Cambridge A Level Economics 9708 — 2010 May/June Paper 4 · Variant 1

This document consists of 4 printed pages. DC (SM/SW) 17086/4 © UCLES 2010 [Turn over UNIVERSITY OF CAMBRIDGE INTERNATIONAL EXAMINATIONS General Certificate of Education Advanced Level 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 5 8 1 8 4 3 6 3 5 * ECONOMICS 9708/41 Paper 4 Data Response and Essay (Supplement) May/June 2010 2 hours 15 minutes Additional Materials: Answer Booklet/Paper

2 9708/41/M/J/10 © UCLES 2010 Section A Answer this question. 1 Interest rates, inflation and growth Between 1 July and 1 October 2007, the GDP of the US rose at an annual equivalent rate of 4.0%. This was faster than the forecast rate of 3.1%. The rise was caused by an increase in consumer spending and by rising exports. By November 2007, however, there were increased signs of a housing market slump, a rise in oil prices and a fall in the value of the US dollar. These changes presented the Federal Reserve (the US central bank) with a problem about interest rates. The Federal Reserve had already cut interest rates in October 2007 and it reduced the interest rate again in November in order to help defend the US economy against the worsening housing market. Further interest rate cuts were thought unlikely, as there was anxiety over the rising price of oil, which by November 2007 had reached a record level. The Federal Reserve said ‘recent increases in energy and commodity prices may result in further inflation’. A difficult balance: conflicting policy objectives 5.5 4.5 3.5 2.5 1.5 0.5 03 04 05 06 07 . . . so the Federal Reserve acted to cut borrowing costs % US interest rate Fig. 2: US interest rate 100 90 80 70 60 50 40 30 20 10 07 06 05 04 03 02 01 00 but soaring oil prices pose an inflation threat . . . year $ per barrel Fig. 3: US crude oil price 1.5 1.4 1.3 1.2 1.1 1.0 0.9 0.8 07 06 05 04 03 02 01 00 . . . and so does the falling dollar dollars to the euro $ Fig. 4: Dollars to the Euro 25 20 15 10 5 0 –5 –10 88 07 00 America’s housing market is slumping . . . annual % change year Fig. 1: House price index

3 9708/41/M/J/10 © UCLES 2010 [Turn over (a) Name two components of aggregate demand not mentioned in the first paragraph of the extract. [2] (b) Calculate the percentage increase in the GDP of the US between 1 July and 1 October 2007. [2] (c) Why does Fig. 4 refer to a ‘falling dollar’ when the trend of the line is upward? [2] (d) Discuss the likely effectiveness of a reduction in interest rates as a solution to a housing market slump. [6] (e) To what extent does the data support the view that the US economy was facing ‘conflicting policy objectives’? [8] Section B Answer two questions from this section. 2 (a) Explain what is meant by an efficient market equilibrium. [12] (b) Discuss how the market mechanism might fail in the allocation of resources. [13] 3 In 2007 the cost of a single ticket on London trains bought at the time of travel was £4. The same ticket bought in advance was £2.50 if used up to 19.00 hrs and £2 after 19.00 hrs. Children could travel free at any time, and those over 60 could travel free after 09.00 hrs. (a) Explain what is meant by price discrimination and analyse what evidence there is of price discrimination in the above statement. [12] (b) Discuss how the output and pricing policy adopted by a firm might differ depending on the market structure in which it operates. [13] 4 ‘The level of wage rates is not satisfactorily explained by economic theory because that theory concentrates on perfect competition while most labour markets are imperfect.’ Discuss whether this claim is true. [25] 5 For some years governments of developed countries have been promoting Fair Trade, which means paying a fair price for primary products bought from African developing countries. Now the governments in developed countries, anxious to conserve resources, are complaining that the transport of products around the world increases pollution and should be limited. They support instead the purchase of goods produced at home. These are often more expensive to produce. African farmers may be left with products that their local people do not eat. (a) Explain what might determine whether a country is classified as developed or developing. [12] (b) Discuss whether the old and the new approaches to trade of the developed countries would help achieve the conservation of resources. [13]

