Cambridge A Level Economics 9708 — 2018 Oct/Nov Paper 4 · Variant 2

1 What’s to be done about rising inequality? There is great inequality of income and wealth in the United States (US), that many believe is not equitable. It seems, even to some of those who benefit from this inequality, that something should be done to reduce it. What are the strongest reasons for trying to bring about greater equality of income and wealth? One obvious reason for redistributing resources from the rich to the poor is simply that this is a way of making the poor better off. Many people in the world are poor, and the improvement in their lives that richer people could bring about by giving money is enormous by comparison with the small sacrifice that this would involve. Redistributing assets increases the well-being of the poor more than it decreases that of the rich. A justification for reducing inequality through non-voluntary means, such as taxation, needs to explain why redistribution of this kind is not just arbitrary. The possibility of making the poor better off is not the only reason for seeking to reduce the world’s rising level of economic inequality. Many people in the US believe that high and rising levels of inequality are objectionable. It is worth inquiring into why this might be so. 1. Economic inequality can give wealthier people an unacceptable degree of control over the lives of others, for example over where and how they can work, what they can buy and in general what their lives will be like. 2. Economic inequality can undermine the fairness of political institutions. If those who hold political offices depend on large private contributions for their election campaigns, they may be more responsive to the interests and demands of wealthy contributors, and those who are not rich will not be fairly represented. 3. Economic inequality undermines the fairness of the economic system itself by making it difficult, if not impossible, to create equality of opportunity. For example, it means that some children will enter the workforce much better prepared than others and people with few assets find it harder to access a loan to start a business or to pay for higher education. Source: Reasons we should fix economic inequality, TM Scanlon, accessed 19 April 2016 180% 160% top 1% of wage 140% earners 120% Percentage 100% change in real pay 80% 60% 40% average wage 20% earners 0% –20% 1975 1980 1985 1990 1995 2000 2005 2010 2015 Fig. 1.1: Change in real annual pay in the US, 1979–2013 Source: Adapted from EPI analysis of data from Kopczuk, Saez and Song (2010) and Social Administration wage statistics. (Accessed 19 April 2016) (a) The article says that many in the US believe that inequality is not equitable. What is the difference between equality and equity? [2] (b) Explain, using the article, two ways in which inequality is considered harmful. [4] (c) Consider whether the changes in real annual pay shown in Fig. 1.1 support the idea of rising inequality in the US. [6] (d) The article refers to a reduction of inequality through taxation. Discuss the effectiveness of fiscal policy in redistributing income. [8]

Mark scheme: Question Answer Marks 1(a) Equity refers to fairness and is a normative concept (1 mark) 2 Equality implies identical positions e.g. pay (1 mark) 1(b) • Too much control/power to the wealthy. 4 • Undermines fairness of political institutions. • Makes it difficult to create equality of opportunity for the less well off • Inequality is harmful to the poor because they suffer disproportionately. 2 × (1 mark for identifying an example from the text + 1 mark for explanation using own words) Maximum 2 for statements only. 1(c) • Both trends are generally upwards (1 mark) 6 • The average wage earner has risen just over 30% (1 mark) • and has limited change since 2000 (1 mark) • Top 1% has risen 140% (1 mark) • From 2000 the top 1% has seen considerable fluctuations (1 mark) • Consideration of the limitations of the diagram (up to 2 marks) • Conclusion: The diagram does support the idea of rising inequality (1 mark) Maximum 6 marks 1(d) • Fiscal policy definition (1 mark) 8 • Discuss the effectiveness of: Regressive/Progressive taxes. (these terms need not be referred to directly) (up to 4 marks) • Discuss the effectiveness of: Transfer payments/Subsidies Direct provision of goods and services (up to 4 marks) • Conclusion (1 mark) Maximum 8 marks

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2 Discuss whether economic efficiency is always achievable in a market economy. [25]

