Cambridge A Level Economics 9708 — 2018 May/June Paper 4 · Variant 2

1 Infrastructure is restricting Indonesia’s economic development One feature of Indonesia’s economy that has been hampering its economic and social development is the lack of quality and quantity of its infrastructure, whether it is ‘hard’ like roads or ‘soft’ like education. In recent years the Indonesian government has given infrastructure a relatively small allocation of public spending. In 2011 only 2.1% of the country’s Gross Domestic Product (GDP) was reserved for infrastructure. In comparison, countries such as China and India spend almost 10% of their GDP on infrastructure. Since the late 1990s expansion of Indonesia’s infrastructure has not matched macroeconomic expansion, and as a consequence economic growth has not reached its full potential. It is estimated that GDP could grow at 1%–2.5% more than the current annual rate. Lack of adequate infrastructure causes distribution costs such as transport and warehousing to rise steeply, thus reducing Indonesia’s competitiveness and attractiveness as an investment location. According to data published by the Indonesian Chamber of Commerce and Industry (Kadin Indonesia), around 17% of a typical company’s total expenditure is absorbed by such costs. In other south-east Asian economies this is below 10%. In particular transport costs are high; by land as well as sea. Despite Indonesia’s island geography, sea transport is yet to be developed substantially. Currently, sea transport is even more expensive than land transport. This results in inflationary pressures on domestically produced products. It partly explains why some domestically grown fruit is more expensive than imported fruit. It also leads to substantial regional price differences. Rice, for example, is much more expensive in eastern Indonesia than in Java or Sumatra. It also prevents businesses from expanding and profitable opportunities are lost. Indonesia suffers from inadequacies in the country’s electricity supply, despite the abundance of energy resources. Part of the problem is that the state-owned electricity distributor, which has a monopoly on electricity distribution, is heavily dependent on government subsidies as the cost of production is higher than the fixed maximum selling price. Soft infrastructure such as education, healthcare and social welfare is also under-developed. The government has made efforts to improve these areas in recent years. A new healthcare system is about to be introduced covering all Indonesians and spending on education has increased markedly. Source: indonesia-investments.com, accessed 17 April 2016 (a) Identify two examples of ‘soft’ infrastructure mentioned in the article. [2] (b) Explain, with the help of a diagram, the effect on consumers of fixing the maximum selling price for the electricity distributed by the state-owned monopoly. [6] (c) Explain the effects on Indonesian firms of the problems identified in the transport of goods. [5] (d) Discuss the likely impact on Indonesia’s GDP of an improvement in its infrastructure. [7]

Mark scheme: Question Answer Marks 1(a) • education 2 • healthcare • social welfare 1+1 1(b) • up to 2 for a diagram – showing maximum price 6 • up to 2 for comment – effect on consumers → shortages • up to 2 for elaboration of monopoly situation (diagram + comment) 2+2+2 1(c) Developed explanations of problems 5 • up to 3 for costs of distribution higher → lower production, less competitive prices • up to 3 for transport problems prevent business expansion → inefficient production, higher costs, lower profits Max 5 marks 1(d) • up to 4 for explaining direct effect of improved infrastructure e.g. 7 education, healthcare, social welfare, transport, electricity → improves workforce skills/workforce health/reduces costs of production/improves efficiency. This leads to increases in Indonesia’s productivity outwards shift of Indonesia PPF/LRAS/AD and increase in overall economic capacity. • up to 3 for discussion about the impact on either short term GDP growth as infrastructure spending may boost AD in SR stimulating actual growth but there may be an opportunity cost or long term GDP. as in the LR capacity will increase and there is potential increase in GDP but AD will have to rise to prevent unemployment. 4+3

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2 (a) Explain, with the aid of a diagram, diminishing marginal utility and its link to indifference curves. [12] (b) Discuss, using indifference curve analysis, how the impact of an increase in indirect taxation on the quantity demanded of a good depends on whether it is a normal or inferior good. [13]

