Cambridge A Level Economics 9708 — 2019 May/June Paper 3 · Variant 2

1 Which statement is correct? A In a command economy firms compete and profit maximise allocating resources efficiently. B In a command economy resources are privately owned. C In a market economy prices are used to signal the value of individual resources. D In a market economy resources are allocated by central planners.

Mark scheme: C

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2 The diagram shows the market for a product, the production of which has both external costs and external benefits. costs, MSC benefits MPC MSB MPB O W X Y Z quantity What is the difference between the level of output that would be produced by the market and the socially optimum level? A WX B WY C XY D XZ

Mark scheme: C

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3 The government is considering building flood defences along a river. It has calculated the costs and benefits as follows. costs benefits $m $m private 450 260 external 60 190 According to cost-benefit analysis, which decision and reasoning about flood defences is correct? decision reasoning A build external benefits are greater than external costs B build social benefits are greater than private benefits C do not build private costs are greater than the external benefits D do not build social costs are greater than the social benefits

Mark scheme: D

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4 The graph shows the total utility (TU) obtained by a consumer from eating biscuits over a period of one hour. total utility TU 0 1 2 3 4 5 6 7 biscuits eaten in an hour After eating how many biscuits does the consumer’s marginal utility begin to diminish? A 3 B 4 C 5 D 6

Mark scheme: A

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5 The diagram shows budget lines for normal goods X and Y. P good Y O R Q good X What could cause a budget line to shift from PQ to PR? level of price of X price of Y consumer incomes A fall rise fall B no change rise no change C rise no change no change D rise no change rise

Mark scheme: C

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6 A consumer spends all of their income on two goods, Y and X, and is at position E. The price of X falls and the price of Y remains constant. The graph shows indifference curves and budget lines which are used to determine the price, income and substitution effects that are related to this price change. Y1 Y Y2 E I2 I1 O X1 X2 X3 X4 X5 X6 X Which distance gives the income effect of this price change? A X1X2 B X1X4 C X2X4 D X5X6

Mark scheme: C

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7 What defines average variable cost? A total cost divided by the quantity of the variable factor employed B total variable cost divided by the quantity of the variable factor employed C total variable cost divided by the output produced D the addition to total variable cost by producing one more unit of output

Mark scheme: C

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8 What cannot be changed in the short run? A the level of stock held by firms B the level of technology available C the market price of goods D the output of individual firms in an industry

Mark scheme: B

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9 The market structure of an industry changed from being an oligopoly to monopolistic competition. What is most likely to have increased? A an individual firm’s ability to influence the market price B an individual firm’s degree of interdependence in the market C the concentration ratio in the market D the number of firms in the market

Mark scheme: D

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10 A firm has total production cost of $200 000. Its average fixed cost is $120 and its average variable cost is $80. What are the firm’s total fixed costs? A $12 000 B $40 000 C $80 000 D $120 000

Mark scheme: D

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11 What is a characteristic of monopolistic competition? A abnormal profits in the long run B advertising supporting product differentiation C all firms charge the same price D barriers to entry are high

Mark scheme: B

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12 The diagram shows the marginal cost (MC), average variable cost (AVC) and average total cost (ATC) curves of a profit maximising firm in a perfectly competitive market. MC cost ATC AVC P4 P3 P2 P1 O output Which market price would mean the firm would operate in the short run but not in the long run? A P1 B P2 C P3 D P4

Mark scheme: B

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13 The table shows the average incomes of the richest 20% of households and the poorest 20% of households in the UK (2015–2016), and the effects of government taxation and benefits on average income. average income average income (£) of (£) of richest 20% poorest 20% before taxes and benefits 85 000 7 000 after direct taxes and cash benefits 68 000 13 000 after all taxes (direct and indirect) and all benefits 63 000 17 000 What can be concluded from the information in the table? A The effects of direct taxation have affected the rich less than the poor. B The government’s policy achieved income equality across households. C The government redistributed all income taken from the rich to the poor. D The government’s policy reduced the income inequality between the poor and the rich.

Mark scheme: D

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14 Assuming there are no externalities, where would a nationalised firm set output to maximise social welfare? A where average revenue equals average cost B where average revenue equals marginal cost C where marginal revenue equals marginal cost D where marginal revenue is zero

Mark scheme: B

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15 What is the specific advantage of pollution permits, when compared with an alternative policy of taxes levied on the quantity of pollutants emitted by firms? A firms have a financial incentive to reduce pollution B no monitoring of firm’s emissions is required C pollution levels can be reduced to zero D the reduction in the level of pollution is more predictable

Mark scheme: D

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16 Which diagram correctly shows the relationship between the average product (AP) and the marginal product (MP) of labour, given that the quantities of other factor inputs remain constant? A B average MP average product, AP product, marginal marginal product product MP AP O O labour labour C D MP average average AP product, product, marginal marginal product product AP MP O O O labour labour

Mark scheme: B

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17 The diagram shows the short-run relationship between the total output of a firm and the quantity of labour. total total output output O quantity of labour What can be concluded about the firm? A It is experiencing increasing returns to scale. B It is experiencing constant returns to scale. C The marginal physical product of capital is constant. D The marginal physical product of labour eventually diminishes.

