Cambridge A Level Economics 9708 — 2013 May/June Paper 4 · Variant 3

This document consists of 3 printed pages and 1 blank page. DC (JF) 72005 © UCLES 2013 [Turn over UNIVERSITY OF CAMBRIDGE INTERNATIONAL EXAMINATIONS General Certificate of Education Advanced Level * 5 1 0 6 8 2 8 5 1 0 * ECONOMICS 9708/43 Paper 4 Data Response and Essays (Supplement) May/June 2013 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/M/J/13 © UCLES 2013 Section A Answer this question. 1 Macroeconomic decisions: microeconomic effects. In 2011 many countries experienced a recession. Most industries, even monopolies, in those countries saw a decline in demand, consumer spending and profits. However the decline was less severe in some firms, for example those in the food and beverage industry, than for others, for example those in the leisure industry. This fall in consumer spending and in consumer confidence might have been caused by anticipated job losses as governments announced reductions in public sector expenditure. Governments decided to reduce expenditure because they had very large budget deficits. Apart from public sector employment reductions the macroeconomic measures they introduced included fewer subsidies, tax increases and a more restrictive monetary policy. Tax increases did not help businesses. For example they made it more necessary for firms to make the control of any credit they gave a priority, and to monitor their cash flow very carefully. Increasing prices to match indirect tax increases in order to retain profit levels was not always possible when consumer demand was reduced. The alternative of reducing costs was also a problem. Some argued that firms operating with a high proportion of fixed costs found the market conditions increasingly difficult as their revenues failed to recover and the possibility for further cost reductions became more limited. Others thought that firms with a higher proportion of variable costs faced greater difficulties. Some governments also reduced investment allowances and subsidies to firms. These tax-free allowances enabled firms to deduct some of the investment cost from what they had to pay in tax. However, a reduction in the allowances had no effect on those industries that did not invest in new equipment. It did harm small and medium-sized enterprises that wanted to buy new machinery, or undertake research in order to become more efficient, or improve their products. The situation was not helped by increased restrictions imposed by the government on banks’ ability to lend. These restrictions meant borrowing for house purchases was more difficult and this again reduced consumer expenditure. (adapted from The Guardian) (a) Use the information to explain how macroeconomic changes can be linked to microeconomic decisions. [5] (b) Analyse with the aid of a diagram, showing costs and revenue for a monopoly, what is likely to happen to the firm’s profits when there is a fall in demand in the industry due to a recession. [5] (c) Suggest, using the concept of income elasticity of demand, why the decline in profits was less severe during the recession in the food industry than in the leisure industry. [4] (d) Do you support the opinion in the information that a recession is likely to be worse for firms with a high proportion of fixed costs than firms with a higher proportion of variable costs? [6]

3 9708/43/M/J/13 © UCLES 2013 Section B Answer two questions. 2 It is important that an economy makes the most efficient use of its resources. This can only be done if firms are allowed to increase in size. Government regulation of firms should, therefore, be minimised. Discuss whether you agree with this statement. [25] 3 (a) Explain how the quantity of labour employed and the wage rate are determined by a firm in a perfectly competitive labour market. [12] (b) Discuss why wage rates might be different in practice from those in a perfectly competitive labour market. [13] 4 Governments often suggest that there has been an improvement in the standard of living in their economy and support their statement by referring to a range of economic indicators. One of the indicators they use is GDP. Discuss whether GDP is a reliable indicator of changes in the standard of living in an economy. [25] 5 (a) What distinguishes a developed economy from a developing economy? [12] (b) Developing economies are often keen to encourage industrial development in rural areas. Developed economies, by contrast, often prevent industrial development in rural areas. Discuss why there might be this difference in policies. [13] 6 (a) Explain how a fall in interest rates might influence the level of investment and, as a result, national income. [12] (b) Discuss, with reference to liquidity preference theory, whether interest rates are the main determinant of consumers’ demand for money. [13] 7 (a) A newspaper reported that ‘unemployment had risen for the third consecutive month.’ What might be the cause of a rise in unemployment? [12] (b) Discuss whether achieving a fall in the level of unemployment should be the main macroeconomic aim of a government. [13]

4 9708/43/M/J/13 © UCLES 2013 Copyright Acknowledgements: Question 1 © adapted: Graeme Wearden; Surge in companies showing signs of financial distress; The Financial Section; The Guardian News and Media Ltd; 14 April 2011. 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. BLANK PAGE