Mark scheme: 2(a) The marginal rate of substitution between two goods is the ‘linking’ concept. 12 Explanation of utility theory and indifference curves. Because of diminishing marginal utility, the MRS is not constant and this explains the shape of the indifference curve. L4 (9–12 marks) For a reasoned and clear explanation of the concepts together with diagrams to illustrate them. Explicit reference to the linkage required. L3 (7–8 marks) For a competent comment but with a limited elaboration of the two concepts, or a reasoned and clear explanation of one concept and limited mention of the other. L2 (5–6 marks) For a superficial explanation concentrating on general concepts with only limited relevant reference to the question. L1 (1–4 marks) For an answer which has a few basic correct facts but includes irrelevancies. Errors of theory or omissions of analysis will be substantial. 2(b) Indirect tax increases the relative price of a good and there will be both 13 income and substitution effects. These must be shown using indifference curves. Discussion of relative size of income and substitution effects for normal and inferior goods. L4 (9–13 marks) For a thorough explanation of the impact of the indirect tax on both types of good together with relevant diagrams. A discussion on the substitution and income effects of the tax increase. Maximum 11 if no conclusion. L3 (7–8 marks) For a competent explanation which does not fully analyse both types of goods. Full analysis of one type and limited analysis of the other. L2 (5–6 marks) For an accurate though undeveloped comment concentrating on only one type of good. L1 (1–4 marks) For an answer which shows some knowledge but does not indicate that the question has been fully grasped. The answer will have some correct facts but include irrelevancies. Errors of theory or omissions of analysis will be substantial.

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3 A businessman claimed it was difficult to make decisions as his business was subject to uncertainty and interdependence. Discuss the methods used by oligopoly firms to reduce uncertainty and interdependence and the extent to which these methods exploit the consumer. [25]

Mark scheme: 3 Explanation of oligopoly market structure, which gives rise to uncertainty 25 and interdependence. Discussion of methods used to reduce these problems (Collusion, Non-price competition or Other) and the impact of these on the consumer. L4 (18–25 marks) For discussion of the methods used in oligopolistic competition to reduce uncertainty and interdependence and which considers the likely impact on the consumer. Maximum 21 if no conclusion. L3 (14–17 marks) For a competent analysis and a more limited discussion of the methods used and their impact on the consumer. L2 (10–13 marks) For accurate though undeveloped explanation. L1 (1–9 marks) 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.

More questions on Different market structures

4 (a) Explain how a firm derives its demand curve for labour and consider how the structure of the product market in which the firm operates affects the firm’s demand curve for labour. [12] (b) Discuss whether it is possible for a trade union to negotiate higher wages and more employment. [13]

Mark scheme: 4(a) The demand for labour is derived from MRP (MPP X MR). The MRP 12 includes the MR of selling the product so it is important to consider whether the firm is a price-taker (and hence facing a constant MR) or has a downward sloping MR curve. L4 (9–12 marks) For an explanation of the derivation of the demand curve for labour and a comment on the effect of the difference of MR in 2 different types of product market. L3 (7–8 marks) For an explanation of the derivation of the demand curve for labour and its link to one type of product market. L2 (5–6 marks) For an explanation of the derivation of the demand curve for labour. L1 (1–4 marks) For an answer which has some basic correct facts but includes irrelevancies. Errors of theory or omissions of analysis will be substantial. 4(b) Discussion of whether TU negotiations lead to (i) rising unemployment (ii) 13 the circumstances in bilateral monopoly where a TU with sufficient power can negotiate both higher wages and higher employment or (iii) closed shop. L4 (9–13 marks) For a thorough discussion of both situations. Maximum 11 no conclusion. L3 (7–8 marks) For a competent explanation a full analysis of one situation or a partial analysis of two sides. L2 (5–6 marks) For an accurate though undeveloped explanation concentrating on only one side. L1 (1–4 marks) For an answer which shows some knowledge but does not indicate that the question has been fully grasped. The answer will have some correct facts but include irrelevancies. Errors of theory or omissions of analysis will be substantial.

