Cambridge A Level Economics 9708 — 2010 May/June Paper 4 · Variant 3

This document consists of 3 printed pages and 1 blank page. DC (NF) 25153 © 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. * 1 5 3 3 9 7 9 0 7 4 * ECONOMICS 9708/43 Paper 4 Data Response and Essay (Supplement) May/June 2010 2 hours 15 minutes Additional Materials: Answer Booklet/Paper

2 9708/43/M/J/10 © UCLES 2010 Section A Answer this question. 1 Income, Spending and Prices in the US Table 1 Some economic indicators for the US economy personal income consumer spending consumer prices Nov 2008 fell 0.4% fell 0.8% fell 2.1% Dec 2008 fell 0.2% fell 1.0% fell 1.0% Jan 2009 rose 0.2% rose 1.0% rose 0.3% Feb 2009 fell 0.2% rose 0.2% rose 0.4% Consumer spending in the US fell by 0.8% in November 2008 and by a further 1% in December. December 2008 was the sixth consecutive month in which consumers cut back on their spending. Between October and December 2008 spending fell by a record 8.9%. Consumers were in a mood to increase their savings but not to go out and spend. Generally, that’s a good thing, but not when everyone does it at the same time. By January 2009, the savings rate in the US had reached the highest it had been for 14 years. This increase in savings was caused by low consumer confidence and the fear of higher unemployment. Declining consumer spending is a particularly troubling sign for the US economy, because spending accounts for more than two-thirds of GDP. GDP fell by 3.9% between October and December 2008, the sharpest decline in 26 years. This decline in spending resulted in – a proposed $888 billion stimulus plan from the government, including about $278 billion in tax cuts, – companies reducing their workforce to cut costs because of falling revenue, – the expectation that business investment, which accounts for about one-tenth of US GDP, would decline during 2009. 5 10 15 (a) What evidence is there in the data that the economic situation in the US improved after December 2008? [3] (b) How far is there any consistent link in the data between (i) changes in personal income and consumer spending and (ii) changes in overall prices and consumer spending? [5] (c) Explain why a fall in spending might be expected to lead to a fall in business investment. [4] (d) Do you agree that a rise in savings is generally ‘a good thing, but not when everyone does it at the same time’ (line 5)? [8]

3 9708/43/M/J/10 © UCLES 2010 Section B Answer two questions. 2 In 2007 the UK Competition Commission indicated that failure in the market mechanism would result in both winners and losers. (a) Explain why producers are usually the winners and consumers are usually the losers when the market fails. [12] (b) Discuss what the government might do when there are losers because the market mechanism has failed. [13] 3 In March 2009, the government of France agreed to pay 250 million Euros to the car manufacturer Renault, which employed 63 000 workers, on condition that it would not reduce the number of French jobs or factories. General Motors, a US car manufacturer which employed 600 000 workers, said that it needed $2 million in government aid to avoid bankruptcy. (a) Describe the characteristics and likely pricing policy of the market structure in which a car manufacturer is likely to operate. [12] (b) Discuss whether economic theory supports the idea that governments should encourage all large organisations. [13] 4 (a) Analyse whether an increase in the wage rate always leads to an increase in the number of hours worked by an individual. [10] (b) A government stated that pay increases in the coming year should be kept to a minimum. Discuss whether the main determinants of wage rates are factors such as trade unions and the government rather than market forces. [15] 5 Economic theory emphasises the idea of an equilibrium position. Discuss whether the idea of an equilibrium is a useful and practical way of explaining the behaviour of a consumer. [25] 6 (a) Explain the causes of unemployment. [12] (b) Explain what is meant by liquidity preference and discuss how it might be affected by an increase in unemployment. [13] 7 ‘Developing countries have a low standard of living, yet many have much wealth in natural resources which multi-national companies would like to exploit.’ Discuss which is the better way of increasing the standard of living: to allow multi-national companies to exploit all the natural resources, or for the government to increase expenditure on education and health. [25]