CAMBRIDGE INTERNATIONAL EXAMINATIONS GCE Advanced Subsidiary Level and GCE Advanced Level MARK SCHEME for the May/June 2013 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 May/June 2013 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 – May/June 2013 9708 43 © Cambridge International Examinations 2013 Section A 1 (a) Use the information to explain how macroeconomic changes can be linked to microeconomic decisions. [5] 5 marks for effects. Those mentioned in the text of how public sector decisions have an impact on private sector firms include – reduced investment, lower profits, reduced demand, not possible to raise prices, public sector employment reduced causing a decline in confidence, fear of job losses, and possible reductions in expenditure, reduced research etc. (b) Analyse with the aid of a diagram, showing costs and revenue for a monopoly, what is likely to happen to the firm’s profits when there is a fall in demand in the industry due to a recession [5] Average revenue (ar) shifts back, marginal revenue (mr) shifts back, output declines to a new marginal cost (mc)/mr point, price falls. It is likely that profits will fall, although this might be a reduction in supernormal profit rather than a loss. Diagram: 1 for labels, 1 for shift of one curve (normally the ar one), 1 for correct change in output. 2 for explanation. (c) Suggest, using the concept of income elasticity of demand, why the decline in profits was less severe during the recession in the food industry than in the leisure industry. [4] It is likely that the food industry deals in more essential products, with lower income elasticity, possibly, and less effect on sales and revenue. This might explain the differences in changes in profit although it is uncertain how the relative costs in leisure and food were affected. (d) Do you support the opinion in the information that a recession is likely to be worse for firms with a high proportion of fixed costs than firms with a higher proportion of variable costs? [6] Explanation of differences between fixed and variable costs. Possibly the situation may be worse if the fixed costs form a high proportion of the costs and cannot be covered nor, in the short run, avoided. (Theory assumes fixed costs paid for before production and only need to cover variable costs. Practice probably is that fixed costs are paid monthly. But either way still have to pay for fixed costs) However, it depends on the level of profits. Firms with lower fixed costs may still be affected badly if the profit levels were not high. Reserve one mark for a conclusion.

Page 3 Mark Scheme Syllabus Paper GCE AS/A LEVEL – May/June 2013 9708 43 © Cambridge International Examinations 2013 Section B General Comments 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.

Page 4 Mark Scheme Syllabus Paper GCE AS/A LEVEL – May/June 2013 9708 43 © Cambridge International Examinations 2013 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. 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. Level 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 Syllabus Paper GCE AS/A LEVEL – May/June 2013 9708 43 © Cambridge International Examinations 2013 2 It is important that an economy makes the most efficient use of its resources. This can only be done if firms are allowed to increase in size. Government regulation of firms should, therefore, be minimised. Discuss whether you agree with this statement. [25] Candidates are expected to consider the argument. First, what is meant by resources and whether the premise is correct about their use; second, if it is correct, whether this can be achieved only by larger firms and thirdly whether the conclusion is correct. Candidates may refute, or accept, the subsidiary conclusion about larger firms, or the final conclusion or both. L4 For a clear consideration of each stage of the argument in the question. A reasoned conclusion should be presented. (18–25) L3 For a competent but more limited comment on the whole argument or by concentrating on part of the argument – maybe the link between resource use and large firms perhaps by discussing economies of scale; or of the final part of the argument about the role of the government. (14–17) L2 For an undeveloped discussion of the argument concentrating on only one aspect and with no overall comment on the conclusion in the question. (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 6 Mark Scheme Syllabus Paper GCE AS/A LEVEL – May/June 2013 9708 43 © Cambridge International Examinations 2013 3 (a) Explain how the quantity of labour employed and the wage rate are determined by a firm in a perfectly competitive labour market. [12] Explanation of wage determination using marginal revenue product or demand and supply for perfect competition only. Candidates should show the link between the market and the firm. Conventionally we have not given as high a mark for D/S approach as for mrp approach. L4 For a sound explanation of theory and a clear understanding of the principles involved linking the market and the firm. (9–12) (7–8 D/S only) L3 For a competent explanation with limited development but still with some mention of the link between the market and the firm. (7–8) (5–6 D/S only) L2 For an undeveloped explanation with no link to the market. (5–6) (3–4 D/S only) L1 For an answer which has some basic correct facts but includes irrelevancies and errors of theory. (1–4) (1–2 D/S only) (b) Discuss why wage rates might be different in practice from those in a perfectly competitive labour market. [13] Candidates should recognise the fact that most markets are imperfect which, in the theory, would affect the shape of the demand/supply/mc/mrp curves. In practice, candidates should also discuss institutional factors such as the role of government legislation and possible effects of the demands for increased incomes by organised groups such as unions. L4 For a reasoned and clearly structured answer dealing with theory and institutional aspects. (9–13) (7–8 D/S only) L3 For a fair but undeveloped answer maybe concentrating on either the theory or the institutions or commenting on both but only briefly. (7–8) (5–6 D/S only) L2 For a limited but acceptable attempt to consider the possible differences. (5–6) (3–4 D/S only) L1 For an answer which has some basic correct facts but includes irrelevancies and errors of theory. (1–4) (1–2 D/S only)

