Cambridge A Level Economics 9708 — 2021 May/June Paper 4 · Variant 1

1 Public services – better or worse? A government usually has macroeconomic policy aims that it hopes will enable some success in raising the quality of life, or well-being, of the population. In doing this the government also hopes to achieve efficiency in the use of resources. Efficiency is measured by relating inputs to outputs. Inputs are relatively easy to count: they are financial costs of public services. Output can also be counted, but it is not necessarily a good measure of the outcome. The outcome is much harder to calculate. It is broader and more subjective – how do we assess whether a public service is ‘better’ or ‘worse’? This is where a knowledge of well-being makes an enormous difference. It could provide a much clearer view of the trade-offs that have to be made in allocating taxpayers’ money to public services. Take the example of healthcare. To maximise the impact of expenditure on well-being, the budget may need to be adjusted to give more to mental health services and less to building general hospitals. For older people it could mean giving priority to programmes that would keep them out of hospital. A focus on well-being should lead to better outcomes. This is where policymakers need a better understanding of behavioural economics. Governments have established Behavioural Insights teams, or Nudge Units. They have had some success. A small change in the wording of a letter to people who owed tax demonstrated how more behaviourally sensitive language sped up payments. The unit also found that jobseekers were nearly twice as likely to turn up for a job fair if the text message from the job centre used their names, and nearly three times as likely if the person sending the text message added ‘good luck’. Do tax reliefs persuade people to save? No. So enrol them instead automatically in a pensions programme as a default position, with the possibility of opting out. Allowing people to learn from mistakes is good: it reduces dependency on the public sector and helps people make better decisions for themselves. But some errors, such as failing to save anything until you are too old to earn, cannot be reversed. Then an early ‘nudge’ is justified. It has proved successful in spreading the habit of saving for retirement into groups not persuaded by tax reliefs alone. In the long term this, and similar behavioural changes, may well have more influence on well-being than can be represented by concentrating on a monetary calculation of GDP. Other economic indicators could be used to assess this change in well-being. Source: RSA Issue 1, 2017 (a) The article refers to macroeconomic policy aims. Identify and explain two such macroeconomic policy aims. [4] (b) Is there evidence in the article that a knowledge of behavioural economics can help public policy? [4] (c) The article says that ‘efficiency is measured by relating inputs to outputs’. Is this how economic theory states that efficiency is determined? [5] (d) The article deals with an improvement in well-being. Discuss whether there are any economic indicators that could be used to assess whether well-being has become better or worse. [7]

Mark scheme: Question Answer Marks 1(a) The article refers to macroeconomic policy aims. Identify and explain 4 two such macroeconomic policy aims. Any two aims (2) explanation (2) 1(b) Is there evidence in the article that a knowledge of behavioural 4 economics can help public policy? • evidence of possible reduction in unemployment • evidence of possible increases in tax payments which could help reduce budget deficit • evidence of persuasion to increase savings might help stop demand inflation 1(c) The article says that ‘efficiency is measured by relating inputs to 5 outputs’. Is this how economic theory states that efficiency is determined? Partly it is for productive efficiency – cost against output; not really the case for allocative efficiency. 1(d) The article deals with an improvement in well-being. Discuss whether 7 there are any economic indicators that could be used to assess whether well-being has become better or worse. Explanation of indicators such as HDI, MEW, GDP per capita; comment on why they are relevant to measuring well-being.

