Economics 9708/41 May/June 2019: question paper and mark scheme
Cambridge AS & A Level Economics (9708), Paper 4 Data Response and Essays, May/June 2019. Read both free below, or download them. Done the paper? Get it marked by AI against this mark scheme.
Loyalty and consumer behaviour
Consumer loyalty can be thought of either in relation to card schemes which offer discounts based on the amount spent with a specific retailer, emotional loyalty where customers are loyal to a particular brand, or as a monopoly loyalty where there is no alternative to the retailer or brand.
Retailers recognise that price has an importance in consumers’ choice. Many supermarkets use loyalty cards to attract customers with promotions and price reductions available only to those who have a card.
By using cards, supermarkets seek a marketing advantage and attempt to build barriers between retailers. Research indicates, however, that although 70% of United Kingdom (UK) consumers hold some kind of loyalty card, only about 10% are loyal to one particular card.
Concerns have been raised that, when consumers are collecting points towards a particular goal, the loyalty card schemes may act as a constraint on free competition and prevent switching between brands. It is also thought that the costs of the scheme might be funded through higher prices. Further, the incentives and marketing discounts used by the scheme are often thought to be confusing and make it more difficult for the consumer to compare prices. There are risks for retailers too. It requires substantial investment to run such a scheme – one supermarket put the cost at US$60m a year.
But how do loyalty card schemes fit into the context of the way in which consumers make choices?
The relative importance of factors that influence consumers when choosing from which shop to buy groceries are one-stop shopping (43%), good service (22%), price (18%), the availability of a coffee shop (12%) and help with packing (6%). Loyalty cards come below these.
Companies who have invested in card schemes use them as a means to gather data on customers.
When the loyalty card is used the retailer can see what the customer prefers to buy and can direct future offers to their wants in specific promotions both on-line and in the mail. Loyalty schemes are thus sometimes less about loyalty and more about understanding customers’ wants.
The economic model of consumer behaviour using indifference curves assumes that consumers conduct research and buy products and services in a rational way. However, many purchases are based on habit and consumer research is imprecise. When the consumer has a low involvement in research or a low emotional attachment to the product, there will be little loyalty.
Source: RSA Journal 1, 2001, page 83
(a) What evidence is there in the article to suggest that loyalty cards make markets imperfectly competitive? [4]
(b) Analyse why a profit maximising retailer might be interested in the link between utility, consumers’ loyalty and price elasticity of demand. [4]
(c) Consider whether there is conflicting evidence in the article about the effectiveness of loyalty cards which offer price discounts. [5]
(d) Discuss how the idea of rationality is used in the indifference curve theory of consumer behaviour. [7]
Section B
Answer two questions from this section.
Mark scheme
1(a) What evidence is there in the article to suggest that loyalty cards make 4
markets imperfectly competitive?
• Create barriers to competition by reducing switches in demand,
• Costs of scheme funded by higher prices
• not affordable by smaller firms – high initial costs, $60m for one
supermarket,
• Causes confusion of information leading to imperfect knowledge.
1(b) Analyse why a profit maximising retailer might be interested in the link 4
between utility, consumers’ loyalty and price elasticity of demand.
• Loyalty will mean consumers do not change suppliers, this might create
a lower price elasticity of demand, (1)
• Explain price elasticity (1)
• With lower price elasticity can subsequently raise prices with resulting
higher profits – depending on cost changes (2)
1(c) Consider whether there is conflicting evidence in the article about the 5
effectiveness of loyalty cards which offer price discounts.
Evidence for the effectiveness of cards:
• Cards enable retailers to find out about consumer wants and target
promotions;
• Article also says retailers recognise the importance of price and can
offer discounts through cards. (2)
In contrast to that it also says
• Price is not most significant factor in determining choice;
• Also there is no loyalty if buying is based on habit, or has low emotional
involvement. (2)
Conclusion: seems to be some conflict. (1)
1(d) Discuss how the idea of rationality is used in the indifference curve 7
theory of consumer behaviour.