Page 7 Mark Scheme Syllabus Paper GCE AS/A LEVEL – May/June 2013 9708 43 © Cambridge International Examinations 2013 4 Governments often suggest that there has been an improvement in the standard of living in their economy and support their statement by referring to a range of economic indicators. One of the indicators they use is GDP. Discuss whether GDP is a reliable indicator of changes in the standard of living in an economy. [25] The indicator mentioned is GDP. Rising GDP is used to suggest that the standard of living has risen. However, GDP does not include – non marketed items (jobs done yourself), this is in 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. L4 For a thorough explanation of the difficulties of using GDP. 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 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 draw a 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)

Page 8 Mark Scheme Syllabus Paper GCE AS/A LEVEL – May/June 2013 9708 43 © Cambridge International Examinations 2013 5 (a) What distinguishes a developed economy from a developing economy? [12] Description of the different economic characteristics in terms of an increase in national income, productive capacity, occupational distribution, or in terms of HDI and standards of living with a mention of population growth, education, health, income distribution. L4 For a sound description with clear understanding of the principles involved and a clear explicit distinction drawn. (9–12) L3 For a competent description but with limited development and explicit distinction. (7–8) L2 For a general description of only some of the factors and vague distinction. (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) Developing economies are often keen to encourage industrial development in rural areas. Developed economies, by contrast, often prevent industrial development in rural areas. Discuss why there might be this difference in policies. [13] Candidates should mention the likely possibility that developing countries rely on the primary sector and this can be cause wide fluctuations in income and disguised unemployment. Industrialisation might increase employment, make a more secure base for income, encourage the use of resources, decrease poverty in urban areas. Developed countries, by contrast, have a desire to preserve rural areas, are concerned about externalities of production in some areas, wish to use the advantage of economies of scale in urban areas. L4 For a good explanation with a reasoned discussion of the different approaches and clearly structured answer which reaches a conclusion. (9–13) L3 For a fair discussion but undeveloped answer which does not present a well-structured reasoned response. (7–8) L2 For a limited but acceptable attempt to consider the different approaches but with little development 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)

Page 9 Mark Scheme Syllabus Paper GCE AS/A LEVEL – May/June 2013 9708 43 © Cambridge International Examinations 2013 6 (a) Explain how a fall in interest rates might influence the level of investment and, as a result, national income. [12] Explanation of comparison of a fall in interest rates against prospective yields of investment, short-term v long-term considerations. Show link between investment and national income with an explanation of the multiplier. L4 For a sound explanation of both parts of the question, – interest/investment; investment/income – and a clear understanding of the principles involved. (9–12) L3 For a competent comment but with limited elaboration of the analysis although the multiplier should be mentioned. (7–8) L2 For a correct explanation of either the link between interest and investment but with no mention of the multiplier process; or a very poor link between interest and investment but a brief description of the multiplier. (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) Discuss, with reference to liquidity preference theory, whether interest rates are the main determinant of consumers’ demand for money. [13] Discussion of the analytical reasons why consumers demand money according to liquidity preference; transactions, precautionary, speculative motives. Interest may only affect transactions and precautionary marginally – high rates may encourage some temporary saving in ‘on-demand’ accounts. Precautionary demand has been weakened by use of credit cards – expenditure on credit cards may be influenced by interest charges. Interest rates do affect speculative demand. There is an inverse relationship – except where there is a ‘liquidity trap’. L4 For a sound discussion with good application and a clear understanding of the principles involved. (9–13) L3 For an accurate reference to the question but with a more limited discussion and minor errors in the analysis. (7–8) L2 For a correct discussion but undeveloped comment, not necessarily logically presented. (5–6) L1 For an answer which has some basic correct facts but includes irrelevancies and errors of theory. (1–4)

Page 10 Mark Scheme Syllabus Paper GCE AS/A LEVEL – May/June 2013 9708 43 © Cambridge International Examinations 2013 7 (a) A newspaper reported that ‘unemployment had risen for the third consecutive month.’ What might be the cause of a rise in unemployment? [12] Explanation of the causes of unemployment. L4 For a sound explanation with a clear understanding of the principles involved dealing with at least four types of unemployment. (9–12) L3 For an accurate but more limited explanation and minor errors in the analysis. Expect at least four types briefly explained, or three types more fully explained. (7–8) L2 For a correct but brief explanation of three types of unemployment not necessarily logically presented. (5–6) L1 For an answer which has some basic correct facts but includes irrelevancies and errors of theory. (1–4) (b) Discuss whether achieving a fall in the level of unemployment should be the main macroeconomic aim of a government. [13] Discussion of the main macro aims of the government with a reasoned argument about which should have the priority. L4 For a reasoned and clear discussion, logically presented, dealing with the possible conflicts between the policies. A conclusion should be presented. (9–13) L3 For a fair but undeveloped discussion, with limited reference to possible conflicts but with a conclusion. (7–8) L2 For a limited discussion with little development and no conclusion. (5–6) L1 For an answer which has some basic correct facts but includes irrelevancies and errors of theory. (1–4)