Cambridge A Level Economics 9708 — 2012 Oct/Nov Paper 4 · Variant 3

This document consists of 4 printed pages. DC (NF/CGW) 52331/3 © UCLES 2012 [Turn over UNIVERSITY OF CAMBRIDGE INTERNATIONAL EXAMINATIONS General Certificate of Education Advanced Level * 6 3 8 9 8 2 2 9 1 2 * ECONOMICS 9708/43 Paper 4 Data Response and Essays (Supplement) October/November 2012 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 9708/43/O/N/12 © UCLES 2012 Section A Answer this question. 1 The virtual economy is set to make billions There has been a rapid growth in companies that sell ‘virtual goods’ on the Internet. The goods do not exist, they are only pictures on a screen used to play computer games. One game for example puts the consumer in the position of a farmer. Items for the farm, such as farm animals, crops and farm buildings, can be purchased. However, the farm buildings and the crops and animals are not real. They are only computer graphics on the consumer’s home computer. One firm has spent US$10m in the last ten years promoting these games. Its director said ‘In the last two years we have seen the revenue of firms in this industry go from nothing to tens and hundreds of millions of dollars.’ The director of another firm said ‘We have two different revenue sources. The first is the sale of the virtual goods for the games, the second is the revenue from other firms who wish to advertise within the game.’ Some items are acquired by consumers because they accumulate points by completing an activity within the game, such as harvesting a crop. Other items can be purchased to speed up the game. Part of the motive, said one consumer who spends about US$10 a month on virtual goods, is to impress your friends and let them see all the virtual goods you have won or bought. It has now become a popular thing to do. Central to the increased popularity of the games is the fact that the virtual goods can be purchased through social networking sites such as Facebook and MySpace. Fig. 1: Facebook’s Membership 400 500 million 300 200 100 Dec 2004 Jul 2010 Aug ‘08 100 million Jul ‘10 500 million Feb ‘10 400 million Dec ‘04 1 million Proof of the attraction of this market is the fact that the social networking sites are negotiating with the virtual goods firms to get a percentage of the revenue every time a consumer purchases a virtual tractor or crop. The promoters of the virtual goods say it enables consumers to buy products without the rush and crowds of shops. They are easy to buy and that is why people are prepared to buy products that do not exist. The firms claim that tens of millions of people buy the virtual products. In December 2009 one of the firms sold part of its business to another firm for US$113 million, whilst another was valued at US$400 million. The director of one virtual goods firm said ‘the industry is one of the most exciting developments of 2009, it is in the early stages of growth but it is growing fast.’

3 9708/43/O/N/12 © UCLES 2012 [Turn over (a) Identify two reasons given why people purchase virtual goods. [2] (b) (i) What indicators may be used to determine whether a firm is large or small? [4] (ii) Is the evidence given enough for you to determine whether the firms that sell virtual goods are large or small? [4] (c) The article says that customer numbers are increasing rapidly. What is likely to happen to the total fixed costs and total variable costs of the virtual goods company as this occurs? [4] (d) From the evidence given, discuss whether it is wise for a firm to spend money advertising products that do not exist through sites such as Facebook on the internet. [6] Section B Answer two questions. 2 ‘The achievement of equilibrium in a market rests solely on the ability to measure marginal utility. This is not possible and, therefore, equilibrium in a market can never be achieved.’ Discuss this argument. [25] 3 (a) With the help of diagrams, analyse how a firm can experience both diminishing returns and economies of scale. [12] (b) ‘Monopolies create a deadweight loss. They should always be discouraged.’ Discuss this opinion. [13] 4 The economic analysis of wage determination states that all wages rates in different occupations will in the long run become the same and equal to the average product of labour. Discuss this statement. [25] 5 In 2010 a number of governments were concerned that they had large budget deficits. A group of economists recommended that the deficit should be reduced by public spending cuts rather than tax increases. (a) Explain what is meant by a budget deficit and why a large deficit might be a source of concern. [12] (b) Discuss the similarities and differences of using spending cuts or tax increases as a means of solving budget deficits. [13]

