Economics 9708/43 October/November 2019: question paper and mark scheme
Cambridge AS & A Level Economics (9708), Paper 4 Data Response and Essays, October/November 2019. Read both free below, or download them. Done the paper? Get it marked by AI against this mark scheme.
Production, living standards and market failure
Today, the average person lives better than they did fifty years ago. Two reasons are given for this. The first is capital accumulation, the idea that if people save more, production increases.
Secondly, we are better at managing resources; we have learned to get more outputs from given inputs. Table 1.1 shows the changes in GDP by continent.
Table 1.1: Average annual real GDP growth rates (%) by continent
Average
1962-71 1972–81 1982–91 1992–2001 2002–11 annual rate
(1962–2014)
Africa 4.5 3.6 2.6 3.1 5.5 3.9
Americas 4.8 3.9 2.5 3.4 2.3 3.3
Asia Pacific 7.9 4.9 5.1 4.9 6.3 5.8
Europe 5.1 2.8 2.4 1.4 2.2 2.7
Education and learning have played a central role in these increases in GDP.
However, there have been fundamental changes in the labour market. It used to be that people often had the same job for years. Now job turnover is high and employers are less willing to invest in formal education. There needs to be systematic intervention by the government. Markets alone will not do a good job of creating a learning society.
It was government support that enabled the decoding of the human genome. But a US company realised that if it could patent a test for a certain gene, it could profit. It succeeded in getting patents for a test on two breast cancer genes. It exercised its monopoly power. When Yale University discovered a better test for the genes the company said they could not use it. But the company’s tests were inferior and people suffered through misdiagnosis. Private returns have nothing to do with social returns.
The values that have allowed western capitalism to thrive – individualism, competition, consumption
– now threaten its future.
Values that were considered less important need now to be cultivated to promote social efficiency: sustainability, community, co-operation and reflection. In the market, this can only be achieved by government intervention to adjust economic disincentives and incentives to take account of external costs and benefits. The lessons of the prisoners’ dilemma might be relevant.
Economic disincentives include taxes on carbon emissions to limit negative externalities. Economic incentives that include subsidies and pollution permits can be used to encourage the development of sustainable technologies and practices.
Source: RSA Journal, Issue 3, 2014
(a) The article says that an increase in saving would increase production. Would an economist necessarily agree with this statement? [5]
(b) Explain what is meant by market failure and consider whether there are examples of market failure in the article. [5]
(c) Suggest why the article says that the lessons of the prisoners’ dilemma might be relevant. [4]
(d) Discuss, with the help of the information, whether the article is correct in asserting that the
‘average person lives better than they did fifty years ago’. [6]
Section B
Answer two questions from this section.
Mark scheme
1(a) The article says that an increase in saving would increase production. 5
Would an economist necessarily agree with this statement?
• Increased saving might mean less consumption which would reduce
demand, not necessarily increase production.
• However, savings might enable banks to lend money for investment
which will increase production.
Up to 3 marks per side; max 5.
1(b) Explain what is meant by market failure and consider whether there are 5
examples of market failure in the article.
Explanation of market failure (up to 3 marks).
Examples are monopoly over gene diagnosis, education, and carbon emissions
(up to 2).
1(c) Suggest why the article says that the lessons of the prisoners’ dilemma 4
might be relevant.
Explanation of the dilemma:
• Need to rely on others for co-operation. The outcome depends on what
others might do and this is uncertain – hence suggestion for intervention
to adjust incentives/disincentives (up to 3 marks).
Article says ‘might’ be relevant. Might do better if ignore the co-operative solution
but might do far worse also (1 mark).
1(d) Discuss, with the help of the information, whether the article is correct in 6
asserting that the ‘average person lives better than they did fifty years
ago’.
• the information is not per capita,
• does not mention relative income distribution,
• no information about inflation,
• there is an increase in GDP, examples from table, but this is not necessarily
same as increase in standard of living,
• there have been improvements in technology, but this is not evenly
distributed,
• conclusion: evidence is questionable.
(a) Explain the meaning of and whether there is a link
(i) between Pareto optimality and equality;
(ii) between free markets and equity. [12]
(b) Consider the methods a government can use to increase efficiency in resource allocation.
[13]
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2(a) Explain the meaning of and whether there is a link 12
(i) between Pareto optimality and equality;
(ii) between free markets and equity.
Meaning of Pareto optimality and equality (4), no link. Pareto optimality doesn’t
necessarily produce equality (2); meaning of free markets and equity (4) free
markets sometimes result in outcomes that are thought not to be fair (equitable)
(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 the methods a government can use to increase efficiency in 13
resource allocation.
Explanation that there may be a lack of efficiency due to overproduction or under
production. Discussion of the methods: taxes, subsidies, licences, regulation,
information, permits, ‘nudge’ incentives, granting property rights, privatisation,
nationalisation and the relevance of the choice to either over or under
production.