Mark scheme: 2 Definitions and explanations of productive efficiency and allocative efficiency 25 Price = MC. Use of perfect competition model to demonstrate market achievement of PE & AE. Discussion of circumstances in which economic efficiency is not attained e.g. imperfect competition, externalities, public goods, asymmetric information. L4 (18–25 marks): For a thorough analysis of the two efficiencies and their application in perfect competition/monopoly, Analysis of either 2 forms of market failure in depth or more than 2 more briefly. There is a conclusion. Max 21 no conclusion. L3 (14–17 marks): For a good analysis of one efficiency or a limited analysis of both efficiencies and a good analysis of 1 form of market failure. or A good analysis of 2 efficiencies and limited analysis of 1 form of market failure. L2 (10–13 marks): For undeveloped explanation of both efficiencies or 1 undeveloped efficiency and 1 undeveloped market failure or 2 undeveloped market failures and limited reference to efficiency. 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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3 (a) Analyse the factors which determine the price of a firm’s product and its output in monopolistic competition. [12] (b) Assess the effect on output and price if a monopoly firm maximises its sales revenue rather than its profit. Consider who will benefit the most from this change. [13]

Mark scheme: 3(a) Analysis of the role of marginal costs and marginal revenue in determining 12 profit maximising output and how the price is determined on the downward sloping demand curve. Reference to the short term and the long term equilibrium positions. L4 (9–12 marks): For an analysis of the role of marginal costs and marginal revenue in determining the profit maximising output and price. Short term (ST) and long term (LT) equilibrium positions are analysed. L3 (7–8 marks): For an analysis of the role of marginal costs and marginal revenue in determining the profit maximising output and price and analysis of either ST or LT equilibrium. L2 (5–6 marks): For a brief explanation concentrating on one aspect or limited reference to the equilibrium position 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. 3(b) An explanation of the sales revenue maximisation model (SRM). How SRM 13 means that both price must be lower and quantity must be greater than in profit maximisation. Consumers gain through lower prices and greater output, managers gain if salaries linked to revenue not profits and shareholders lose as profits are reduced. Reference to the separation of ownership and control allowing SRM. L4 (9–13 marks): For discussion of the SRM model which identifies the separation of ownership and control. Identifies the higher output and lower price of SRM compared with profit maximising model. Identifies who gains and who loses. There is a conclusion. Max 11 no conclusion. L3 (7–8 marks): Equilibrium output and price are identified which does not fully analyse the outcomes of the SRM model. L2 (5–6 marks): For a descriptive explanation. 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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4 Consider whether wages are only determined by the market forces of supply and demand. [25]

Mark scheme: 4 The use of supply and demand to explain the determination of wages. The 25 demand for labour explained through the marginal revenue productivity theory. Consideration of elasticities of supply and demand on wage level. A discussion of the impact of minimum wage levels, government, the intervention of a Trade Union, and monopsonistic employers. L4 (18–25 marks): For an analysis of the determination of wages showing differing level of supply and demand and a consideration of the impact of elasticity on wages. 2 examples non-market forces are analysed, such as government and trades union. An analysis of MRP. A conclusion is required. Max 21 no conclusion L3 (14–17 marks): For an analysis of the determination of wages showing differing level of supply and demand and a consideration of the impact of elasticity on wages, with 1 example of analysis of non-market forces L2 (10–13 marks): For an explanation based on only supply and demand, lacks consideration of non-market forces. L1 (1–9 marks): For an answer which has some basic correct facts but includes irrelevancies. Errors of theory or omissions of analysis will be substantial.

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5 Robots are increasingly used in various areas of production. (a) Explain the type of unemployment which may arise as a result of the increased use of robots. Consider the contribution this may make to total unemployment in an economy. [12] (b) Discuss whether GDP is always a good measure of living standards. [13]