More questions on Economic development

2 Assess the suggestion that a free market economy is neither possible nor desirable. [25]

Mark scheme: 2 Assess the suggestion that a free market economy is neither possible 25 nor desirable. Explanation of meaning of the free market economy and its link to an efficient allocation of resources. Distinction between productive and allocative efficiency. Discussion of whether it is desirable – individual actions are not always best for society as a whole. Discussion of whether it is possible – existence of market failure and necessity/desirability of government intervention to achieve efficiency L4 (18–25 marks) For a thorough explanation and a reasoned discussion dealing with both desirability and possibility; efficiency and possible reasons for market failure/government intervention. A conclusion should be drawn. Max 21 no conclusion. L3 (14–17 marks) For a competent explanation of the meaning of pure market. The analysis will probably concentrate on either the desirability or the possibility with little reference to the other. L2 (10–13 marks) For a correct but undeveloped explanation with some attempt at analysis but only brief discussion with no conclusion. L1 (1–9 marks) For an answer that has some basic correct facts but includes irrelevancies and errors of theory.

More questions on Resource allocation in different economic systems

3 (a) Explain what is meant by the concept of the ‘equilibrium position of a consumer’ and how the concept might be used to construct a demand curve for a good. [12] (b) Distinguish between the income and substitution effects of a change in a good’s price and analyse why the effect of a change in price is not always the same for different goods. [13]

Mark scheme: 3(a) Explain what is meant by the concept of the ‘equilibrium position of a 12 consumer’ and how the concept might be used to construct a demand curve for a good. Explanation of consumer equilibrium using either marginal utility or indifference curves. The equilibrium must be related to a point on the demand curve and then there should be an explanation of how other points on the demand curve might be caused. L4 (9–12 marks) For a sound explanation of the analysis and a clear link to the demand curve caused by either changes in price or changes in marginal utility. With accurate diagrams and a clear understanding of the principles involved. L3 (7–8 marks) For an accurate reference to the question but with a more limited explanation showing the effect of a change in price with the budget line but not linked to a demand curve, L2 (5–6 marks) For a briefer explanation of the analysis and equilibrium position but with no link to the demand curve; or with inaccurate diagrams and weak explanation. L1 (1–4 marks) For an answer that has some basic correct facts but includes irrelevancies and errors of theory. 3(b) Distinguish between the income and substitution effects of a change 13 in a good’s price and analyse why the effect of a change in price is not always the same for different goods. A price fall is reflected in a change in the budget line (pivot from point on axis of the good with no price change) with a subsequent change in equilibrium. The equilibrium change involves substitution and income effects. Substitution effect would be in the opposite direction to the price change. The income effect is represented by a parallel shift of the budget line is in the same direction as the substitution effect for the normal good but in the opposite direction for an inferior and Giffen good. Demand will increase for a normal good, but the extent will depend on elasticity, it will increase for an inferior good but not as much as for a normal good. For a Giffen good the final demand is less than the original demand. L4 (9–13 marks) For a reasoned and clear discussion, logically presented dealing with income, substitution effects and at least two different types of good, (normal, inferior, Giffen). L3 (7–8 marks) For a fair but undeveloped discussion probably concentrating on income, substitution. Mention might be made of different elasticities of a normal good or of the difference between normal goods and inferior/Giffen. There would be only a brief comment on the individual demand curve or no discussion about the demand curve. L2 (5–6 marks) For a limited explanation with a lack of development of both income/substitution and different types of good. L1 (1–4 marks) For an answer that has some basic correct facts but includes irrelevancies and errors of theory.

More questions on Indifference curves and budget lines

4 (a) What costs ought a profit-maximising firm take into consideration when making decisions about price and output? [12] (b) ‘Price discrimination is always possible but never desirable.’ Do you agree with this opinion? [13]

