Cambridge A Level Economics 9708 — 2017 Oct/Nov Paper 4 · Variant 3

1 Big is bad At its best, capitalism should be all about competition and consumer choice. This leads to innovation, improved value and quality. It is in contrast to the state, which is about compulsory taxation and monopoly provision. Big business is somewhere between capitalism and the state. Unfortunately, companies tend to merge until they have as much power as a cartel and operate against the public interest. Huge companies are difficult to manage; full-time executives do not know what is happening – as has been witnessed by the recent collapse of large banks that required support from huge amounts of taxpayers’ money to survive. Other large companies are conglomerates, lacking focus and any real purpose save carrying on for their own sake. They pay consultancies to devise ‘mission statements’ to give a pretended meaning to what they stand for. Staff feel detached from the overall undertaking. Large companies miss interesting opportunities for growth in small markets. They talk about innovation but do it badly and so compensate by making acquisitions. For example, giant drug companies are paying large prices to acquire drug development firms because they have lost the confidence to discover new drugs themselves. Small and medium-sized companies, by contrast, can adjust and take risks that large companies cannot. In sectors such as financial services and packaged consumer goods, large companies are facing competition. Barriers to entry are low, capital is plentiful and technology enables newcomers to undercut prices of established rivals. Surveys suggest that young talented people want to work for themselves or smaller companies, not multinationals beset by internal management politics. New businesses have dynamism and vigour. They are more productive and more innovative. Fragmented markets and ever more diverse tastes of consumers threaten the dominance of the old brands. Economies of scale are a myth in many industries, especially newer sectors such as technology and services. There is a belief that companies need to be huge to trade globally and that there are efficiencies from scale when trading internationally. These are exaggerated in the modern era. Small and medium-sized companies can be flexible and adaptable. With an improving economy and falling oil prices, smaller businesses have a great opportunity for improving profits and maintaining prices. Large firms remain uniform with dull, identical brands everywhere. It’s time for the craft industries, the food specialists, the new banks and the break-up of the dominant corporations. Source: Sunday Times, 12 April 2015 (a) Explain what is meant by a positive statement and a normative statement and consider whether the first paragraph should be classified as positive or normative. [4] (b) Briefly describe what is meant by a cartel and explain why it is said to be against the public interest. [4] (c) Analyse what is meant by the statement that ‘there are efficiencies from scale when trading internationally’. [4] (d) The article is headed ‘Big is bad’. Discuss whether there is sufficient evidence provided to support that statement. [8]

Mark scheme: Question Answer Marks 1(a) positive: objective, can be tested. Normative: value judgement. 2 First 4 paragraph has both. Use of ‘should’ – normative, others positive. 2 1(b) group acting together, fixes output, fixes prices, prevents competition, 4 1(c) comment on meaning of economies of scale and seeming relevance to large 4 international markets. 1(d) some evidence to support about consultancies, lack of innovation, 8 acquisitions not innovation, managerial problems (e.g. of banks), tendency to cartels – but no figures, or details. There is also evidence about niche markets, economies of scale, international trade – but no details or success rates, price changes, costs, whether profits have improved. no source for surveys re young people. Oversimplification of role of state. Some normative words: dull identical brands, innovate badly, give pretended meaning to their aim. Article presents negative side of large business and beneficial side of smaller businesses. Not a balanced view. Max 7 no conclusion

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2 (a) Explain why an identical price fall would result in a different demand curve for a normal good from that for an inferior good. Use indifference curve analysis to support your answer. [12] (b) ‘The only criticism of demand theory is that the consumer is not rational.’ Consider whether you agree with this statement. [13]

Mark scheme: 2(a) Explanation of indifference curves, description of normal good, (positive 12 substitution, positive income) inferior, (negative income does not outweigh positive substitution for price fall) Link to demand curve, showing possible different slope of curve and different price elasticity. L4 for a reasoned answer with a conclusion illustrating all the points, shape of curve, equilibrium, construction of demand, change in price, change in demand, 9–12 L3 for a competent answer that deals with part of the analysis, probably only briefly linking equilibrium to demand curve 7–8 L2 for a less developed answer probably the demand curve link, or mention of elasticity 5–6 L1 For an answer that has some basic correct facts but includes irrelevancies and errors of theory 1–4 2(b) Discussion of consumer theory; is it likely that consumers behave irrationally, 13 is it possible to construct indifference curves, calculate marginal utility, elasticity, price equilibrium. L4 for a sound discussion and comment with good illustrations and a clear understanding of the principles involved. 10 max no conclusion. 9–13 L3 for a competent but less developed discussion idea of rationality or a more limited debate about the realism of the demands of the theory. 7–8 L2 for a correct but undeveloped explanation with some attempt at analysis but only brief discussion with no conclusion. 5–6 L1 For an answer that has some basic correct facts but includes irrelevancies and errors of theory 1–4

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3 (a) Describe how a firm is said to operate in order to maximise profits. Consider whether it will cease to operate if total revenue fails to cover total cost. [12] (b) Some large supermarkets publicise the fact that they ‘price match’ other major supermarkets, charging the same prices for the same brands of products as their competitors. Analyse how firms are said to behave in oligopolistic markets. Discuss how far this is supported by the above statement. [13]