Mark scheme: 5(a) Recognition of technological unemployment as a part of structural 12 unemployment. Substitution of capital for labour leading to higher unemployment. New technology may reduce price of capital relative to labour. An increase in productivity leading to an increased demand for labour. New technology may lead to a fall in prices, higher aggregate demand increasing employment. The contribution of technological unemployment to total unemployment depends on the structural composition of an economy and the level of aggregate demand. Some reference to alternative forms of unemployment. L4 (9–12 marks): For an explanation of technological unemployment and discuss 2 impacts of technological unemployment, comment on contribution of technological unemployment to total unemployment. L3 (7–8 marks): For an explanation of technological unemployment and discuss one impact of technological unemployment. Reference to one other form of unemployment. L2 (5–6 marks): For an explanation of technological unemployment. 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) The role of real GDP per capita (pc) as a measure of living standards. 13 Limitations of real GDP pc such as unemployment, distribution of income, education/health/cultural change/hours worked, do the statistics produced reflect economic activity. Use of PPP for international comparisons. Alternative measures of economic welfare: e.g. MEW, HDI, MPI. L4 (9–13 marks): For analysis of the real GDP pc as a measure of living standards and 3 limitations, an explanation of 1 alternative measure of living standards. A conclusion is required. Max 11 if no conclusion. L3 (7–8 marks): For analysis of real GDP or GDP pc and 2 limitations of the measure. L2 (5–6 marks): For an explanation of GDP and 1 limitation. 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.

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6 A country with an open economy has an increasing demand for its exports and a fall in the supply of labour. (a) Explain the effects of these changes on the general price level and national output in that economy. [12] (b) Consider the effectiveness of using only monetary policy in this situation. [13]

Mark scheme: 6(a) Identify the components of aggregate demand/supply affected by the two 12 economic factors. Effect of increased demand for exports on aggregate demand. The effect of a labour shortage on costs of production and aggregate supply. Analysis of the effect on output and prices using aggregate demand and aggregate supply analysis. L4 (9–12 marks): For an analysis of the two changes on AD and AS and their impact on price level (increases) and output might increase/decrease or remain unchanged (uncertain). L3 (7–8 marks): For an analysis of the two changes on AD and AS and their impact on either the price level or output. L2 (5–6 marks): For an explanation of the changes on AD and/or AS. 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) Accept a response based on the stem of the question e.g. answers that 13 discuss the effectiveness of monetary policy in causing the original shifts in the AD/AS. or Alternatively accept a response that discusses the effectiveness of monetary policy to address the changes resulting from the shifts that have taken place in 6a. Definitions of MNC and economic growth. Explanation and analysis of the role of monetary policy in changing AD/AS. The monetary transmission mechanism and its impact. A consideration of alternative policies. Explanation and analysis of the roles fiscal policy and supplied side policies could play in reducing the impact of the two factors. L4 (9–13 marks): For an analysis of the role of monetary policy, the monetary transmission mechanism and its impact. Candidates should also discuss an alternative policy fiscal or supply-side. A comment on the limitations of the chosen policies. A conclusion is required Max 11 No conclusion L3 (7–8 marks): For an analysis of the role of monetary policy. A brief reference to fiscal policy or supply-side policies. L2 (5–6 marks): For an explanation of monetary policy or a descriptive approach to monetary policy and 1 more policy. 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.

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7 (a) Explain how developing countries differ from developed countries. [12] (b) Assess the extent to which a multinational company’s investment in a developing country leads to economic growth. [13]

Mark scheme: 7(a) A consideration of a number of different factors: GDP, GDP per capita, the 12 likely age structure, the structure of the economy, access to capital, the type and quantity of investment, the ability of the labour force, the state of the balance of payments. L4 (9–12 marks): For an analysis which shows how a factor differs depending on the different stages of development. 3 different factors considered. L3 (7–8 marks): For an analysis of the 2 different factors. L2 (5–6 marks): For an explanation of 1 well-developed factor or 2 with limited development. 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. 7(b) The role of a multinational corporation (MNC) in bring investment to a 13 country. The impact of investment as a component of AD. Multiplier effects of investment. Consideration of the size of the multiplier. Recognition that unemployment exists but labour skills may be inadequate. Impact on the other elements of AD, government, imports, exports and consumption. L4 (9–13 marks): For an analysis of MNC Investment on the GDP of a developing country. Impact of 3 factors on economic growth with positive and negative comments. A conclusion is required. Max 11 if no conclusion L3 (7–8 marks): For an analysis of Investment on the GDP of a developing country. Impact of 2 factors on economic growth. L2 (5–6 marks): For an explanation of the effect of investment on GDP. Impact of 1 factor on economic growth 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.

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