4 9708/43/O/N/12 © UCLES 2012 6 (a) Explain the causes of unemployment and consider which cause is the most significant for a country with which you are familiar. [12] (b) The main guide to the economic development of a country is the proportion of its working population engaged in the tertiary sector. Discuss whether this statement is true. [13] 7 The table below shows figures for GDP for two countries in 2000 and 2010. Country GDP 2000 $US billions GDP 2010 $US billions USA 9 825 13 271 India 469 929 Discuss whether the above figures are sufficient to conclude that the standard of living in the USA is higher than the standard of living in India. [25] Copyright Acknowledgements: Question 1 © BBC news channel bbc/co.uk/1/hi/technology/8425623.stm accessed 30/12/09). Figure 1 © Facebook.com. 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.

CAMBRIDGE INTERNATIONAL EXAMINATIONS GCE Advanced Subsidiary Level and GCE Advanced Level MARK SCHEME for the October/November 2012 series 9708 ECONOMICS 9708/43 Paper 4 (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 should be read in conjunction with the question paper and the Principal Examiner Report for Teachers. Cambridge will not enter into discussions about these mark schemes. Cambridge is publishing the mark schemes for the October/November 2012 series for most IGCSE, GCE Advanced Level and Advanced Subsidiary Level components and some Ordinary Level components.

Page 2 Mark Scheme Syllabus Paper GCE AS/A LEVEL – October/November 2012 9708 43 © Cambridge International Examinations 2012 Section A 1 (a) Easy to buy; show off to friends [2] (b) (i) Explanaion of different possible criteria – output level, size of workforce, turnover, market share, capital investment [4] (ii) There is not enough data to be sure; candidates should make a judgement about what might be considered to represent a large firm. They may suggest that capital of $10m is large, revenue large, employment small, market share unknown, value of companies $113m and $400m large. However they may give reasons to suggest that some of these figures represent smaller firms in the communications industry. There should be an overall judgment. [4] (c) Accept any reasoned answer. Fixed costs may increase if there are developments in computer software or the purchase of bigger computers to cope with the demand; variable costs may not increase unless extra staff are needed to monitor the computer use and deal with payments records, or in marketing to persuade other companies to advertise on the site. [4] (d) Evidence that it is wise: big demand, – increased revenue – get others to pay to advertise – value of company Evidence that it is unwise: new/risky – fashionable [6]