Mark scheme: 4(a) What costs ought a profit-maximising firm take into consideration 12 when making decisions about price and output? Comment on different types of cost. If the aim is profit maximising, then the significance of marginal cost should be mentioned and the significance of average total cost in the long run and average variable cost in the short run. L4 (9–12 marks) For a consideration of profit maximising position and role of ATC in long run and AVC in the short run. L3 (7–8 marks) For an answer that concentrates on the profit maximising position and the role of ATC in the long run. AVC will probably be omitted. L2 (5–6 marks) For an answer that concentrates only on the profit maximising position. L1 (1–4 marks) For an answer that has some basic correct facts but includes irrelevancies and errors of theory. 4(b) ‘Price discrimination is always possible but never desirable.’ 13 Do you agree with this opinion? This requires an explanation of price discrimination and an evaluation of whether it is always possible and whether there might be benefits from price discrimination if it means the firm can continue operating to avoid shutting down. L4 (9–13 marks) For clear analysis of possibility/profitability of price discrimination (separate markets, different price elasticities of demand) and potential benefits. L3 (7–8 marks) For an analysis of the possibility of price discrimination, probably concentrating on either separate markets or different elasticities and very limited comment on potential benefits. L2 (5–6 marks) For an analysis of price discrimination that is incomplete and with no evaluation of its potential benefit to the firm. L1 (1–4 marks) For an answer that has some basic correct facts but includes irrelevancies and errors of theory.

More questions on Different market structures

5 ‘Wage differentials can be explained by economic theory. They are a sign of the power of a firm to exploit its workforce and are unjust.’ Do you agree with this view? [25]

Mark scheme: 5 ‘Wage differentials can be explained by economic theory. They are a 25 sign of the power of a firm to exploit its workforce and are unjust.’ Do you agree with this view? The question presents an assertion. Candidates should discuss whether the theory does explain differentials in wage rates, and comment on the conclusion presented. Candidates should consider what is meant by ‘differential’. Is it different wages for the same job between people with the same experience or different wages for different jobs, or different levels of experience? It is likely that in imperfect competition (monopsony) wage rates may be lower than in perfect competition, but the differential might also be due to differences in supply and in the shape of the MRP curve. Differentials may also be due to differences in private/public sector pay and possible political issues in fixing wage rates. L4 (18–25 marks) For a thorough analysis of theoretical wage determination, a clear discussion about the meaning of differential, and consideration of what might cause differentials in wages. There are three parts to consider: whether wage differentials can be explained by the theory, whether they are the result of the power of the firm and whether they are unjust, Expect a comment on all three parts. L3 (14–17 marks) For a competent explanation of wage theory but with a weaker use of the analysis. There will be a more limited discussion of the meaning of differential. Expect a comment about two of the parts of the question. L2 (10–13 marks) For a correct but undeveloped descriptive approach with scant comment on the meaning of differential and a comment about only one of the parts of the statement. L1 (1–9 marks) 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.

More questions on Labour market forces and government intervention

6 (a) Distinguish between a country’s national debt and its public sector budget deficit and consider which is the more important. [12] (b) Discuss the effectiveness of alternative macroeconomic policies used to reduce a public sector budget deficit. [13]

Mark scheme: 6(a) Distinguish between a country’s national debt and its public sector 12 budget deficit and consider which is the more important. Candidates should clearly distinguish between the national debt and the public sector budget deficit. The national is the cumulative amount of debt which consists of the total amount of money borrowed from the private sector and other purchases of government securities since the government began borrowing. The public sector budget deficit occurs when a government spends more than its income in a particular time period, usually one year. Both are important due to their potential effects on the macro economy. Interest has to be paid on the national debt and this has an opportunity cost regarding the use of scarce public sector resources. The budget deficit has to be financed and this has important implications for the impact of this on key macroeconomic indicators. L4 (9–12 marks) For an answer that provides a clear explanation of both terms and why each is important in relation to macroeconomic policy. An attempt should be made to evaluate the relative importance of each indicator and also an attempt should be made to show how both elements are linked. A conclusion should provide evidence of some consideration of why one indicator may or may not be more important than the other. L3 (7–8 marks) For responses that demonstrate a good grasp of both indicators and why both indicators are important by linking each to macroeconomic management. No attempt will be made to examine the relative importance of each indicator and the conclusion will not be fully developed. L2 (5–6 marks) For a description of both indicators but with a limited attempt to establish the importance of each indicator. There will be little reference to the potential links between the indicators and no discussion regarding their effect on key macroeconomic indicators. No conclusion will be provided. L1 (1–4 marks) For an answer that has some basic correct facts but includes irrelevancies and errors of theory. 6(b) Discuss the effectiveness of alternative macroeconomic policies used 13 to reduce a public sector budget deficit. Short run policy approaches can be divided into those based on increases in the level of taxation and those related to cuts in public expenditure. Longer term measures might relate to supply side policies used to achieve economic growth. The effectiveness of each group of measures can be analysed by assessing their relative impact on the deficit in the short run and long run and considering costs associated with each policy alternative. L4 (9–13 marks) For a discussion that refers to at least two groups of alternative macroeconomic measures and attempts to assess the costs/benefits associated with each approach. Good responses will identify the distinction between short run and long run approaches. A reasoned conclusion should be provided. L3 (7–8 marks) For analysis of how different macroeconomic policies might be used to reduce a budget deficit but no attempt to distinguish between short run and long run approaches and no attempt to discuss which policy option might be the more effective. L2 (5–6 marks) For an answer that describes how a budget deficit can be reduced but does not provide any supporting analysis of how each policy might work and only partially attempts to develop points raised. No conclusion will be provided. L1 (1–4 marks) For an answer that has some basic correct facts but includes irrelevancies and errors of theory.