L4 (9–13 marks): For a critical discussion of at least three methods and their
effectiveness and application. (Taxes and the opposite subsidies should count as
one alternative).
L3 (7–8 marks): For a critical competent discussion of at least two methods or a
weaker comment on at least four methods.
L2 (5–6 marks): For a competent comment on one method or a comment on
three or more methods.
L1 (1–4 marks): For an answer that has some basic correct facts but includes
irrelevancies and errors of theory.
(a) Critically discuss the explanation in economic theory of how a rational consumer exercises choice and how it links to a demand curve. [12]
(b) Analyse how a consumer’s equilibrium might change if the government increased a sales tax
(goods and services tax) on a normal good, an inferior good and a Giffen good. [13]
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3(a) Critically discuss the explanation in economic theory of how a rational 12
consumer exercises choice and how it links to a demand curve.
Explanation of diminishing marginal utility or indifference curves and the link to
equilibrium price and, through changes in price, to the demand curve; critical
comment on the difficulty of calculating marginal utility and its application.
L4 (9–12 marks): For a sound explanation of the analysis and a clear
understanding; explanation of link to demand; with a comment on the possibility
of calculating marginal utility.
L3 (7–8 marks): For a competent comment but with limited development of the
analysis – may be no clear link to demand – and a very brief critical comment.
L2 (5–6 marks): For a brief explanation and with no clear link between
equilibrium and demand and no critical comment.
L1 (1–4 marks): For an answer that has some basic correct facts but includes
irrelevancies and errors of theory.
3(b) Analyse how a consumer’s equilibrium might change if the government 13
increased a sales tax (goods and services tax) on a normal good, an
inferior good and a Giffen good.
Explanation of changes in consumer equilibrium using indifference analysis to
distinguish between the types of good. Indirect tax will increase the price and the
answer really needs to consider the distinction between income and substitution
effects.
L4 (9–13 marks): For a clear analytical discussion of effect of an indirect tax
increase is to increase price; income and substitution effect move in same direction
for normal good, in opposite directions for inferior good but a price rise would still
result in a fall in demand; they move in opposite direction for a Giffen good but a
rise in price will lead to a rise in demand.
L3 (7–8 marks): For an understanding of a rise in tax causing a rise in price but a
clear analysis/discussion of the effect on only two of the goods.
L2 (5–6 marks): For a weaker understanding of the effect of the tax change and a
poor analysis of the income and substitution effects, maybe just concentrating on
the utility explanation or elasticity.
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.
(a) Contrast the features of a perfect competitive market with those of an oligopoly and compare the aims of the firms in each of these market structures. [12]
(b) Discuss what you would expect to happen to the output of the industry and the level of profit if perfect competition were replaced by a monopoly. [13]
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4(a) Contrast the features of a perfect competitive market with those of an 12
oligopoly and compare the aims of the firms in each of these market
structures.
Explanation in terms of criteria for perfect competition and the
similarities/differences that occur in oligopoly; size and number of firms.
Candidates should also consider the likely aims of the two structures – profits,
output, and price changes.
L4 (9–12 marks): For an explanation/comment of both market structures –
criteria, aims, likely profits with a clear structure.
L3 (7–8 marks): For a competent explanation/comment that does not fully
analyse both types of market structure. There will be some comment, but the
analysis will not be fully developed or extensive.
L2 (5–6 marks): For an accurate though undeveloped explanation/comment
concentrating possibly on either the criteria or the aims probably presented as
two separate parts of the answer with no direct distinction drawn.
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.
4(b) Discuss what you would expect to happen to the output of the industry and 13
. the level of profit if perfect competition were replaced by a monopoly.
Discussion and comment on the determination of price and output, market price
takers or price makers, levels of output, levels of profit in short run and long run.
Supernormal profits might occur in perfect competition in the short run but not in
the long run; supernormal profits might occur in the long run in monopoly. Actual
price may be higher in monopoly, but economies of scale may enable a lower
price in monopoly.
L4 (9–13 marks): For a sound discussion with good explanation of the analysis
and a clear understanding of the differences between perfect competition and
monopoly.
L3 (7–8 marks): For a competent comment but with limited development of the
analysis or a concentration on either perfect competition or monopoly.
L2 (5–6 marks): For a brief explanation of both market structures and with a
weak discussion of the distinction between the two types of market.
L1 (1–4 marks): For an answer that has some basic correct facts but includes
irrelevancies and errors of theory.
Analyse and discuss whether the economic theory of wages can explain why there are inequalities in wage rates in a country. [25]
Mark scheme
5 Analyse and discuss whether the economic theory of wages can explain 25
why there are inequalities in wage rates in a country.
Discussion of determinants of wages. Candidates should explain the theoretical
analysis and discuss the reason for higher wages and inequality in wage rates.
These inequalities could occur not only in different occupations but within the
same occupation.
The discussion should include reference to how the theoretical analysis
accommodates the market forces of supply and demand but can be moderated
by the influence of trade unions and government policy with possible influences
on inequalities in wage rates.