4 9708/43/M/J/10 © UCLES 2010 BLANK PAGE Copyright Acknowledgements: Question 1 © http://money.cnn.com/2009/02/02/news/Economy/personal_income_spending/index; 20/04/09. 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 9708/43 Paper 43 (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 43 © UCLES 2010 Section A. 1 (a) Spending increased in Jan and Feb which would indicate an improvement; – this might be linked to the fact that price changes were no longer negative; income was also up in Jan, but fell in Feb; So some improvement. [3] (b) There is no apparent consistency between income and spending either in direction or amount. Even if spending is considered in the subsequent month to the income change there is no consistency. There is more consistency between the overall price change and spending in the direction of the change in the same month, but not in the extent of the change. Up to 3 for either comparison. [5] (c) A fall in spending will cause a fall in demand, expected revenue/profits to business will decline. If the decline is significant or if it is protracted and it is thought that the trend will continue then there will be less revenue with which to invest and no incentive to invest. [4] (d) A rise in saving could mean more funds available to lend which will stimulate the economy. However, if everyone saves more we know from the multiplier that this means reduced injections into the economy as people spend less. We are told that spending accounts for two-thirds of GNP. Increased saving and low spending affects businesses, it could cause more unemployment. It also affects the government which would probably have to spend more supporting the unemployed and also receive less in tax revenue. The data says that US government is proposing to reduce taxes but this will come at a cost later either in a switch of government expenditure – so some anticipated projects will not be funded – or in subsequently raised taxes which will not be welcome. Up to 6 for comment on positive side, up to 6 for comment on negative side – max 8 but multiplier should be mentioned on one side of the argument. If no mention of multiplier max 6. [8]

Page 3 Mark Scheme: Teachers’ version Syllabus Paper GCE AS/A LEVEL – May/June 2010 9708 43 © 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 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. 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.

Page 4 Mark Scheme: Teachers’ version Syllabus Paper GCE AS/A LEVEL – May/June 2010 9708 43 © UCLES 2010 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. 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 43 © UCLES 2010 2 (a) Market clearing where demand equals supply with the best results for everyone is based on perfect information and perfect markets. With imperfect markets and imperfect information market failure occurs. This could be because of monopoly influences with resulting higher profits for producers but higher prices for consumers – and with possibly less choice. It could be because of externalities which may affect consumers but would not necessarily have to be accounted for by producers. It could be from a lack of information – it is likely that producers will have more information about the effects of a product than consumers. L4 For a good analysis and clear explanation of both winners and losers. [9–12] L3 For a competent analysis of both sides but with less development or a concentration on one or two aspects of market failure. [7–8] L2 For a limited general explanation of market failure with only a brief evaluation or a comment concentrating on one market failure – probably monopoly. [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 the possibility of government intervention through regulation, through taxation or through control. L4 For a good analysis of both fiscal and regulative measures with a clear explanation of how they can help overcome the failure. [9–13] L3 For a competent but less developed explanation, maybe concentrating on fiscal measures. [7–8] L2 For a limited general explanation of the measures. [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]

Page 6 Mark Scheme: Teachers’ version Syllabus Paper GCE AS/A LEVEL – May/June 2010 9708 43 © UCLES 2010 3 (a) Explanation of imperfect market, probably oligopoly. Award up to L2 for an explanation of theoretical monopoly or monopolistic competition. Use full mark range if candidates use the legal definition of a monopoly rather than the theoretical definition as this allows for more than one form of monopoly. L4 For a good analysis of the characteristics with a description of the pricing policy which reflects interdependence or collusion. [9–12] L3 For a competent analysis of the characteristics and a weaker description of the possible pricing structure. [7–8] L2 For a limited general explanation of characteristics and with little on pricing policy. [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) Microeconomic theory usually suggests some advantages of large organisations because of increased efficiency, economies of scale and research and development. However, it also comments on their disadvantages – increased market power which can lead to higher prices, diseconomies which could lead to higher costs, higher profits which might be caused by restricting choice, discrimination or lower output. However, macroeconomic theory might support the idea of increasing subsidies to encourage industry, to support regions and to stimulate growth. The theory does not suggest that all large organisations should be encouraged. L4 For a good analysis of both micro and macro aspects with a conclusion about whether all large organisations should be encouraged. [9–13] L3 For an explanation which concentrates on either macro or micro or which deals with both aspects in a less developed manner. There should still be a conclusion. [7–8] L2 For a limited general explanation probably of micro analysis with no supporting conclusion. [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]