Explanation of indifference curves. General description without link to rationality
max 4
Consumer knows combinations between which there is indifference, this is a
rational calculation which remains constant over the curve,
Consumer knows satisfaction levels and which combination is preferred to
another,
Consumer rationally compares satisfaction to price, and buys to achieve
maximum satisfaction
Consumer can compare two goods using rational deductions.
Section B: Essays
The Essays are to be assessed using the Levels of Response approach, process and generic grid of
descriptions.
The descriptions in the grid are generic so that answers to all Essays are assessed against a
common set of criteria.
The mark scheme for the Essays includes indicative content describing the likely approaches and
relevant arguments candidates may make in their answers, but there will be a variety of relevant,
valid responses seen.
The mark scheme also includes the mark bands to be used for each level for each question.
(a) Explain the meaning of and whether there is a link
(i) between externalities and public goods
(ii) between transfer payments and the poverty trap. [12]
(b) Consider whether the existence of externalities in production means that it is impossible to achieve an optimal allocation of resources. [13]
Mark scheme
2(a) Explain the meaning of and whether there is a link 12
(i) between externalities and public goods
(ii) between transfer payments and the poverty trap.
Meaning of externality and public goods (4), link? Existence of externalities can
be found with public goods which are not provided by the market. (2); meaning
of transfer payments and poverty trap (4) link? Poverty can be relieved by
transfer payments. Finding work but only on a low income may result in
withdrawal of transfer payment and cause return to poverty (2)
L4 (9–12 marks) For a sound explanation of all four concepts and conclusion
about the two links.
L3 (7–8 marks) For weaker explanation of four concepts or sound explanation
of three concepts and conclusion about at least one of the links.
L2 (5–6 marks) For a sound explanation of two of the concepts but little
comment about the link.
L1 (1–4 marks) For an answer that has some basic correct facts but includes
irrelevancies and errors of theory.
2(b) Consider whether the existence of externalities in production means that 13
it is impossible to achieve an optimal allocation of resources.
Explanation of meaning of efficiency allocation and explanation of the analysis
which ensures an efficient optimum may be reached. Allocative efficiency is
intended. Allocative efficiency ensures that no one can be made better off
without someone being worse off. Individual actions are not always best for
society as a whole and externalities (market failure result). Discussion of
necessity/desirability of government intervention to achieve efficiency. This
could be by taxes, subsidies, regulation, information provision, ownership,
persuasion (nudge theory) rather than by enforcement.
L4 (9–13 marks) For an accurate discussion of externalities and market failure,
with examples and a conclusion about the need for and methods of
government intervention. Expect at least three methods.
L3 (7–8 marks) For a more limited discussion of the externalities and market
failure and more limited range of methods governments can use to overcome
market failure. Expect at least two methods.
L2 (5–6 marks) For a brief analysis of externalities and very scant coverage of
methods to correct them. Expect at least one method.
L1 (1–4 marks) For an answer that has some basic correct facts but includes
irrelevancies and errors of theory.
(a) Explain what is meant by ‘the principal–agent problem’ and analyse why it is likely to be found in some market structures and not others. [12]
(b) Explain what is meant by a contestable market and discuss whether a firm in a contestable market necessarily aims to maximise its profit. [13]
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3(a) Explain what is meant by ‘the principal–agent problem’ and analyse why 12
it is likely to be found in some market structures and not others.
The owner of the business (principal) is not necessarily taking the decisions
about its operation. This is done by managers (the agent). There may be
difference between the aims and objectives of the two. Unlikely to occur in
perfect competition, firms are too small; or monopolistic competition. Occurs in
larger firms, usually with shareholders in oligopoly and monopoly.
L4 (9–12 marks) For clear explanation of the ‘problem’ and a comment on why
it occurs in some market structures and not others.
L3 (7–8 marks) For a less developed explanation but with a judgement on
where the ‘problem’ may exist.
L2 (5–6 marks) For a briefer explanation, or an inaccurate description of
market structures, unclear judgement.
L1 (1–4 marks) For an answer that has some basic correct facts but includes
irrelevancies and errors of theory.
3(b) Explain what is meant by a contestable market and discuss whether a 13
firm in a contestable market necessarily aims to maximise its profit.
