced there would be 3000 job losses. Another, Tiscali, announced 800 job losses and BT, the UK telecoms giant, announced a £450m major investment and restructuring resulting in thousands of job cuts. Analyse whether the above is what marginal revenue product theory predicts will happen when a labour market becomes less competitive and large investment takes place. [25] 4 (a) Explain what is meant by the transactions, precautionary and speculative demands for money. [10] (b) An employee moves to another job because it pays more. However, the old job was paid weekly and the new job is paid monthly. At the same time interest rates are increased. Discuss how these changes would affect the employee’s transactions, precautionary and speculative demands for money. [15] 5 (a) Explain whether low GDP is a good indicator that a country has a low standard of living. [12] (b) Discuss whether the main aim of a government should be to have a policy on population growth if it wishes to increase the standard of living in its country. [13] 6 (a) In some countries there has been fear of economic recession in recent years. Explain the main characteristics of an economic recession. [10] (b) Discuss the policies that might be used to bring an economic recession to an end. [15] 7 The economy of South Africa is growing faster than its potential growth rate. The Governor of the central bank of South Africa said ‘This is why we have inflation. We need to deal with inflation as it does not lead to job creation. Interest rates are the only tool available to control inflation’. Do you agree with the Governor’s opinion on inflation? [25]

4 BLANK PAGE Copyright Acknowledgements: Question 1 Question 2 Question 7 © The Times (UK); 16/02/08. © The Independent, Business Section; 09/11/2008. © The Times of Swaziland; 23/08/2007. 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. 9708/42/O/N/09

UNIVERSITY OF CAMBRIDGE INTERNATIONAL EXAMINATIONS GCE Advanced Level MARK SCHEME for the October/November 2009 question paper for the guidance of teachers 9708 ECONOMICS 9708/42 Paper 42 (Data Response and Essays – Supplement), maximum raw mark 70 This mark scheme is published as an aid to teachers and candidates, to indicate the requirements of the examination. It shows the basis on which Examiners were instructed to award marks. It does not indicate the details of the discussions that took place at an Examiners’ meeting before marking began, which would have considered the acceptability of alternative answers. 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 2009 question papers for most IGCSE, GCE Advanced Level and Advanced Subsidiary Level syllabuses and some Ordinary Level syllabuses.

Page 2 Mark Scheme: Teachers’ version Syllabus Paper GCE A LEVEL – October/November 2009 9708 42 © UCLES 2009 Section A 1 (a) (i) Explanation of relation between marginal utility, the price of good(s) and consumer satisfaction. [4] (ii) Consumers believe drinking bottled water has become fashionable. Maybe this is not irrational even though there is no evidence of maximising satisfaction as there is no real comparison with the value (satisfaction) of tap water against bottled water. Consumers may believe bottled water is better and gives them more satisfaction. [4] (b) It could lead to decreased employment, decreased incomes, trade balance improved by decreased imports. Increased revenue depending on elasticity of demand. There may be fewer external costs and less spent on dealing with the empty bottles. [5] (c) Some of the article is emotive rather than factual – vanity, advertising, implies fashionable goods are necessarily wasteful, ‘free money’ statement, notion that money saved would all go to developing countries, appears to emphasise current environmental issues. The use of phrases ‘would be better for everyone’, ‘morally unacceptable’, ‘environmentalists believe... unnecessary… emissions’. Less emotive and more factual are the statements about the relative costs of water, level of imports, long distance water is carried for import, excessive profits, the lack of any positive statement about the value of the water industry by the minister. [7]

Page 3 Mark Scheme: Teachers’ version Syllabus Paper GCE A LEVEL – October/November 2009 9708 42 © UCLES 2009 Section B General Comments for Section B: The essay questions carry a maximum mark of 25. Try not to ‘bunch’ marks, but use the whole mark range. If there is any doubt in your mind, give the benefit of doubt to the candidate. The difference in grades should be assessed on the ability of the candidate to demonstrate the various objectives of the examination listed in the syllabus and not purely on the ability to itemise further facts from the content of the syllabus. Marks should be awarded for the ability to demonstrate that aim (b) of the syllabus has been achieved as well as aim (a) – which refers to content knowledge. It is the objective of the examination, as listed in the syllabus, to assess both these aims. An overall guide for marks for individual questions is given below; these are from a total of 25. They may be applied proportionally of course to parts of questions where the total is less than 25: Mark 1–9 (Linked to Level 1 in individual question notes). 1–5 where the answer is mostly irrelevant and only contains a few valid points made incidentally in an irrelevant context. There will also be substantial omissions of analysis. 6–9 where the answer shows some knowledge but does not indicate that the meaning of the question has been properly grasped. Basic errors of theory, or an inadequate development of analysis may be evident. Mark 10–13 (Linked to Level 2 in individual question notes). 10–11 where there is evidence of an ability to identify facts or some ability at graphs and/or a fair ability to apply known laws to new situations. There should be an accurate although undeveloped explanation of the facts relating to the question together with an explanation of the theory, and evidence of some ability to discriminate and form elementary judgements. Do not expect a clear logical presentation. There will not be much evidence of the ability to recognise unstated assumptions, nor to examine the implications of a hypothesis, nor of the ability to organise ideas into a new unity. 12–13 where the answer has a more thorough relevance to the question but where the theory is incompletely explained. 14–17 (Linked to Level 3 in individual question notes). 14–15 where there is a good knowledge of the facts and theory of the question, clear evidence of the ability to use the facts and theory with accurate reference to the question that may have presented the candidate with a novel application. There should also be evidence, where appropriate, of the ability to examine the implications of the question and an attempt to distinguish between facts and value judgements. Clear statements, supported by reasoned arguments should be given and there should be some attempt at a conclusion to the question. There should be a reasoned structure to the whole answer. Do not expect too many extra illustrative points which are not explicitly referred to in the question, do not expect too much critical comment on unstated assumptions 16–17 for an answer showing a well reasoned understanding of the question’s requirements and of the relevant theory: the analysis should be sound though the illustration and development may not be very full.