More questions on Labour market forces and government intervention

5 (a) Explain the difference between actual growth and potential growth. [12] (b) To what extent do you agree that the costs of economic growth are greater than the benefits? [13]

Mark scheme: 5(a) Actual growth is an increase in the volume of goods and services produced. 12 Firms increase their output, while consumption, investment and exports are increasing. Potential growth is an increase in the capacity of an economy to produce goods and services. Reference to short run and long run and comment on link to production possibility or aggregate demand. L4 (9–12 marks) For a sound explanation of both terms and a clear understanding of the differences. L3 (7–8 marks) For an accurate explanation on one term and limited explanation of the other. L2 (5–6 marks) For an accurate explanation of one term or a weak explanation of both terms. L1 (1–4 marks) For an answer which has some basic correct facts but includes irrelevancies. Errors of theory or omissions of analysis will be substantial. 5(b) A discussion of the benefits of economic growth e.g. rising GDP, improving 13 standard of living, better health, longer lifespans. A discussion of the costs of economic growth e.g., pollution, congestion, increase in working hours. L4 (9–13 marks) For a thorough discussion of both sides of the issue. Maximum11 if no conclusion. L3 (7–8 marks) For a competent comment which does not fully analyse both sides. An analysis of one side and limited analysis of the other. L2 (5–6 marks) For an accurate though undeveloped comment concentrating on one side. L1 (1–4 marks) For an answer which shows some knowledge but does not indicate that the question has been fully grasped. The answer will have some correct facts but include irrelevancies. Errors of theory or omissions of analysis will be substantial.

More questions on Economic growth and sustainability

6 In 2016, governments in some countries were concerned about inflation, whilst the governments of other countries were concerned about recession. (a) Consider how the causes of recession may differ from the causes of inflation. [12] (b) Examine the view that ‘recession can only be solved by monetary policy’. [13]

Mark scheme: 6(a) Explanation of the causes of both terms and a consideration of how their 12 causes may differ. L4 (9–12 marks) For a sound explanation of two causes of recession and two causes of inflation and reference to how they may differ. L3 (7–8 marks) For a competent explanation of two causes of one term and one cause of the other. L2 (5–6 marks) For an explanation of one cause of each term or two causes of one term. L1 (1–4 marks) For an answer which has some basic correct facts but includes irrelevancies. Errors of theory or omissions of analysis will be substantial. 6(b) A discussion of the role of monetary policy in correcting a recession and of 13 alternative approaches. L4 (9–13 marks) For a thorough discussion of monetary policy and at least one alternative. Maximum of 11, if no conclusion. L3 (7–8 marks) An analysis of monetary policy and awareness of another policy. L2 (5–6 marks) For an accurate though undeveloped explanation concentrating on only monetary policy. L1 (1–4 marks) For an answer which shows some knowledge but does not indicate that the question has been fully grasped. The answer will have some correct facts but include irrelevancies. Errors of theory or omissions of analysis will be substantial.

More questions on Effectiveness of policy options to meet all macroeconomic objectives

7 A free market economy operates to the benefit of both consumer and producer to achieve the most efficient outcome, and therefore there is no role for a government to play in controlling the market. Consider the extent to which this statement is correct. [25]

Mark scheme: 7 An explanation of productive and allocative efficiency. A discussion of the 25 free market economy and its limitations. The role and limitations of government in controlling the market. L4 (18–25 marks) For a discussion of both efficiencies which considers the effects of competition in achieving them. Two or more alternative forms of market failure and the application of government policies to reduce them. Maximum 21, if no conclusions. L3 (14–17 marks) For a discussion of efficiency with a single form of market failure. A brief reference to the need for government. L2 (10–13 marks) For an accurate though undeveloped explanation of efficiencies, market failure and/or government intervention. L1 (1–9 marks) 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.

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