Cambridge A Level Economics 9708 — 2014 May/June Paper 1 · Variant 3

1 One of the central themes of economics is that resources are scarce. What is certain from this? A Difficult choices are unavoidable for economic agents. B Food shortages will become more severe over time. C Resource allocation cannot be left solely to the price mechanism. D There will be a continuing upward trend in commodity prices.

Mark scheme: A

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2 In their transition to market economies some former command economies have adopted a gradual approach. This has meant continuing with some of the features of their command system. What is not a valid, short-run reason for continuing with the feature shown? feature reason for continuation A inconvertible currency to attract foreign direct investment B price controls on foodstuffs to protect the real value of workers’ incomes C state ownership of banks to avoid large-scale bankruptcies D tariffs on imported manufactures to allow comparative advantage to develop

Mark scheme: A

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3 A country is producing electrical goods and medicines at full capacity. An innovation is developed that enables the country to produce a new medicine which becomes in great demand. How would this be represented by its production possibility curves? electrical Z X goods Y W O medicines A as a movement from W to X B as a movement from X to Y C as a movement from X to Z D as a movement from Y to X

Mark scheme: C

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4 What would encourage the growth of the international division of labour? A an improvement in transport systems B instability in international exchange rates C restrictions on the movement of resources D the widespread introduction of tariffs

Mark scheme: A

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5 What would not cause the demand curve for foreign holidays to shift to the left? A a fall in consumers’ disposable income B a fall in the price of domestic holidays C a rise in advertising of domestic holidays D a rise in the price of foreign holidays

Mark scheme: D

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6 A good has unitary price elasticity of demand and at a price of $25 it sells 100 000 units. Which price must the firm charge if it wants to sell 125 000 units of the good? A $24 B $20 C $16 D $12

Mark scheme: B

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7 The diagram shows how a 10% increase in consumer incomes shifts the demand for good X from D to D1. price ($) 10 D1 D 0 80 100 quantity (kg) Which statement about good X is correct? A It is a normal good with income elastic demand. B It is a normal good with income inelastic demand. C It is an inferior good with income elastic demand. D It is an inferior good with income inelastic demand.

Mark scheme: C

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8 The diagram shows the relationship between a firm’s total revenue and the quantity of goods sold. revenue TR O quantity What is the price elasticity of demand for the good? A zero B between zero and one C one D between one and infinity

Mark scheme: B

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9 A movement along a supply curve for a product is likely to occur if there is a rise in A the demand for a complementary product. B the distribution costs of the product. C the subsidy a producer receives for producing the product. D the wages of the employees who produce the product.

Mark scheme: A

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10 A firm makes televisions. What does the elasticity of supply for the firm represent? A the need to increase production because of a successful advertising campaign B the possibility of switching production from other goods the firm makes to televisions C the speed at which additional fixed factors used to produce televisions can be obtained D the way the firm’s production changes as a result of a change in price of televisions

Mark scheme: D

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11 Demand and supply in a competitive market both decrease by 10% at all prices. What will be the effect on the equilibrium price and quantity sold? price quantity sold A 10% decrease 10% decrease B 10% decrease no change C 5% decrease 5% decrease D no change 10% decrease

Mark scheme: D

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12 The graph shows the annual % changes in the prices of new houses and existing houses in the United Kingdom between 2010 and 2012. 15 10 new houses 5 price 0 existing houses (% change) –5 –10 –15 2010 Mar Apr May Jun Jul Aug Sep Oct Nov Dec 2011 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec 2012 Jan Feb Mar What can be concluded about the graph? A In the period after October 2010, new houses were more expensive than existing houses. B In the period up until January 2011, there was a steady fall in the prices of existing houses. C The average price of existing houses was lower in March 2012 than two years earlier. D The prices of new houses continued to rise throughout the period.

Mark scheme: D

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13 Between 2006 and 2007, the price of skimmed milk powder on the world market rose from $1000 per tonne to $2400 per tonne. Assuming that the market is a free market, what will result from the price change? A Consumers will buy more complements to skimmed milk powder. B Farmers will increase the size of their dairy herds to supply more milk. C Firms processing milk into skimmed milk will switch to producing substitutes. D Governments will introduce a system of rationing.

Mark scheme: B

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14 A firm opens a new factory on the outskirts of a town. What will be included among the externalities arising from the opening of the new factory? an increase in the an increase in the wages paid to an increase in sales revenue of workers in a traffic congestion local neighbouring shopkeepers factory A no no yes B no yes yes C yes no no D yes yes no

Mark scheme: C

More questions on Private costs and benefits, externalities and social costs and benefits

15 The table shows some of the costs when a firm produces a good. total cost to society external cost output $ $ 23 316 16 24 322 18 What is the additional cost to a firm of producing the 24th unit? A $2 B $4 C $6 D $8

Mark scheme: B

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16 What impact would internalising negative externalities have on the output and price of a product? output price A decrease decrease B decrease increase C increase decrease D increase increase

Mark scheme: B

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17 A local council runs a museum. It used to charge an admission fee. It decided to give free entry in the hope of encouraging more people to use the museum and find out about the history of its area which the council regards as being important. What can be said about the museum? A It is a merit good because it is believed to be worth greater attendance. B It is a merit good because it is run by the local council. C It is a public good because anyone can use the museum. D It is a public good because people do not now have to pay for admission