Page 4 Mark Scheme: Teachers’ version Syllabus Paper GCE A LEVEL – October/November 2009 9708 42 © UCLES 2009 18–25 (Linked to Level 4 in individual question notes). 18–20 where there is a thorough knowledge of the facts and theory with an excellent ability to describe, explain or analyse this in a precise, logical, reasoned manner. There should be an ability to query some of the assumptions in the question and clear evidence of an ability to distinguish between fact and value judgements and to draw some conclusions on the matter being discussed. Conclusions should be formed and expressed within a sound structured answer so that the whole is well presented. New illustrations and apposite examples should be introduced as further evidence of an ability to recognise the principles of the question and their application to relevant current situations. 21–25 for an answer which, given the time constraint, could not be improved significantly: it will have clear analysis, ample illustration and a good attempt at considered evaluation. Be positive in your marking awarding marks for what is there without being too much influenced by omissions. Marks should not be deleted for inaccuracies. 1 2 3 4 Total mark 10 1–3 4–5 6–7 8–10 Total mark 12 1–4 5–6 7–8 9–12 Total mark 13 1–4+ 5–6+ 7–8+ 9–13 Total mark 15 1–5 6–8 9–11 12–15

Page 5 Mark Scheme: Teachers’ version Syllabus Paper GCE A LEVEL – October/November 2009 9708 42 © UCLES 2009 2 (a) Explanation of possible effect of growth in size on output and costs – the difference between the changes in total and the changes in average cost. Explanation of economies of scale and possible diseconomies of scale and possible resulting effect on profits. A conclusion. L4 For a clear explanation of average costs, a full explanation of different types of economies and possible diseconomies of large size. Good structure to the answer. (9–12) L3 For a competent explanation of average cost but with a limited development of economies, or a fuller development of only some of the economies but still with a conclusion. (7–8) L2 For a correct but weak explanation of the economies with little comment on the possible diseconomies. No explicit balance in the answer is given and the reader is left to draw conclusions. (5–6) L1 For an answer which has some basic correct facts but includes irrelevancies. Errors of theory or omissions of analysis will be substantial. (1–4) (b) Comment on market power of monopolies and effect on price; comment on the exploitation of resources by a large company which can create barriers to entry and force up prices. The government might be concerned about the lack of provision for conservation, exploitation of consumers, excessive profits, safety and health issues. L4 For a reasoned and well argued discussion with accurate development of several of the points and a reasoned conclusion. (9–13) L3 For a clear but undeveloped discussion but one which still tries to make a conclusion. The answer may comment only on one or two points about monopoly pricing and profits. (7–8) L2 For a limited attempt to consider the information but with no conclusion. (5–6) L1 For an answer which has some basic correct facts but includes irrelevancies. Errors of theory or omissions of analysis are substantial. (1–4) 3 Discussion of the theory of wages. Imperfect markets would result in reduced employment and also lower wages compared with perfect markets. Large investment is likely to cause factor substitution in favour of capital especially in telecommunications. However, productivity may go up as a result with possible beneficial effects on wages. In telecommunications, the decrease in demand for labour is unlikely to be caused by a decrease in demand for the product. L4 For a thorough explanation of the analysis of wage determination with a clear link to the explanation of wages and a clear comparison between more and less competitive markets. Overall conclusion and well-structured answer. (18–25) (14–17 for demand and supply only) L3 For a competent explanation of imperfect markets but with limited discussion and comparison and imprecise conclusion. (14–17) (10–13 for demand and supply only) L2 For a correct but undeveloped explanation with only a brief comparison and no real conclusion. (10–13) (6–9 for demand and supply only) L1 For an answer which contains inaccuracies and only a few correct points. (1–9) (1–5 for demand and supply only)