4 9708/41/M/J/10 © UCLES 2010 6 (a) A firm undertakes a major investment. Analyse why in a closed economy without a government the increase in national income from this investment might be higher than in an open mixed economy. [12] (b) Discuss the policies that a government might use to influence the level of investment in an economy. [13] 7 Economic analysis adequately explains how a rational consumer determines a pattern of consumption from a given income in a perfect market with no advertising. It does not explain the more common case of what happens if income changes or if there is advertising. The theory is, therefore, of little merit. Do you agree with these assertions? [25] Copyright Acknowledgements: Question 1 © The Times Business Section; page 44-4; 01/11/2007 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.

UNIVERSITY OF CAMBRIDGE INTERNATIONAL EXAMINATIONS GCE Advanced Subsidiary Level and GCE Advanced Level MARK SCHEME for the May/June 2010 question paper for the guidance of teachers 9708 ECONOMICS 9708/41 Paper 41 (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 May/June 2010 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 AS/A LEVEL – May/June 2010 9708 41 © UCLES 2010 Section A. 1 (a) government spending/investment, private investment, [2] (b) The information says 4% per year, rise in 3 months, therefore, is 1% (The question does not required an explanation but award 1 mark if there is an attempted explanation of annual equivalent rate, but an incorrect answer). [2] (c) Shows $ against euro. More $ per euro, so dollar is worth less. [2] (d) Fall in interest rates makes borrowing easier, demand for houses increases, average price of houses rises, construction industry is more likely to make profits and be willing to increase supply of houses – presuming that banks are willing to lend to consumers up to 4 if no evaluation. [6] (e) Housing market slump could lead to increased unemployment – beginning in the construction industry but spreading to industries which supply contents for houses and materials for house building. The slump could be helped by lower interest rates. However, lower interest rates and the increase in oil prices might increase inflation. Falling interest rates could also increase spending and put further pressure on inflation. Value of dollar is declining and this causes further pressures on the balance of payments and exports. [8]

Page 3 Mark Scheme: Teachers’ version Syllabus Paper GCE AS/A LEVEL – May/June 2010 9708 41 © UCLES 2010 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 one 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 two 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 organize 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. Mark 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 AS/A LEVEL – May/June 2010 9708 41 © UCLES 2010 Mark 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. Corresponding marks for sub-sections. 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 AS/A LEVEL – May/June 2010 9708 41 © UCLES 2010 2 (a) Explanation of equilibrium in terms of productive efficiency and allocative efficiency. L4 For a clear explanation of both types of efficiency and a comment on the possibility of achieving efficiency in different market structures. [9–12] L3 For a more limited explanation of both types of efficiency but with little comment. [7–8] L2 For a limited attempt probably with an explanation of only productive efficiency or a more general explanation using demand and supply curves only. [5–6] L1 For an answer which has some basic correct facts but includes irrelevancies. There will be errors of theory or omissions of analysis. [1–4] (b) Discussion of areas of market failure through lack of knowledge, imperfections, monopolies and externalities. L4 For a sound discussion with good explanation of the several market failures with a discussion of the resulting misallocation of resources. [9–13] L3 For a full comment of one market failure, probably monopoly or externalities and a briefer discussion of the effect on the allocation of resources. [7–8] L2 For a correct but very limited explanation of market failure, either with a brief examples or in general terms. [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]

