Cambridge A Level Economics 9708 — 2014 May/June Paper 2 · Variant 3

This document consists of 3 printed pages, 1 blank page and 1 insert. DC (CW) 103179 © UCLES 2014 [Turn over Cambridge International Examinations Cambridge International Advanced Subsidiary and Advanced Level * 0 7 6 5 1 1 1 1 9 8 * ECONOMICS 9708/23 Paper 2 Data Response and Essay (Core) May/June 2014  1 hour 30 minutes No Additional Materials are required. READ THESE INSTRUCTIONS FIRST An answer booklet is provided inside this question paper. You should follow the instructions on the front cover of the answer booklet. If you need additional answer paper ask the invigilator for a continuation booklet. Section A Answer this question. Brief answers only are required. Section B Answer any one question. You may answer with reference to your own economy or other economies that you have studied where relevant to the question. The number of marks is given in brackets [ ] at the end of each question or part question.

2 9708/23/M/J/14 © UCLES 2014 Section A Answer this question. 1 European biofuel targets contribute to global hunger, says Oxfam Governments throughout the world are under pressure to prevent global warming. One solution has been to adopt policies designed to switch from energy sources that rely upon fossil fuels, such as oil, and replace them with biofuels that are made from sugar and cereals. In the United States one policy introduced in 2006 was to subsidise biofuel production, but this was removed in 2011. In 2009, European Union (EU) governments agreed to targets committing them to produce 10% of their transport energy from biofuels by 2020. However, the targets designed to help fight climate change have become increasingly controversial. It is claimed by the charity Oxfam that the EU’s biofuel policies are having a devastating impact on the world’s poorest people through rapidly rising food prices and worsening hunger. It has calculated that the land required to meet the targets for one year could feed 127 million people. Because of this increased demand for land to produce crops the adoption of targets to prevent global warming is being questioned. This demand for land to produce crops for biofuels is pushing food production on to land that is less suitable for agriculture, such as forests and grasslands. These had been acting as ‘carbon sinks’ absorbing greenhouse gases and as a result helping to prevent climate change. Estimates show that using this land to produce food crops could be as bad for the environment as putting an extra 26 million cars on Europe’s roads. The big problem is that the world’s limited resources—land, water, soil—are being used to grow crops for biofuel production when they could be used to produce much-needed food. Source: www.guardian.co.uk 2012 Content removed due to copyright restrictions.

3 9708/23/M/J/14 © UCLES 2014 (a) (i) Calculate the rate of food price inflation from 2003 to 2009. [1] (ii) Calculate the rate of food price inflation from 2009 to 2012. [1] (b) What evidence is contained in Table 1 to suggest that the adoption of biofuel targets in the EU had an impact on food prices? [2] (c) Using diagrams, explain how the removal of the subsidy for biofuel production in the United States in 2011 would be likely to affect the market for: (i) biofuels. [3] (ii) fossil fuels. [3] (d) (i) Use a production possibility curve to show the trade-off between the production of crops for biofuels and the production of food crops. [2] (ii) Explain why the cost of food production is increasing as more land is used to grow crops for biofuels. [2] (e) Carbon emissions are believed to contribute to global warming. Discuss whether indirect taxes on fossil fuels might be a more effective way of preventing global warming than government commitments to biofuel targets. [6] Section B Answer one question. 2 (a) Explain the factors that might make the price elasticity of demand for a good highly inelastic.  [8] (b) Discuss why businesses might attempt to change the price elasticity of demand for their products and consider whether it is likely that they will be successful in their attempt. [12] 3 (a) Explain, using appropriate diagrams, the meaning of the term ‘externalities’. [8] (b) Discuss the most appropriate policy that a government should adopt when the production of a good gives rise to a negative externality. [12] 4 (a) Explain the factors that might cause an economy to experience a current account deficit. [8] (b) Discuss the policies available to a government faced with a current account deficit and consider which policy has the fewest disadvantages for the consumers in that economy. [12]

4 9708/23/M/J/14 © UCLES 2014 BLANK PAGE Copyright Acknowledgements: Question 1 © www.fao.org; Table: 1 Food Price Index; Food and Agricultural Organization of the United Nations; 2012. Question 1 © Felicity Lawrence; Extract: European biofuel targets contribute to global hunger; Guardian News & Media Ltd; 17 September 2012. 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. 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 MARK SCHEME for the May/June 2014 series 9708 ECONOMICS 9708/23 Paper 2 (Data Response and Essay – Core), maximum raw mark 40 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 2014 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 LEVEL – May/June 2014 9708 23 © Cambridge International Examinations 2014 1 (a) (i) Calculate the rate of food price inflation from 2003 to 2009. [1] 57% (1 mark) (ii) Calculate the rate of food price inflation from 2009 to 2012. [1] 35.66% (1 mark) (b) What evidence is contained in Table 1 to suggest that the adoption of biofuel targets in the EU had an impact on food prices? [2] Candidates are expected to use the data in Table 1 to provide evidence that biofuel targets had an impact on food prices. A number of approaches are acceptable. e.g. 1. Cereal prices and/or sugar prices, both of which are used in biofuel production, have risen more than the overall food price index (up to 2 marks). e.g. 2. The rate of inflation of cereal prices increases after 2009 when the targets began. (up to 2 marks). (c) Using diagrams explain how the removal of the subsidy for biofuel production in the United States would be likely to affect the market for biofuels. [3] (i) biofuels. For an appropriate diagram showing how the removal of the subsidy will increase price and reduce quantity of biofuels. No diagram 1 mark maximum. (up to 3 marks). (ii) fossil fuels. [3] For an appropriate diagram showing a shift to the right of the demand curve for fossil fuels as biofuels become more expensive and the resulting rise in price and rise in quantity demanded. No diagram 1 mark maximum (up to 3 marks). (d) (i) Use a production possibility curve to show the trade-off between the production of crops for biofuels and the production of food crops. [2] For an accurate ppc diagram showing the trade-off with production of biofuel and food on the axes. If the diagram is provided, but the trade-off is not indicated 1 mark maximum (up to 2 marks). (ii) Explain why the cost of food production is increasing as more land is used to grow crops for biofuels. [2] As resources are not homogeneous, the opportunity cost will increase, as less suitable resources are used to produce food (up to 2 marks).

