Cambridge A Level Economics 9708 — 2015 Oct/Nov Paper 2 · Variant 1

This document consists of 4 printed pages and 1 Insert. DC (RW) 97189/3 © UCLES 2015 [Turn over Cambridge International Examinations Cambridge International Advanced Subsidiary and Advanced Level * 5 6 3 7 7 1 5 3 4 0 * ECONOMICS 9708/21 Paper 2 Data Response and Essay (Core) October/November 2015 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 9708/21/O/N/15 © UCLES 2015 Section A Answer this question. 1 Increased cereal supplies push down prices and boost world trade The Food and Agriculture Organisation’s (FAO) forecast for world cereal production in 2013 has been adjusted upward by 8.5%, a record level of output. Early prospects for crops to be harvested in 2014 are also favourable. Overall prospects for wheat production in the northern hemisphere remain good. In the southern hemisphere, maize output is likely to rise in Brazil and Argentina. The prospects for the 2014 rice crop are mixed, with Brazil expanding output, while in the rest of South America, insufficient rainfall is limiting the supply of rice. The lack of water for irrigation is also limiting rice output in Australia and Sri Lanka. FAO’s forecast for world consumption of cereals in 2013 is forecast to rise by 1.7 %. This is slightly larger than the predicted population growth. Other uses of cereals, apart from food and animal feed, are expected to show a strong growth in 2013/14. Source: adapted from Food and Agriculture Organisation Table 1: selected FAO food price indices (Base year 2002–2004 (average of prices) = 100) The Total Food Price Index (meat, cereals, dairy, vegetable oils & sugar) Cereals Price Index (includes wheat, rice & maize) Dairy Product Price Index 2011 229.9 240.9 229.5 2012 213.3 236.1 193.6 2013 209.8 219.2 242.7 2014 January 203.4 188.4 267.7 Source: adapted from Food and Agriculture Organisation India grain subsidy may only cause hunger elsewhere India’s battle against hunger might cause problems for the world’s poorest. The Indian Government has said that 67 % of India’s population, over 800 million people, will have the right to buy up to 5 kilogrammes (kg) of rice, wheat and other cereals from the state each month at subsidised prices. This substantial food subsidy will worsen public finances. The total food subsidy expenditure is estimated to be US$25 billion. When the production of rice in India is insufficient, the subsidy may destabilise the global rice market. India will be forced to import rice, which will lead to higher prices and rice shortages in other importing countries such as Nigeria, Bangladesh, Indonesia and the Philippines. India’s good intentions may just push its rice shortages on to the rest of the world. Source: adapted from Reuters Breakingviews 2013

3 9708/21/O/N/15 © UCLES 2015 [Turn over (a) (i) Calculate the percentage change in the price of cereals between 2011 and January 2014. [2] (ii) Explain two possible reasons why the world price of cereals and the world price of dairy products moved in opposite directions between 2012 and January 2014. [4] (b) Explain how an economist would decide whether cereals and dairy products are substitutes. [3] (c) Use a diagram to illustrate how a subsidy will affect the price and quantity of rice produced in India. [3] (d) Explain a likely opportunity cost of the Indian Government’s spending on the food subsidy. [2] (e) Discuss whether food subsidies are likely to solve the world’s food shortages in the long run. [6]

4 9708/21/O/N/15 © UCLES 2015 Section B Answer any one question. 2 (a) Explain, using the concept of income elasticity of demand, how a fall in incomes affects the demand for inferior goods and necessary goods. [8] (b) Discuss the policies that businesses might adopt to maintain sales when incomes are falling and consider which is most likely to be successful. [12] 3 (a) With the help of diagrams, explain how both cost-push and demand-pull inflation can be caused by a falling exchange rate. [8] (b) Distinguish between the domestic and external consequences of inflation and discuss which are the more damaging to an economy. [12] 4 Assume, in a two-country, two-product world, that one economy is more efficient at producing both products. (a) Explain how the efficient economy can benefit from specialisation and trade with the less efficient economy. [8] (b) Evaluate the economic reasons that the less efficient economy might offer to justify protection of its industries. [12] 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. To avoid the issue of disclosure of answer-related information to candidates, all copyright acknowledgements are reproduced online in the Cambridge International Examinations Copyright Acknowledgements Booklet. This is produced for each series of examinations and is freely available to download at www.cie.org.uk after the live examination series. 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.

® IGCSE is the registered trademark of Cambridge International Examinations. CAMBRIDGE INTERNATIONAL EXAMINATIONS Cambridge International Advanced Subsidiary and Advanced Level MARK SCHEME for the October/November 2015 series 9708 ECONOMICS 9708/21 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 October/November 2015 series for most Cambridge IGCSE®, Cambridge International A and AS Level components and some Cambridge O Level components.