Page 6 Mark Scheme: Teachers’ version Syllabus Paper GCE AS/A LEVEL – May/June 2010 9708 41 © UCLES 2010 3 (a) Explanation of price discrimination requiring separate markets for the same product and different elasticities for it to be profitable. Difference in the time of day. Could be argued to be a separate product. Different fares for different people – who may have different elasiticities of demand – on the same service does separate the market for the same product. Those who cannot buy fares in advance also face price discrimination. L4 For a clear explanation of price discrimination with mention of both separate markets and different elasiticities. Good discussion and application to the examples given. [9–12] L3 For a more limited explanation of price discrimination, possibly not mentioning elasiticity and a more limited consideration of the examples given. [7–8] L2 For a very general comment on price discrimination with limited analysis and only brief comment on the examples given. [5–6] L1 For an answer which has some basic correct facts but includes irrelevancies. There will be errors of theory or omissions of analysis. [1–4] (b) Discussion of output and pricing policy in different market structures. Market price and output in perfect competition against attempts to control the price and output in imperfect competition. Candidates could mention maximum profits, price leadership, collusion, interdependence and oligopoly, non-price competition, establishing barriers to entry. L4 For a reasoned and full discussion and clearly structured answer on which covers three market structures, probably perfect competition, monopoly and one other. [9–13] L3 For a competent but less developed discussion of three market structures or a fuller discussion of two market structures. [7–8] L2 For a limited but attempt at two market structures or a full account or one market structure. [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]

Page 7 Mark Scheme: Teachers’ version Syllabus Paper GCE AS/A LEVEL – May/June 2010 9708 41 © UCLES 2010 4 Discussion of the theory of wages i.e. marginal revenue productivity theory (MRP). Labour markets may be imperfect but the theory does explain imperfect markets. It does not give a definitive answer to the level of wages where negotiations exist, or where there are trade unions, or government intervention. It gives the limits between which the wage will be fixed. L4 For a thorough explanation of the analysis of wage determination with a clear link to the explanation of wages with discussion of institutional factors and government policy. [18–25] (14–17 for demand and supply only without institutional factors and government policy) L3 For a competent explanation but with limited discussion and application and imprecise conclusion. [14–17] (10–13 for demand and supply only) L2 For a correct but undeveloped explanation with only brief application and no real conclusion. (6–9 for demand and supply only) [10–13] L1 For an answer which contains inaccuracies and only a few correct points. [1–9] (1–5 for demand and supply only) 5 (a) Explanation of the characteristic differences between a developing country and a developed country. L4 For a sound explanation and explicit comparison of the characteristics giving a good range of indicators both economic and social. [9–12] L3 For a competent explanation but with a limited development, or a fuller development of only a few characteristics but still with an explicit comparison. [7–8] L2 For a correct but weak explanation of the characteristics 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 using information given. Fair Trade might promote specialisation and, therefore, a better use of resources which overall, might lead to some ‘conservation’. The use of home products could well cost more to produce especially if they require use of extra heat or fertilisers. The weather may not be as suitable for them and the saving in transport cost could be outweighed by extra production costs. 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]

Page 8 Mark Scheme: Teachers’ version Syllabus Paper GCE AS/A LEVEL – May/June 2010 9708 41 © UCLES 2010 6 (a) Analysis and explanation of the working of the multiplier showing the link between investment and national income, recognising that there would be no leakages to taxes and imports in the pure market economy. L4 For a sound explanation with clear understanding of the principle involved. [9–12] L3 For a competent explanation but with limited development. [7–8] L2 For a general explanation probably in descriptive form. [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) The government might wish to influence the investment by using fiscal or monetary policy. It might also influence the investment of the private sector by regulation. It can use taxes or subsidies, interest rates, regulations or controls. L4 For a reasoned discussion and clearly structured answer with several alternative policies. [9–13] L3 For a competent discussion but with a more limited range of policies. [7–8] L2 For a weaker attempt which may concentrate on only one type of policy, not present any drawbacks of that policy or not develop any wider analysis. [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] 7 There are three different parts to the argument. Candidates should explain utility theory and consumer equilibrium. They should then consider whether the theory allows for account to be taken of a change in income and whether the existence of advertising, which could provide more information and increases rational choice, might be included in the theory. Even if the advertising is purely persuasive the belief that it is correct might also be considered to be the basis for a rational choice. They should then consider whether the overall conclusion of the argument is correct. L4 For a thorough explanation of the theory and a reasoned discussion of the results of an change in income and of the influence of advertising. [18–25] L3 For a competent explanation of the theory but a more limited discussion of the other elements in the assertion. Probably the income aspect will be better dealt with than the advertising. [14–17] L2 For a correct but undeveloped explanation of the theory and only a brief discussion of the other elements to the assertion. [10–13] L4 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]