More questions on Fiscal policy

7 (a) Explain and critically evaluate the quantity theory of money. [12] (b) Monetary policy relies heavily on the theory of a monetary transmission mechanism. Explain how a monetary transmission mechanism works and discuss its effectiveness. [13]

Mark scheme: 7(a) Explain and critically evaluate the quantity theory of money. 12 The quantity theory of money is based on the assumption that there is a direct relationship between a change in the money supply and the rate of inflation. The theory uses the equation MV= PT. This assumes that V is constant and T is constant (i.e. consistent with the full employment level of transactions). On this basis, any change in M (the money supply) will have a direct effect on P (the price level). Critics question both of these assumptions and also point out that it is extremely difficult to measure the money supply and also difficult to effectively control the money supply. L4 (9–12 marks) For a clear explanation of the quantity theory of money and the assumptions upon which this theory is based. At least two critical evaluation points should be raised which question the assumptions and the ability to measure/control some of the variables in the equation. L3 (7–8 marks) For detailed analysis of the quantity theory and how it is supposed to work in practice. This should be supported by some critical comment based on the assumptions of the theory. L2 (5–6 marks) For some knowledge of the quantity theory of money and how it might be used to support the monetarist explanation of the cause of inflation. Key assumptions relating to this theory might not be considered and critical comment will be brief and undeveloped. L1 (1–4 marks) 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. 7(b) Monetary policy relies heavily on the theory of a monetary 13 transmission mechanism. Explain how a monetary transmission mechanism works and discuss its effectiveness. The monetary transmissions mechanism links changes in the money market to changes in the goods market. Changes in the money supply will change interest rates which will impact on the level of investment and ultimately this will change real variables such as output and employment. Evaluative comment might refer to the liquidity trap, an inelastic MEC curve, the effect of negative expectations on investment, a possible weak multiplier effect or the negative feedback effect of an increase in income on the rate of interest. L4 (9–13 marks) For a detailed explanation of the Keynesian monetary transmission supported by an accurate, clearly labelled diagram. Responses should identify at least two reasons why the link between the money market and goods market might be weak. Based on the preceding evaluation a conclusion should comment on the effectiveness of the theory. L3 (7–8 marks) For clear analysis of the links between the money market and the goods market supported by an accurate, relevant diagram. Some evaluative comment will be provided but not fully developed. Conclusion will be brief. L2 (5–6 marks) For a descriptive approach that does not support comment with an appropriate diagram with very little comment relating to the effectiveness of the process and no attempt to provide an appropriate conclusion. L1 (1–4 marks) For an answer that has some basic correct facts but includes irrelevancies and errors of theory.

More questions on Monetary policy