Contestable market is one with zero entry and exit costs. No barriers to entry
and no barriers to exit, such as contractual agreements. For a market to be
perfectly contestable, industry technology would be readily available to
potential entrants. This makes the market potentially competitive and aims
other than profit maximising might exist. Discussion of alternative aims;
behavioural, managerial, satisficing, limit pricing.
L4 (9–13 marks) For a clear explanation of contestable market, and aim of
perfectly competitive firm with two alternative aims. Good structure to the
answer.
L3 (7–8 marks) For a weaker comment either the explanation of contestable,
or the perfectly competitive aim or only one alternative aim.
L2 (5–6 marks) For a brief undeveloped answer with lack of clarity about
contestable and the alternative aim.
L1 (1–4 marks) For an answer that has some basic correct facts but includes
irrelevancies and errors of theory.
‘A rise in wages and salaries will increase the costs of production, decrease profits, cause inflation and is detrimental.’
Discuss whether the economic theory of wage determination supports the view that an increase in the level of wage rates is detrimental for the firm and for the worker. [25]
Mark scheme
4 ‘A rise in wages and salaries will increase the costs of production, 25
decrease profits, cause inflation and is detrimental.’
Discuss whether the economic theory of wage determination supports
the view that an increase in the level of wage rates is detrimental for the
firm and for the worker.
Candidates should consider each part of the statement. The theory of wage
determination should be explained. Do a rise in wages necessarily decrease
profits, cause inflation and would it be detrimental to the firm and worker.
Comment should be given on how the outcome may be affected by changes in
productivity, changes in the demand for the product, the existence of trade
union bargaining, a minimum wage affecting the supply, by large
monoposonies forcing down wages from the competitive level. There should be
a conclusion and a well-structured answer
L4 (18–25 marks) For a critique of the statement and a thorough explanation
of the analysis of wage determination with a clear comment on effect on firm
and worker depending on what changes prompted the rise in wages.
L3 (14–17 marks) For a weaker critique of the statement with weaker structure
on how wage rises affect the firm and worker. Or a good account of the effect
on either the firm or the worker.
L2 (10–13 marks) For a correct but undeveloped analysis with much briefer
critique 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.
(a) Distinguish between the internal value of money and the external value of money and consider whether there is a link between these two values. [12]
(b) ‘Policies which attempt to control the internal value of money will automatically make it difficult to control the external value of money.’
Discuss the view that this statement is only partially correct. [13]
Mark scheme
5(a) Distinguish between the internal value of money and the external value of 12
money and consider whether there is a link between these two values.
Answers should explain that the internal value of money will be determined by
inflation and subsequent purchasing power and the external value will be
determined by the foreign exchange value of the domestic currency. Links
between the two values should be discussed. For example, an increase in
inflation might lead to a fall in the exchange rate, therefore a fall in the internal
value might be associated with a fall in the external value.
L4 (9–12 marks) For an answer which attempts to discuss how a change in the
internal value of money might affect the external value and vice versa.
Good responses will provide at least two examples and consider changes in
both directions. Might also discuss the strength of the links.
L3 (7–8 marks) For an analysis of what might affect each of the two types of
value and a limited attempt to identify why a change in one value might lead to
a change in the other value.
L2 (5–6 marks) For an explanation of what is meant by internal and external
value of money and establishing a clear distinction between the two.
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.
5(b) ‘Policies which attempt to control the internal value of money will 13
automatically make it difficult to control the external value of money.’
Discuss the view that this statement is only partially correct.
Policies which attempt to control the internal value of money will include all
policies used to control inflation. These might include monetarist, Keynesian
demand pull and Keynesian cost push. Different policies would be expected to
have a different impact on the external value of money. The response should
use analysis to establish the links between the policies and their impact and
make some attempt to discuss whether such policies automatically make it
difficult to control the external value of money.
L4 (9–13 marks) For an answer which attempts to evaluate how far the
statement under consideration can be described as ‘only partially’ correct.
There should also be a discussion relating to whether these policies will
‘automatically’ make it difficult to control the external value of money. Examples
and evidence should be provided to form a conclusion.
L3 (7–8 marks) For an answer which analyses why policies identified to control
the internal value will have some impact on the external value. For example, an
increase in interest rates to help control demand pull inflation might lead to an
increase in exchange rates due to short term capital inflows.