Page 7 Mark Scheme: Teachers’ version Syllabus Paper GCE AS/A LEVEL – May/June 2010 9708 43 © UCLES 2010 4 (a) Normally increase in wages leads to increase in number of hours. Exception: backward supply curve where higher wages causes substitution effect – more work taken instead of leisure – but this is outweighed by income effect – less need to work the hours – and overall fewer hours are worked. L4 For a sound explanation with clear understanding of the analysis and a clear conclusion. [8–10] L3 For a competent explanation but with limited development of the income and substitution effect. There should still be a conclusion. [6–7] L2 For a general explanation with little detail and no conclusion. [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) In perfect competition, market forces dominate. In imperfect competition, institutional factors such as government, trade unions will influence the final level of wages. The government is able to control public sector pay but not private sector pay. L4 For a reasoned discussion and clearly structured answer with sound knowledge of the analysis of both perfect and imperfect markets with a conclusion. [12–15] L3 For a competent discussion, but without such a full development. There should still be a conclusion. [9–11] L2 For a limited but acceptable attempt to describe the theory but without any real development and without a conclusion. [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] 5 Candidates should explain the nature of the equilibrium in terms of marginal utility theory for the consumer. They should comment on how the equilibrium is reached and then comment on the relevance of the theory. For the consumer there is the difficulty of measuring utility, comparing utility between goods, and persuasion to buy through advertising and not through consumer’s calculation of utility. L4 For a clear discussion of the analysis using the equi-marginal principle and a good comment on the usefulness and practicality of giving a value to the equilibrium position. A conclusion should be given. [18–25] L3 For a competent discussion the analysis but a weaker evaluation of its practical usefulness. Some attempt at a conclusion will be presented. [14–17] L2 For a brief comment on the analysis with very limited evaluation, or a fuller comment on the analysis but with no evaluation and no 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 contains irrelevancies and errors of theory. [1–9]

Page 8 Mark Scheme: Teachers’ version Syllabus Paper GCE AS/A LEVEL – May/June 2010 9708 43 © UCLES 2010 6 (a) explanation of the different causes of unemployment. L4 For a clear explanation with accurate development of at least four causes of unemployment, cyclical, structural, frictional, seasonal, voluntary. [9–12] L3 For a clear explanation of at least three causes or more than three with undeveloped explanation. [7–8] L2 For a limited attempt with little development. [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) Demand for money/liquidity preference based on transactions plus precautionary demand – the demand for active balances. It is determined by income; frequency with which people are paid; time of year; method of payment – use of credit cards reduces active balance demand; some influence on precautionary demand from the rate of interest – although this is likely to be more relevant to firms’ active balances than individuals. An increase in unemployment would affect income, but there may be compensating changes in the use of credit cards. Possible reductions in consumer spending would affect firms receipts and their liquidity preference. Some unemployment, e.g. seasonal, could be already accounted for in the determinants of liquidity preference L4 For a good analysis of liquidity preference and a clear attempt to link changes in unemployment to that demand for money. [9–13] L3 For a less developed explanation with weaker links to the changes in unemployment. [7–8] L2 For a limited general explanation. [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 Candidates should comment on the meaning of ‘standard of living’ and general influences on the standard of living – with a brief comment on the value of different indicators, for example, GDP, GDP per capita, HDI. They should then consider how the use of natural resources might increase the standard of living – short term and long term – and if so whether it is a good policy to allow multinational companies to use the resources and if so to what extent they should be used. They should then consider alterative policies which might improve living standards particularly the value of government spending on education and health and the link between this expenditure and likely changes in the standard of living. L4 For a discussion of the factors which are involved in the analysis of each the stages of the argument together with a conclusion. [18–25] L3 For a competent discussion of part of the argument – probably that related to the explanation of living standards and government policy – with briefer comment on resource exploitation. Some attempt at a conclusion will be presented. [14–17] L2 For a brief comment on part of the argument, with a weak explanation of the analysis and with no 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 contains irrelevancies and errors of theory. [1–9]