2023 ASRJC H2 Econs Prelim Paper 2 Suggested Answers

1 © ASRJC Economics Department B Anderson Serangoon Junior College 2023 JC2 Preliminary Examination H2 Economics 9570/02 Suggested Answers and Marker’s Comments Section A 1. The cocoa buyers' deal, which sets a minimum price on cocoa beans at US$2,600 per ton, aims to reduce income gaps between farmers and traders. However, it may affect cocoa beans prices and export revenues. Consequently, chocolate producers specialising in mass- produced chocolate and those focusing on artisanal creations may be prompted to look for cocoa beans substitutes such as carob beans. (a) Explain two unintended consequences for the governm ent resulting from the implementation of a minimum price on cocoa. [ 10] (b) Discuss how the implementation of a minimum price o n cocoa beans may affect the revenue of chocolate and carob beans producers. [15] Suggested answer part a)  R1: Allocative inefficiency [Can consider resource s are overallocated to cocoa production]  R2: Worsening of other macro goals or government b udget The implementation of a minimum price policy is aim ed at supporting farmers' income and improving income equity. While this policy is designed with good intentions, it often leads to unintended consequences for the government, such as economic inefficiencies and a n egative impact on macroeconomic objectives. Introduction R1 : A price floor (P 1) is a government-imposed minimum price that is set above the equilibrium price (P0) in a market. It is typically implemented with the intention of ensuring that farmers receive a certain level of income. In a free and competitive market, supply and demand determine the equilibrium price (P 0) and quantity (Q 0) of a cocoa. When the quantity supplied equals the quantity demanded at equilibrium output Q 0, the sum of consumer and producer surplus is maximised and allo cative efficiency is achieved. No other output /price combination will r esult in as much benefit to the consumers and producers as a whole. R1 : Explain how the minimum price worsens efficiency C Quantity of cocoa Q0 Q2 Q1 Price 0 S0 D0 P0 E0 P1 A

2 © ASRJC Economics Department When a minimum price (P 1) is set above the equilibrium price (P 0), producers are willing to produce at Q 2. However, due to the higher price, consumers are only willing to consume at Q 1. The implementation of minimum price will result in surplus (Q 2Q1) as the quantity supplied (Q 2) exceeds the quantity demanded(Q 1), leading to deadweight loss (ACE 0). Deadweight loss reflects the value of transactions that do not occur due to the minimum price. These are the mutually beneficial transactions that that would have taken place in a free market at the equilibrium price but are now lost because the price is artificially high. At the same time, due to higher price, producers al located more resources into t