Page 6 Mark Scheme: Teachers’ version Syllabus Paper GCE A LEVEL – October/November 2009 9708 42 © UCLES 2009 4 (a) 2 marks each for transactions and precautionary, 6 for speculative demands for money. This section is an explanation, what each term means and, briefly, what it is dependent upon – income, time of year, possible future purchases, interest rates, level of interest rates and elasticity. L4 For a sound explanation with clear understanding of the concept. (8–10) L3 For a competent explanation but with more limited comment on what each term is dependent upon. (6–7) L2 For a general but very brief explanation. (4–5) L1 For an answer which has some basic correct facts but includes irrelevancies. Errors of theory or omissions of analysis will be substantial. (1–3) (b) Increase in pay will increase transactions demand, monthly rather than weekly pay will also increase transactions demand. (Candidates might mention the effect of increased use of credit cards where purchases are made but not paid for at the same time. This alters the changes in transactions as income changes that were originally suggested when the concept was developed). The higher rate of interest might encourage some minor reduction in transactions demand on a temporary basis. If precautionary demand is for unexpected expenditure there will be no change, assuming expectations are the same. Higher interest causes price of securities to fall and may increase demand for securities rather than for idle balances of money in anticipation of selling when price rises. Higher interest may increase demand for currency from foreign buyers, causing rise in exchange rate which reinforces demand for currency. Expectations about future of exchange rates may shift speculative curve. L4 For a reasoned discussion on transactions and precautionary – up to 6, on speculative – up to 9, clearly structured answer. (12–15) L3 For a competent discussion but with less development, transactions and precautionary up to 4, speculative up to 7. (9–11) L2 For a weaker attempt which gives only a brief comment and discussion. Transactions and precautionary up to 3, speculative up to 5. (6–8) L1 For an answer which has some basic correct facts but includes irrelevancies. Errors of theory or omissions of analysis will be substantial. (1–5)

Page 7 Mark Scheme: Teachers’ version Syllabus Paper GCE A LEVEL – October/November 2009 9708 42 © UCLES 2009 5 (a) Explanation of the meaning of GDP and a comparison of that indicator with other suitable indicators of standard of living. Alternative measures such as GDP per head, HDI, MEW should be mentioned. If no alternative measures mentioned = L3 max. L4 For a sound explanation and explicit comparison giving a good range of indicators both economic and social and a conclusion. (9–12) L3 For a competent explanation but with a limited comparison, or a fuller development of only two indicators but still with a conclusion. (7–8) L2 For a correct but weak explanation and little development. No explicit comparison given and reader is left to draw conclusions. (5–6) L1 For an answer which has some basic correct facts but includes irrelevancies. Errors of theory or omissions of analysis will be substantial. (1–4) (b) Discussion should consider what the point of a population policy might be. If it is to promote economic growth then other aims and policies might be more pertinent. A consideration of the use of resources, of the international trade, of the development of industry and services, of health care and education might be mentioned. L4 For a reasoned and well argued discussion with accurate development of the discussion and a reasoned conclusion. (9–13) L3 For a clear but undeveloped discussion but one which still tries to make a conclusion. (7–8) L2 For a limited attempt to consider the information but with no conclusion. (5–6) L1 For an answer which has some basic correct facts but includes irrelevancies. Errors of theory or omissions of analysis are substantial. (1–4) 6 (a) Description of the term using economic variables such as employment, output, prices, international trade. Candidates could describe the effects of recession on the lives of employees, companies and government. L4 For a sound explanation with clear understanding of the term. (8–10) L3 For a competent explanation but with more limited development of the idea. (6–7) L2 For a general but very brief explanation. (4–5) L1 For an answer which has some basic correct facts but includes irrelevancies. Errors of theory or omissions of analysis will be substantial. (1–3) (b) Discussion and analysis of government policies, fiscal, monetary, regulations and their effects on employment, output and growth. L4 For a reasoned discussion on different types of policy with a comment on how the policies will affect a recession. (12–15) L3 For a competent discussion but with less development and less comment on how the policies affect a recession. (9–11) L2 For a weaker attempt which gives only a brief discussion. (6–8) L1 For an answer which has some basic correct facts but includes irrelevancies. Errors of theory or omissions of analysis will be substantial. (1–5)

Page 8 Mark Scheme: Teachers’ version Syllabus Paper GCE A LEVEL – October/November 2009 9708 42 © UCLES 2009 7 Candidates should recognise that they have to comment on an argument. First, they need to decide whether inflation may be caused by the pressure on demand and on resources through fast growth. Secondly, they need to decide whether the reason for dealing with inflation is because it does not lead to job creation. The decision has to be taken whether inflation needs to be controlled and whether it is because of the lack of jobs. Thirdly, they need to consider, if inflation has to be controlled, whether interest rate policy is the only tool available. A conclusion on whether they support the argument, or parts of the argument, should be given. L4 For a thorough comment and discussion with a reasoned development of each stage of the argument, with a conclusion clearly presented. (18–25) L3 For a competent discussion but without necessarily considering each stage of the argument. There should still be a use of analysis to support the conclusion which should be clearly presented. (14–17) L2 For a correct but undeveloped discussion with only limited reference to supporting analysis and without a consideration of each stage of the argument. The structure will not be clear and the answer will be left without a definitive conclusion. (10–13) L1 For an answer which shows some knowledge but does not indicate that the question has been fully grasped, or where the answer is mostly irrelevant. (1–9)