L2 (5–6 marks) For an answer which explains alternative policies to control
inflation and recognises that these policies will have an effect on the external
value of money.
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.
‘The failure of the policy of quantitative easing (QE) to solve problems associated with an economic recession illustrates the weakness of monetary transmissions mechanisms in particular and monetary policy in general.’
Critically evaluate this statement. [25]
Mark scheme
6 ‘The failure of the policy of quantitative easing (QE) to solve problems 25
associated with an economic recession illustrates the weakness of
monetary transmissions mechanisms in particular and monetary policy in
general.’
Critically evaluate this statement.
Quantitative Easing should be explained and the problems generally
associated with an economic recession should be clearly identified. The links
between Quantitative Easing and the monetary transmissions mechanism
should be established and these links should be further extended to allow a
discussion of the effectiveness of monetary policy on real variables such as
income, output and employment. Evaluative comment and a conclusion should
be provided to assess the accuracy of the statement.
L4 (18–25 marks) For an answer which focuses upon each of the four
elements referred to in the statement and makes an attempt to assess the
extent to which problems associated with a recession might be solved by the
use of Quantitative Easing. Evaluative comment should produce a
conclusion/judgement regarding the success/failure of Quantitative Easing
L3 (14–17 marks) For an answer which attempts to link each element of the
statement and provides some analysis of how/why these elements are linked.
Diagrams might be used to illustrate how the monetary transmissions works
and how this might address the problems associated with a recession
L2 (10–13 marks) For a correct explanation of each of the key elements of the
statement but no attempt to link these elements to address the specific
question
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.
(a) Assess the impact of foreign direct investment (FDI) on developing economies. [12]
(b) It is often stated that the problem of ‘a vicious cycle of poverty’ exists in developing countries.
Explain what this means and discuss how this problem might be solved. [13]
Mark scheme
7(a) Assess the impact of foreign direct investment (FDI) on developing 12
economies.
Answers should clearly identify what is meant by foreign direct investment
(FDI) and should demonstrate an awareness of its special importance
regarding developing economies. Links between FDI and multinational
corporations should also be referred to. The focus should be upon the impact
of FDIs on developing economies. This focus would examine both positive and
negative impacts on key areas of a developing economy such as: growth;
employment; infrastructure; balance of payments; environment.
L4 (9–12 marks) For an attempt to evaluate how far FDI proceeds to create a
net positive effect on relevant key indicators of development such as economic
growth, productivity, employment and foreign trade. A conclusion should look at
whether the overall net effect of FDI could be considered beneficial
L3 (7–8 marks) For a detailed analysis of the how foreign direct investment
might impact on undeveloped economies. Analysis should focus upon a
comparison between the potential positive and potential negative effects of FD
L2 (5–6 marks) For a brief, undeveloped answer which describes the potential
impact on a few economic issues but does not provide any supporting analysis
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) It is often stated that the problem of ‘a vicious cycle of poverty’ exists in 13
developing countries.
Explain what this means and discuss how this problem might be solved.
A clear explanation of the connections between low incomes, low savings, low
investment and low growth rates should be provided. Responses might also
refer to the cycle of poverty relating to development which refers to links
between low income, low levels of education, low productivity. The
effectiveness of alternative measures introduced to break these cycles should
be discussed.
L4 (9–13 marks) For a comparison of alternative solutions and some attempt
made to evaluate the likely effectiveness of different approaches. A wide range
of measures might be discussed including: supply side policies; use of
overseas aid; promote export led growth; increase productivity in the primary
sector; incentives to increase savings; direct government intervention.
L3 (7–8 marks) For a more detailed examination of the nature of a cycle of
poverty should be provided with an attempt to analyse why the cycle continues
and why it is difficult to introduce policies which might break the cycle. Possible
solutions based on analysis should be provided
L2 (5–6 marks) For knowledge and understanding of what is meant by a ‘cycle
of poverty’ in relation undeveloped countries but no attempt to analyse why the
cycle occurs.
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.
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Economics 9708/41 for May/June 2019 is out of 70 marks, with 2 hours 15 minutes to answer it.
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