Page 3 Mark Scheme Syllabus Paper GCE AS LEVEL – May/June 2014 9708 23 © Cambridge International Examinations 2014 (e) Carbon emissions are believed to contribute to global warming. Discuss whether indirect taxes on fossil fuels might be a more effective way of preventing global warming than government commitments to biofuel targets. [6] For an analysis of the impact of indirect taxes upon global warming (up to 3 marks). For an evaluative comment on which is most effective (up to 3 marks). Essays 2 (a) Explain what is meant by the term ‘money’ and outline its characteristics in a modern 21st century economy. [8] For knowledge and understanding of the meaning of the term ‘money’ (up to 4 marks). Candidates are expected to demonstrate a good understanding of what is meant by ‘money’ and its functions in society. A definition is expected for a good mark. For application explaining the characteristics of money in a modern economy. (Up to 4 marks). Candidates need to focus on what acts as money in a modern economy, and it is essential that a reference is made to forms of money other than cash. It is essential that bank deposits and the transfer of these deposits in a modern society (e.g, cheques and debit cards) is explained for a good mark. (b) Discuss whether money is able to perform all its functions in an economy that is experiencing a high rate of inflation. [12] For analysis showing how the functions of money are affected by a high rate of inflation (up to 8 marks). The analysis will include an explanation of the functions and the impact of high inflation on each. For example, the medium of exchange, the store of value and so on. For evaluative comment on the ‘all its functions’ aspect of the question (up to 4 marks). Evaluative comment will distinguish how each function is affected by high inflation, and whether some functions might continue successfully. For example, the store of value function will be affected by high inflation before the medium of exchange function is affected. But during hyperinflation, the medium of exchange function is also affected. So whether functions are affected primarily depends upon the rate of inflation.

Page 4 Mark Scheme Syllabus Paper GCE AS LEVEL – May/June 2014 9708 23 © Cambridge International Examinations 2014 3 (a) Explain the factors that might make the price elasticity of demand for a good highly inelastic. [8] For knowledge and understanding of ‘price elasticity of demand’ and ‘highly inelastic’ (up to 4 marks). Candidates are expected to demonstrate good understanding of price elasticity and should provide an accurate explanation of highly inelastic. For application explaining factors that cause the demand for a good to be inelastic (up to 4 marks). The application will focus on an explanation of the factors that influence price elasticity such as the availability of substitutes, proportion of income spent upon a product and so on. (b) Discuss why businesses might attempt to change the price elasticity of demand for their products and consider whether it is likely that they will be successful in their attempt. [12] For analysis showing why businesses would want to change the price elasticity of demand (up to 8 marks). The analysis will explain the link between inelastic demand and changes in total revenue. It will also include an explanation of the way in which the elasticity can be influenced, such as through the means of advertising, removal of rivals and so on. For evaluative comment on the ‘likely to be successful’ aspect of the question (up to 4 marks). Evaluative comment will assess the likely success of attempts by businesses to make demand for their product more inelastic. Such comment might include the view that it depends upon the number of rivals that makes it difficult to increase inelasticity and might question the effectiveness of advertising. 4 (a) Explain the factors that might cause an economy to experience a current account deficit. [8] For knowledge and understanding of the meaning of current account deficit (up to 4 marks). Candidates are expected to show an accurate understanding of the components of the current account and what is meant by a deficit. For application explaining why current account deficits might arise (up to 4 marks). A number of possible causes may be identified and explained. Credit quality of explanation rather than, for example, the number of causes identified. An overvalued exchange rate, loss of comparative advantage, high relative rates of inflation etc.

Page 5 Mark Scheme Syllabus Paper GCE AS LEVEL – May/June 2014 9708 23 © Cambridge International Examinations 2014 (b) Discuss the policies available to a government faced with a current account deficit and consider which policy has the fewest disadvantages for the consumers in that economy. [12] For analysis showing how at least two policies are designed to deal with a current account deficit (up to 8 marks). The analysis may refer to expenditure switching and expenditure dampening policies. Credit accuracy and quality of explanation. For evaluative comment on the ‘fewest disadvantages’ aspect of the question (up to 4 marks). Examples of evaluative comment include the impact on consumer choice when expenditure- switching policies are adopted, and the impact on living standards when expenditure- dampening policies are deployed. Candidates need to make some assessment of ‘fewest disadvantages’ to receive full evaluative marks.