L4 (18–25 marks): For a thorough analysis of theoretical wage determination
with a clear discussion of the role of trade unions and their likely significance
over other factors.
L3 (14–17 marks): For a competent explanation but with limited discussion of
trade unions and their significance.
L2 (10–13 marks): For a correct but undeveloped theoretical analysis with very
bald comment about the role of trade unions.
L1 (1–9 marks): For an answer that has some basic correct facts but includes
irrelevancies and errors of theory.
(a) Explain the speculative motive for the demand for money and consider its significance in relation to monetary policy. [12]
(b) Discuss the view that monetary policy can be used effectively to control demand-pull inflation but not to control cost-push inflation. [13]
Mark scheme
6(a) Explain the speculative motive for the demand for money and consider its 12
significance in relation to monetary policy.
The speculative demand for money is determined by an individual’s view of what
will happen to future rates of return on long-term government securities. There is
an inverse relationship between the price of bonds and the rate of return on
these bonds. Investors will hold cash if they think interest rates are likely to rise
in the future and hold bonds if they think interest rates will fall in the future. At
very low rates of interest the speculative demand for money might become
perfectly elastic. This creates a liquidity trap and makes it very difficult for
monetary policy to have a significant impact on real variables.
L4 (9–12 marks): For an answer that attempts to evaluate the significance of the
speculative demand for money by drawing a diagram, identifying the liquidity trap
and then linking this to monetary policy. A conclusion might consider the extent
of this significance and why it might vary depending upon the state of the
economy. For example, the speculative demand for money is likely to be more
significant in a time of recession.
L3 (7–8 marks): For an answer that provides a clear analysis of the relationship
between expectations of changes in the future rate of interest and the
speculative demand for money. A diagram might be provided which helps to
analyse this relationship.
L2 (5–6 marks): For a limited explanation of the speculative demand for money
but does not explain clearly why interest rates will affect the speculative demand
for money.
L1 (1–4 marks): For an answer that has some basic correct facts but includes
irrelevancies and errors of theory.
6(b) Discuss the view that monetary policy can be used effectively to control 13
demand-pull inflation but not to control cost-push inflation.
Monetary policy might use changes in the money supply, changes in interest
rates and changes in exchange rates. Changes in all three of these variables
might have an impact on demand-pull inflation. For example, a decrease in
interest rates might stimulate consumption spending or cause a fall in exchange
rates which should increase aggregate monetary demand.
Alternatively, a fall in exchange rates would increase the price of imported raw
materials which could cause cost-push inflation. Diagrams could be used to
illustrate these effects.
L4 (9–13 marks): For an answer which attempts to address the view contained
in the question. Responses should focus upon evaluating the extent of monetary
policy on demand-pull inflation and whether/why monetary policy can cause cost-
push inflation. A conclusion should be provided which makes a judgement
regarding the view under consideration and this should be based on preceding
evidence.
L3 (7–8 marks): For an answer which analyses the effects of different monetary
policy options which have different impacts on aggregate demand and costs, and
why these changes can cause inflation. Supporting diagrams might be used to
illustrate these effects.
L2 (5–6 marks): For an answer which identifies different types of monetary
policy and which describes some of the causes of demand-pull and cost-push
inflation.
L1 (1–4 marks): For an answer that has some basic correct facts but includes
irrelevancies and errors of theory.
‘There have been many attempts to measure changes in living standards both within and between countries. Although some have been more useful than others, none of these alternative measures has produced a sufficiently accurate, reliable indicator of changes in living standards.’
How far would you agree with this statement? [25]
Mark scheme
7 ‘There have been many attempts to measure changes in living standards 25
both within and between countries. Although some have been more useful
than others, none of these alternative measures has produced a
sufficiently accurate, reliable indicator of changes in living standards.’
How far would you agree with this statement?
Responses should explain different attempts to measure living standards and the
key elements of each indicator. GDP per capita, Human Development
Index(HDI), Measure of Economic Welfare(MEW), Multi-dimensional Poverty
Index might be considered and, in each case, the extent to which they might
represent a reliable indicator of changes in living standards.
L4 (18–25 marks): For an answer which provides a detailed analysis of two
measures but also considers additional measures. The emphasis will be upon
highlighting factors which affect living standards but are not addressed by any
measure. A conclusion should then allow a judgement as to how far the
candidate would agree with the statement under consideration.
L3 (14–17 marks): For an answer which identifies at least two alternative
measures and analyses why they have been used to measure changes in living
standards. Some comparative analysis should be used and there should be
some indication of an attempt to discuss why neither measure would be
completely accurate nor reliable.
L2 (10–13 marks): For an answer which is limited to a description of some
measures, but which does not attempt to discuss their accuracy.
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.
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Economics 9708/43 for October/November 2019 is out of 70 marks, with 2 hours 15 minutes to answer it.
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