Mark scheme: A

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18 In the diagram, D is the demand curve of an agricultural commodity and S1 is the initial supply curve. S1 6 5 4 price 3 S2 ($) 2 1 D 0 0 1 2 3 4 5 6 quantity (000 tonnes) The government introduces a buffer scheme to maintain farm incomes at their initial level. What quantity would the government need to buy from the farmers to add to the buffer stock if a bumper harvest causes the supply curve to move to S2? A 1000 tonnes B 2000 tonnes C 3000 tonnes D 4000 tonnes

Mark scheme: A

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19 The production possibility curve shows island J’s ability to produce fish and fruit. It specialises entirely in fish in which it has a comparative advantage and trades fish for fruit from island K. As a result, island J increases its consumption from 80 tonnes of fish and 60 tonnes of fruit, point X, to 100 tonnes of fish and 100 tonnes of fruit, point Y. 200 fish (tonnes) 100 Y 80 X O 60 100 fruit (tonnes) What was island J’s exchange rate of fish for fruit? A 1 tonne of fish for 2 1 tonne of fruit B 1 tonne of fish for 4 3 tonne of fruit C 1 tonne of fish for 1 tonne of fruit D 1 tonne of fish for 2 tonnes of fruit

Mark scheme: C

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20 The table shows details on the Gross Domestic Product (GDP) and the balance of payments of four countries. Which country had the largest net errors and omissions figure in terms of US$? current account total of capital GDP balance as a % and financial (US$) of GDP accounts (US$) A 50bn –8.0 4bn B 50bn –2.0 3bn C 100bn –3.0 3bn D 100bn +4.0 –4bn

Mark scheme: B

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21 What would not be a reason for a government to impose a quota on imports? A to prevent dumping B to raise tax revenue C to reduce a balance of trade deficit D to support an important industry

Mark scheme: B

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22 The European Union imposes a quota on the volume of garments imported from China. What is likely to be the effect on the prices received by Chinese garment producers and on the prices paid by the consumers of Chinese garments in Europe and the United States (US)? prices received prices paid by prices paid by by Chinese European US consumers producers consumers A decrease decrease decrease B decrease increase increase C increase decrease increase D increase increase decrease

Mark scheme: D

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23 The table shows a country’s employment statistics. million population of working age 100 number in employment 60 number unemployed 4 What is the participation rate and the unemployment rate? participation rate unemployment rate % % A 60 4.0 B 60 6.25 C 64 4.0 D 64 6.25

Mark scheme: D

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24 The table shows the changes in the general price level of four countries over three years expressed as index numbers. Which country experienced a constant rate of fall in the real value of money? year 1 year 2 year 3 A 100 80 60 B 100 90 81 C 100 108 116 D 100 120 144

Mark scheme: D

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25 In Year 1 the price of a barrel of oil increased from $60 to $110. In Year 2 there was a further increase to $115 a barrel. Assume that oil price changes have an immediate impact on the general level of prices and that their Consumer Price Index weightings remains unchanged. What will be the effect of the changes in the oil price on a country’s Consumer Price Index and on its inflation rate in Year 2 compared with Year 1? effect on the effect on the Consumer Price Index rate of inflation A decrease decrease B decrease increase C increase decrease D increase increase

Mark scheme: C

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26 Why is a deficit on the current account of the balance of payments in economies with freely floating exchange rates often thought to be an economic problem? A It implies a net outflow of capital from the economy. B It involves borrowing from abroad. C It leads to increases in unemployment. D It results in a loss of foreign exchange reserves.

Mark scheme: B

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27 In which situation must a country’s balance of trade in goods and services improve? A Export costs rise more than import costs. B Export prices rise more than import prices. C Export revenues rise more than import revenues. D Export volumes rise more than import volumes.

Mark scheme: C

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28 Assume the Chinese monetary authorities are committed to maintaining the exchange rate of China’s currency, the Yuan, against the US$ between P1 and P2 on the diagram. S price of Yuan P2 (in US$) P1 D2 D1 O quantity of Yuan What might they do if demand changed from D1 to D2? A impose controls on Chinese investment overseas B increase interest rates C sell US$ from foreign exchange reserves D sell Yuan on the foreign exchange markets

Mark scheme: D

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29 The table shows observations of the exchange rate of an economy and its current account balance over six years. exchange rate current account balance year (US dollars per unit (billions of US dollars) of domestic currency) 1 2.0 –3 2 1.5 –5 3 1.5 –4 4 1.5 –3 5 1.5 0 6 1.5 +3 Which concept does the data in the table illustrate? A exchange rate appreciation B purchasing power parity C the J-curve effect D trade-weighted exchange rates

Mark scheme: C

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30 A country experiences a significant appreciation in its foreign exchange rate. Which statement correctly describes the most likely combination of effects? A Aggregate demand rises and international competitiveness falls. B Exporters’ profits rise and the terms of trade worsen. C Inflation falls and unemployment rises. D The current account deficit falls and production costs rise.

Mark scheme: C

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