Cambridge IGCSE Economics 0455 — 2012 May/June Paper 3 · Variant 2

1 (a) What is meant by external costs? .......................................................................................................................................... .......................................................................................................................................... .......................................................................................................................................... .......................................................................................................................................... .......................................................................................................................................... .......................................................................................................................................... .......................................................................................................................................... ......................................................................................................................................[2] (b) What evidence is there in the extract of the economic problem? .......................................................................................................................................... .......................................................................................................................................... .......................................................................................................................................... .......................................................................................................................................... .......................................................................................................................................... .......................................................................................................................................... .......................................................................................................................................... ......................................................................................................................................[2] (c) Why may obesity lead to an increase in government spending? .......................................................................................................................................... .......................................................................................................................................... .......................................................................................................................................... .......................................................................................................................................... .......................................................................................................................................... .......................................................................................................................................... .......................................................................................................................................... ......................................................................................................................................[2] (d) (i) Does the extract suggest that the poor spend more on food than the rich? Explain your answer. .................................................................................................................................. .................................................................................................................................. .................................................................................................................................. .................................................................................................................................. .................................................................................................................................. .................................................................................................................................. .................................................................................................................................. .................................................................................................................................. .................................................................................................................................. .................................................................................................................................. .................................................................................................................................. ..............................................................................................................................[3] (ii) Does the extract suggest that the demand for cigarettes is price elastic or price inelastic? Explain your answer. .................................................................................................................................. .................................................................................................................................. .................................................................................................................................. .................................................................................................................................. .................................................................................................................................. .................................................................................................................................. .................................................................................................................................. .................................................................................................................................. .................................................................................................................................. .................................................................................................................................. .................................................................................................................................. ..............................................................................................................................[3] (e) Discuss whether the US Government should tax chocolate. .......................................................................................................................................... .......................................................................................................................................... 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.......................................................................................................................................... ......................................................................................................................................[8] [Total: 20] The extract ‘Challenges facing the BRICs’ will be needed for this question.

Mark scheme: 1 (a) 2 marks for costs which have a harmful effect on third parties/those not involved with producing or consuming the product. 2 marks for social costs minus private costs. 1 mark for harmful effects (credit an appropriate example such as pollution). Do not credit just repetition of ‘costs’. 1 mark for identifying those affected, i.e. third parties/others/those not involved with producing or consuming the product (credit an appropriate example such as those living near a polluting factory). Note: No marks for general comment referring to the impact on people/society/community (confusion with social costs). [2] (b) 1 mark for demand for health care is exceeding the resources available to supply it. 1 mark for this indicates that wants exceed resources/there is a problem of scarcity or defining the economic problem. 1 mark for dealing with health problems caused by obesity prevents other health problems being treated. [2] (c) 1 mark for it may increase government spending on health care because of the health problems it creates. 1 mark for it may increase government spending on sickness benefits because people may be unable to work or may be off sick. 1 mark for may increase government spending on health campaigns/advertising, healthy eating and/or exercise. 1 mark for government spending on subsidising low fat food. [2] (d) (i) 1 mark for the extract mentions that the poor spend a higher proportion on food. 1 mark for this does not necessarily mean they spend more in total. 1 mark for the poor may actually spend less because their income is lower. [3] (ii) 1 mark for inelastic demand. 1 mark for the extract mentions that smoking is addictive/raising tax on cigarettes has not proved effective. 1 mark for the quantity of cigarettes demanded is likely to change by less than the change in price/defining inelastic demand. [3] IGCSE – May/June 2012 0455 32 (e) Why it should, e.g. it may • raise revenue • reduce obesity • reduce the consumption of chocolate • reduce the external costs associated with obesity (diagram may be used). Why it should not, e.g. • likely to be a regressive tax • eating high fat foods is not the only cause of obesity • the poor may not have easy access to healthy foods • may just switch to other high fat foods • demand may be inelastic • may reduce employment in the chocolate industry • may reduce GDP. Up to 2 marks for discussing why another policy may be more effective. Maximum of 4 marks for a list or list-like approach. Maximum of 5 marks for a one-sided discussion. [8]