Page 3 Mark Scheme Syllabus Paper GCE AS/A LEVEL – October/November 2012 9708 43 © Cambridge International Examinations 2012 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. 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 Syllabus Paper GCE AS/A LEVEL – October/November 2012 9708 43 © Cambridge International Examinations 2012 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 2 Candidates should discuss the argument presented. They should explain productive and allocative efficiency; they should explain diminishing marginal utility; they should consider whether there is a link between the efficiency and utility; they should consider the conclusion of the argument. [25] L4 For a thorough explanation of efficiency and utility and a consideration of the argument in the question. A reasoned conclusion should be presented [18–25] L3 For a competent but more limited comment on both efficiency and utility or a full explanation but little comment on whether there is link between them. There should still be some judgement on the conclusion in the question. [14–17] L2 For an undeveloped explanation of efficiency/utility with very little discussion of whether there is a link between them. It is likely that no overall comment on the conclusion in the question will be given. [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 5 Mark Scheme Syllabus Paper GCE AS/A LEVEL – October/November 2012 9708 43 © Cambridge International Examinations 2012 3 (a) Explanation of diminishing returns in the short run and economies of scale in the long run. [12] L4 For a sound explanation of both concepts with accurate clear diagrams and a clear understanding of the principles involved [9– 2] L3 For an accurate reference to the question but with a more limited explanation perhaps concentrating on one of the concepts – probably economies of scale – or with minor errors in the analysis or in the diagrams [7–8] L2 For a poor explanation of the concepts, or a more accurate explanation but with inaccurate diagrams to support the text [5–6] L1 For an answer which has some basic correct facts but includes irrelevancies and errors of theory [1-4] (b) Explanation of deadweight loss and a discussion on the merits of monopolies. [13] L4 For a sound explanation of the analysis and a good discussion of the merits and demerits of monopoly with a conclusion [9–3] L3 For a competent comment on the analysis but with limited development of the discussion on monopolies and a weaker conclusion. [7–8 ] L2 For a brief explanation and with a weak discussion [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] 4 Explanation of the economic theory of wages and a comparison of the perfect and imperfect factor market. Wage rates will equal average product in perfect competition; wage rates will not be equal between different occupations. [25] L4 For a thorough analysis of theoretical wage determination with a clear discussion of the difference between the perfect market and imperfect market and a comment on the differences in wage rates. (14–17 for demand and supply only with institutional factors and government policy) [18–25] L3 For a competent explanation but with limited discussion of the perfect imperfect market comparison or with little comment on whether wage rates will become equal. (10–13 for demand and supply) [14–17] L2 For a correct but undeveloped theoretical analysis or with no comment on whether wage rates will become equal. (6–9 for demand and supply) [10–13] 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 Syllabus Paper GCE AS/A LEVEL – October/November 2012 9708 43 © Cambridge International Examinations 2012 5 (a) Explanation of public sector/government budget and meaning of deficit; comment on possible concerns over international standing, wasteful use of resources, inefficiencies, inability to raise finance, short term v long term. [12] L4 For a sound explanation of the analysis and a clear understanding with a conclusion [9–12] L3 For a competent comment but with limited development of the analysis and a weaker conclusion. [7–8] L2 For a brief explanation and with a weak comment on the possible problems and no conclusion [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 of the effects, one affects revenue, the other expenditure. Both aim to reduce the gap between revenue and expenditure. They affect different groups of people. Spending cuts may affect necessary services, be implemented unequally, be more readily applied to public sector provision. The amount of revenue generated by tax increases depends on the type of tax and, if indirect, on the elasticity of demand for the product. If the taxes are on income they may also affect hours worked detrimentally. [13] L4 For a sound discussion with good explanation of the analysis and a clear understanding of the similarities and differences [9–13] L3 For a competent comment but with more limited development of the differences [7–8] L2 For a brief explanation and with a weak discussion of the effects [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] 6 (a) Explanation of the different causes of unemployment with a comment on the significance for the candidate’s country. [12] L4 For a clear explanation with accurate development of at least four causes of unemployment and a comment on their own country [9–12] L3 For a clear explanation of at least three causes or more than three with undeveloped explanation or lack of comment on significance. [7–8] L2 For a limited attempt with little development of either causes or significance [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 Syllabus Paper GCE AS/A LEVEL – October/November 2012 9708 43 © Cambridge International Examinations 2012 (b) Discussion of occupational distribution of the population of a developing/developed country and a consideration whether this is the most significant indicator of development. [13] L4 For a sound discussion with good explanation of the characteristics with a conclusion. [9–13] L3 For a competent comment but with limited development but still with a conclusion [7–8] L2 For a brief explanation and with a weak discussion and no conclusion [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 The figures give only GDP. They may lead to the conclusion that it is likely that the standard of living is higher in the US than in India, but not definitely. GDP does not include: non-marketed items (jobs done yourself, which is in the measure of economic welfare (MEW); the underground economy; the effect of externalities; the distribution of income; the size of the population; whether expenditure has been on production which increases standard of living in the future but not necessarily in the short term; whether the increase in production has been at the expense of leisure time and well-being. [25] L4 For a thorough explanation of the difficulties of using GDP, a comment on the figures given and how they might be used effectively. There should be a conclusion which should refer to the stimulus. [18–25] L3 For a competent explanation which does not fully analyse the difficulties of using GDP but makes some attempt at evaluation and tries link the discussion to the stimulus. A brief conclusion should be stated. [14–17] L2 For an accurate though undeveloped explanation with some attempt at analysis but no real attempt to link to the stimulus given. [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]