Mark scheme: 3(a) Explanation of profit maximisation rule, may operate when TR less than TC in 12 short run provided AR is at least equal to AVC L4 for a sound explanation with good analysis and a clear understanding of the principles involved for both parts of the question 9–12 L3 for a competent comment on profit maximisation with concentration on normal/abnormal profit, little comment about short/long run, 7–8 L2 for a less developed answer, concentrating on maximum profit point, and poor understanding of significance of AVC 5–6 L1 For an answer that has some basic correct facts but includes irrelevancies and errors of theory 1–4 3(b) Oligopoly theory assumes there profit maximisation, (price match supports 13 this); product differentiation/advertising, (supports); concern about competitor’s actions – interdependence, (supports); prices relatively constant, (debateable support); few large firms (large – supports, few – debateable); possible collusion (not supported). L4 for a discussion of at least 4 of the assumptions and comment on price matching with overall conclusion 9–13 L3 for a discussion of 3 points with reasoned analysis and comment. 7–8 L2 for a more general or imprecise answer mainly concentrating on the theory with little focus on the question. 5–6 L1 For an answer that has some basic correct facts but includes irrelevancies and errors of theory 1–4

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4 The French film industry is subsidised by the government. Some actors receive very high fees. In 2015 it was proposed that, as part of the fee is public money, some of the subsidy should be withdrawn. Discuss what might happen to employment and wages if a subsidy for production were reduced. Use the economic theory of wage determination in perfect and imperfect labour markets to support your answer. [25]

Mark scheme: 4 Discussion of wage determination. Question refers to any labour market so 25 both perfect and imperfect markets can be considered. Reduced subsidy increases costs. Outcome would depend on balance of increased costs against demand (MRP) L4 for a thorough critique of the statement and an explanation of the analysis of wage determination with a clear comparison of perfect and imperfect markets. There should be a conclusion and a well-structured answer. 18–25 (14–17 D&S) L3 for a weaker critique of the statement but a competent explanation of imperfect market wage determination. Max L3 without MRP. 14–17 L2 for a correct but undeveloped analysis with only a brief comment and recognition of the range of relevant issues to consider. No real conclusion 10–13 L1 for an answer that shows some knowledge but does not indicate that the question has been fully grasped or where the answer is mostly irrelevant 1–9

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5 (a) Analyse what might cause an increase in unemployment in an economy. [12] (b) Discuss what impact an increase in unemployment is likely to have on an economy. [13]

Mark scheme: 5(a) Analysis of the causes of an increase in unemployment. Although the 12 information is essentially the same as the static causes of unemployment candidates should make some comment about the reasons for an increase in unemployment drawing attention to what might have changed to result in such an increase. 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 that has some basic correct facts but includes irrelevancies and errors of theory 1–4 5(b) Discussion of the likely impact of unemployment – reduced expenditure by 13 consumers, but possibly increased expenditure by governments on training programmes, benefit schemes; reduced incomes, reduced rate of economic growth, social factors and impact of unemployment. L4 For a sound discussion with good explanation of the possible outcomes. 10 max no conclusion 9–13 L3 For a competent comment but with limited development. 7–8 L2 For a brief explanation and with a weak discussion and no conclusion 5–6 L1 For an answer that has some basic correct facts but includes irrelevancies and errors of theory 1–4

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6 The table shows economic growth rates of GDP for selected countries for 2013. Switzerland 1.9% Sweden 1.5% Uganda 6.0% Zimbabwe 4.5% Source: worldbank.org (a) Does this table mean that Zimbabwe and Uganda should be classified as developed countries and Switzerland and Sweden as developing countries? [12] (b) Discuss why developing countries often aim to increase economic growth. [13]

Mark scheme: 6(a) Assessment of the use of GDP as an indicator compared with alternative 12 indicators, comment on the relevance of GDP for classification of developing countries, value other characteristics for the classification. Comment that the table only relates to 1 year. L4 For a full coverage of problems of data collection, and a discussion of usefulness and drawbacks of using GDP, link to developing status 9–12 L3 For a competent but more limited discussion of the validity of using GDP, only brief link to developing status 7–8 L2 For a general comment with nothing on alternative measures and with no explicit link to developing status. 5–6 L1 For an answer that has some basic correct facts but includes irrelevancies and errors of theory 1–4 6(b) Explanation of the benefits of growth in terms of increases in income, 13 productive capacity, trading position, employment, profitability, standards of living. L4 For a sound explanation with clear understanding of the principles involved and a clear conclusion 9–13 L3 For a competent explanation but with limited development, max7, no conclusion 7–8 L2 For a general description of only some of the factors and no conclusion5–6 L1 For an answer that has some basic correct facts but includes irrelevancies and errors of theory 1–4

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7 In recent years, many countries have faced economic difficulties. At such a time, discovering the best means of allocating scarce resources becomes much more pressing. Consider whether the study of economics has anything to offer to achieve an efficient allocation of

Mark scheme: 7 Explanation of meaning of efficient allocation and explanation of the analysis 25 which ensures an efficient optimum may be reached. Distinction between productive and allocative efficiency. Discussion of reasons for market failure and necessity/desirability of government intervention to achieve efficiency. This could be by persuasion (nudge theory) rather than by enforcement. Nudge theory, originally an ethical idea not a government manipulative tool, involves designing choices to encourage decision making in wider positive interests of society. But it can be used in government context. Conclusion about efficacy of relying on market system. Max 21 with no conclusion. L4 for a thorough explanation and a reasoned discussion dealing with both aspects of efficiency and possible reasons for government intervention. A conclusion should be drawn. 18–25 L3 for a competent explanation of the terms with accurate but limited discussion. 14–17 L2 for a correct but undeveloped explanation with some attempt at analysis but only brief discussion with no conclusion. 10–13 L1 For an answer that shows some knowledge but does not indicate that the question has been fully grasped or where the answer is mostly irrelevant. 1–9

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