More questions on Price elasticity of demand (PED)

2 (a) Using information from the extract, state what happened to the price level in 2009 in: (i) India .................................................................................................................................. ..............................................................................................................................[1] (ii) China. .................................................................................................................................. ..............................................................................................................................[1] (b) Why may a country experience a shortage of workers at the same time as it is encountering a relatively high unemployment rate? .......................................................................................................................................... .......................................................................................................................................... .......................................................................................................................................... .......................................................................................................................................... .......................................................................................................................................... .......................................................................................................................................... .......................................................................................................................................... ......................................................................................................................................[2] (c) Explain how raising the rate of interest can reduce aggregate (total) demand. .......................................................................................................................................... .......................................................................................................................................... .......................................................................................................................................... .......................................................................................................................................... .......................................................................................................................................... .......................................................................................................................................... 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.......................................................................................................................................... .......................................................................................................................................... ......................................................................................................................................[4] (d) Using Figure 1, describe the trends in the current accounts of the balance of payments as percentages of GDP in the four countries shown. .......................................................................................................................................... .......................................................................................................................................... .......................................................................................................................................... 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.......................................................................................................................................... .......................................................................................................................................... .......................................................................................................................................... .......................................................................................................................................... .......................................................................................................................................... ......................................................................................................................................[4] (e) Explain an example of a conflict between government economic aims mentioned in the extract. 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......................................................................................................................................[2] Question 2(f) is on the next page

Mark scheme: 2 (a) (i) It rose. (1) (No marks for just writing 11.3%) (ii) It fell. (1) (No marks for just writing –1.2%) [2] (b) 1 mark for identifying workers may lack appropriate skills/education/qualifications or be occupationally immobile. 1 mark for identifying workers may be geographically immobile. 1 mark for development of why occupational immobility may have caused this situation. 1 mark for development of why geographical immobility may have caused this situation. Note: it is not necessary to use these particular terms as long as the concepts are clearly understood. [2] (c) 1 mark for consumption/investment/net exports are components of aggregate demand. 1 mark for it may reduce consumption. Up to 2 marks for why it may reduce consumption – encourage saving, discourage borrowing, reduce the money supply. 1 mark for it may reduce investment. Up to 2 marks for why it may discourage investment – increase cost of borrowing, encourage saving, reduce expected sales. 1 mark for it may discourage net exports. Up to 2 marks for why it may reduce net exports – attract hot money, raise exchange rates, raise export prices and lower import prices. Maximum of 3 marks for explanation of the influence on one component of aggregate demand. [4] IGCSE – May/June 2012 0455 32 (d) 1 mark for Brazil’s current account balance changed from a surplus to a growing deficit/current account position deteriorated or worsened. 1 mark for China’s surplus consistently fell/current account position deteriorated or worsened/current account was always in surplus. 1 mark for India’s deficit consistently rose/current account position deteriorated or worsened/current account was always in deficit. 1 mark for Russia’s surplus fluctuated/current account was always in surplus/trend for Russia’s surplus to fall or current account position deteriorated or worsened and then improved. Note: Do not credit purely numerical observations including ‘positive’ and ‘negative’. [4] (e) 1 mark for reference to conflict between reducing inflation and reducing unemployment. 1 mark for recognising inflation may benefit from a reduction in AD whilst such a reduction may increase unemployment. [2] (f) Why it might, e.g. it may result in • higher output • higher tax revenue • less spending on benefits • more efficient use of resources. Why it might not, e.g. it may cause • inflation • shortage of workers • lack of flexibility • more imports. Maximum of 4 marks for a one-sided discussion. Maximum of 3 marks for a list or list-like approach. [6]

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