Mark scheme: D

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18 Company X reduces its number of workers from 250 to 200 and as a result its output decreases from 5000 to 4800 units per day. Company Y increases its number of workers from 800 to 1000 and as a result its output increases from 2000 to 2200 units per day. What happens to labour productivity of the workers in the two companies? company X company Y A falls rises B rises falls C rises rises D falls falls

Mark scheme: B

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19 What is not included in the measurement of national income? A age-related pensions B dividends obtained from foreign investments C housing authorities’ income from rent D profits distributed to shareholders

Mark scheme: A

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20 The graphs show the Human Development Index and its component parts for Zimbabwe. Human Development Index education index 0.55 0.6 0.5 0.55 0.5 0.45 0.45 0.4 0.4 0.35 0.35 0.3 0.3 1990 2000 2005 2010 2011 2012 2013 1990 2000 2005 2010 2011 2012 2013 1995 1995 life expectancy GNI per capita, ppp (2011 ppp) 0.55 0.6 0.5 0.55 0.5 0.45 0.45 0.4 0.4 0.35 0.35 0.3 0.3 1990 2000 2005 2010 2011 2012 2013 1990 2000 2005 2010 2011 2012 2013 1995 1995 Between 2005–2010, which components of HDI have comparable changes to its overall change? A education and GNI per capita B education and life expectancy C education, GNI per capita and life expectancy D GNI per capita and life expectancy

Mark scheme: B

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21 What makes it possible for the increase in real national output to exceed the increase in labour productivity? A an increase in employment B an increase in the inflation rate C an increase in the money supply D an increase in total earnings

Mark scheme: A

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22 The table shows the annual percentage (%) change in China’s GDP and the contribution of some of its component parts between 2006 and 2012. 2006 2007 2008 2009 2010 2011 2012 GDP 12.7 14.2 9.6 9.2 10.4 9.3 7.7 consumption 5.1 5.6 4.2 4.6 4.5 5.2 4.2 investment 5.5 6.0 4.5 8.1 5.5 4.5 3.9 net exports 2.1 2.6 0.9 –3.5 0.4 –0.4 –0.4 What can be concluded about China’s economy between 2006 and 2012? A China’s current account was in surplus more years than it was in deficit. B China’s economic rate of growth fell in more years than it rose. C China’s growth was greater overall in consumer goods than in capital goods. D China’s standard of living rose at a decreasing rate.

Mark scheme: B

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23 What is a cause of seasonal unemployment? A a general decrease in the demand for goods and services B a lack of necessary skills in the workforce C a temporary change in the pattern of consumers’ expenditure D an unwillingness of workers to move to other parts of the country where there is work

Mark scheme: C

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24 Which row correctly identifies leakages from a country’s circular flow of income? private sector public sector trade sector (S > I) (T > G) (X > M) A no no yes B no yes yes C yes no no D yes yes no

Mark scheme: D

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25 In a closed economy with no government expenditure and no taxation, the initial income is $5000 million. All savings are carried out by consumers, who save 20% of any additional income received above $5000 million. Firms plan to invest $1000 million. What is the value of the multiplier? A 0.8 B 4 C 5 D 8

Mark scheme: C

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26 The diagram shows a liquidity preference curve (LP) representing the demand to hold money in relation to the rate of interest and the money supply (MS) in an economy. The market is in equilibrium at interest rate r. MS rate of interest r LP O quantity of money If the government increases the money supply, what will be the effect on the interest rate? A falls below zero B falls to zero C increases D no effect

Mark scheme: D

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27 An increase in which of the following will cause a decrease in investment spending? A business confidence B company profits C interest rates D national income

Mark scheme: C

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28 The graph shows a shift in the liquidity preference curves for an economy from LP; to LP2. LP, LP, rate of interest O quantity of money What might have caused this shift? increased pessimism about the future of the economy an increase in real national income A v v B v x Cc x v D x x

Mark scheme: A

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29 What is most likely to increase in the short run following a rise in an economy’s rate of inflation caused by a demand-side shock? A the current account deficit on the balance of payments B the price of government bonds C the purchasing power of the currency D the rate of unemployment

Mark scheme: A

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30 Which combination of policies is most likely to increase output? fiscal policy monetary policy A decrease budget deficit decrease interest rates B decrease budget deficit increase interest rates C increase budget deficit decrease interest rates D increase budget deficit increase interest rates

Mark scheme: C

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