Page 2 Mark Scheme Syllabus Paper Cambridge International AS/A Level – October/November 2015 9708 21 © Cambridge International Examinations 2015 Data Response 1 (a) (i) Calculate the percentage change in the price of cereals between 2011 and January 2014. [2] The price of cereals fell/decreased/declined (1 mark) by 21.8%. (1 mark) Accept an answer between 21.0 and 22.0. Accept a minus sign as indication of a fall in price. (ii) Explain two possible reasons why the world price of cereals and the world price of dairy products moved in opposite directions between 2012 and January 2014. [4] Candidates need to explain one reason why the price of cereals fell and one reason why the price of dairy products increased over the time period. The selected reasons could be suggested in the data but any ‘possible’ reasons are acceptable. The reasons will be based upon supply and demand, so any possible reasons for an increase in the supply and/or a reduction in the demand for cereals and a decrease in the supply and/or an increase in the demand for dairy products can score. For an explained reason for the fall in the price of cereals. (Up to 3 marks) For an explained reason for the rise in the price of dairy products. (Up to 3 marks) (4 marks maximum) Maximum of 2 marks without any reason given for the change in demand and/or supply. (b) Explain how an economist would decide whether cereals and dairy products are substitutes. [3] For an accurate formula of cross elasticity of demand. (1 mark) For stating that if cereals and dairy products are substitutes the cross elasticity of demand will be positive. (1 mark) For explanation of this value in terms of an increase in the price of one product will lead to a rise in demand for its substitute. (1 mark) For explanation that the higher the value of the coefficient the closer the two products are as substitutes. (1 mark) (3 marks maximum)

Page 3 Mark Scheme Syllabus Paper Cambridge International AS/A Level – October/November 2015 9708 21 © Cambridge International Examinations 2015 (c) Use a diagram to illustrate how a subsidy will affect the price and quantity of rice produced in India. [3] For a diagram showing the shift to the right of the supply curve. (1 mark) For a fall in the price of the product. (1 mark) For an increase in equilibrium quantity. (1 mark) If no diagram is included, but correct description is given, award 1 mark. If the shift of the supply curve is implied in a diagram, but not actually shown, award 2 marks. (d) Explain a likely opportunity cost of the Indian Government’s spending on the food subsidy. [2] For a clear statement of the concept of ‘opportunity cost’. (1 mark) For an example of opportunity cost in terms of government expenditure e.g. reduced spending on infrastructure, education, health care. (1 mark) (e) Discuss whether food subsidies are likely to solve the world’s food shortages in the long run. [6] For understanding of the cause of food shortages e.g. population growth, poor harvests, lack of investment in agriculture and whether subsidies are likely to solve food shortages that arise from these problems. (Up to 4 marks) For evaluative comment on the likely effectiveness of subsidies. (Up to 2 marks)

Page 4 Mark Scheme Syllabus Paper Cambridge International AS/A Level – October/November 2015 9708 21 © Cambridge International Examinations 2015 Essays 2 (a) Explain, using the concept of income elasticity of demand, how a fall in incomes affects the demand for inferior goods and necessary goods. [8] For knowledge and understanding of income elasticity of demand. (Up to 4 marks) For knowledge and understanding of what income elasticity of demand is. (1 mark) For an accurate formula. (Up to 2 marks) For some elaboration. (1 mark) For application of the concept to explain how inferior and necessary goods respond to a fall in incomes. (Up to 4 marks) Application to inferior goods. (Up to 3 marks) Application to necessary goods. (Up to 3 marks) (4 marks maximum) (b) Discuss the policies that businesses might adopt to maintain sales when incomes are falling and consider which is most likely to be successful. [12] When incomes are falling the demand for normal and necessary goods, to a lesser extent, will fall. Businesses need to offset this with policies to increase the demand for these goods. For example, advertising is designed to shift the demand curve to the right. A reduction in price will increase sales. Also, some businesses might switch to the production of inferior goods. Whether policies are successful depends upon a number of factors. For example, the success of price reductions depends upon the price elasticity of demand. For analysis of policies designed to maintain sales. (Up to 8 marks) For evaluative comment on the success of the policies suggested. (Up to 4 marks) 3 (a) With the help of diagrams, explain how both cost-push and demand-pull inflation can be caused by a falling exchange rate. [8] For knowledge and understanding and application showing how a decline in the exchange rate can cause cost-push inflation. (Up to 4 marks) Maximum of 3 marks if no diagram. For knowledge and understanding and application showing how a decline in the exchange rate can cause demand-pull inflation. (Up to 4 marks) Maximum of 3 marks if no diagram.

Page 5 Mark Scheme Syllabus Paper Cambridge International AS/A Level – October/November 2015 9708 21 © Cambridge International Examinations 2015 (b) Distinguish between the domestic and external consequences of inflation and discuss which are the more damaging to an economy. [12] The internal effects of inflation include the impact upon savings and investment, the effects upon savers and lenders and the haphazard re-distribution of incomes in addition to shoe- leather and menu costs. The external effects of inflation are principally the effects upon trade. Which is most damaging depends upon issues such as the extent to which an economy is open or closed. For analysis of the domestic and external effects of inflation. (Up to 8 marks) Up to 6 marks on internal effects. Up to 6 marks on external effects. For evaluative comment upon which is most damaging. (Up to 4 marks) 4 Assume, in a two-country, two-product world, that one economy is more efficient at producing both products. (a) Explain how the efficient economy can benefit from specialisation and trade with the less efficient economy. [8] For knowledge and understanding of the law of comparative advantage. (Up to 4 marks) For application to show how each country can benefit. (Up to 4 marks) (b) Evaluate the economic reasons that the less efficient economy might offer to justify protection of its industries. [12] A number of reasons are often advanced to justify protection of domestic industries from foreign trade. These include to allow industries to decline slowly, to prevent dumping, for strategic reasons and the infant industry argument. The main reason to support protection is to allow comparative advantage to emerge. So on this basis the infant industry argument is often justified in terms of economic theory. For analysis of the arguments often used to justify protectionism. (Up to 8 marks) For evaluative comment on the justification of these arguments. (Up to 4 marks)