EJC 2023 JC2 H2 Econs Prelim P2 Suggested Answers for sharing

1 © Eunoia Junior College Economics Department 2023 2023 EJC JC2 H2 Economics Preliminary Examination Paper 2 Suggested Answers, Mark Schemes and Markers’ Report Essay Question 1 In 2022, the tablet market remains dominated by Apple, with Samsung coming in second. Apple engages in various marketing strategies and Apple E ducation Pricing. The promotional Apple Education Pricing is available to students but not to the public. (a) Explain what needs to be considered when a rational firm like Apple makes decisions on pricing and non-pricing strategies. [10] (b) Discuss the extent to which consumers as well as ot her firms are negatively affected by Apple’s dominance in the tablet market. [15] Part (a) – Question Analysis Question Analysis Framework Details Approach Command word Explain what: Make clear the factors Start point Objectives of a rational firm End point Decision making on pricing and non -pricing strategies Content & Context Content (Scope of coverage) Decision-making framework Marginalist principle: MC = MR Revenue and cost analysis Context Rational firm like Apple ; Tablet market Introduction While firms could pursue various objectives, the traditional objective of a rational firm like Apple is to maximise profits at Marginal Revenue (MR) = Marginal Cost (MC). To maximise profits, Apple can either raise total revenue (TR) or lower total cost (TC) by engaging in pricing and non-pricing strategies. In making decisions on pricing and non-pricing strategies to engage in, a rational firm like Apple will need to consider its benefits, costs and constraints. Body Point 1: Benefits of pricing and non-pricing s trategies   raise TR or lower TC   Profits rise Pricing strategies:  The tablet market can be characterised as an oligo poly with high barriers to entry and few dominant firms such as Apple and Samsung. As oligopolistic firms are mutually interdependent, one firm’s behaviour greatly affects its rivals. Apple would likely avoid price competition since prices tend to be rigid or sticky but may engage in 3 rd degree price discrimination like the Apple Education Pricing.  For instance, with no cost difference, Apple charg es a lower price for students since tablets like iPad take up a larger proportion of their income. The lower price charged in the price elastic market will result in a more than proportionate ris e in quantity demanded, therefore total revenue rises.  On the other hand, the public (other than students ) will be charged a higher price since the price of iPad is likely to take up a relatively sma ller proportion of their income. A rise in price

2 © Eunoia Junior College Economics Department 2023 will bring about a less than proportionate fall in quantity demanded, hence, total revenue increases.  Thus, the benefit of engaging in pricing strategie s such as 3 rd degree price discrimination is to raise total revenue.  Limit/predatory pricing also accepted. OR Non-pricing strategies:  Apple's marketing campaigns consistently highlight simplicity, design, and innovation, from the minimalist design of its products to the innovative features that differentiate them from rivals like Samsung. By establishing a brand identity that is instantly recognisable and resonates with consumers, Apple has built a solid emotional connec tion with its customers and a loyal fan base.  As a result, demand for Apple’s tablets rises, and the degree of substitutability between products are weakened, making demand for Apple products more price inelastic. Figure 1: Benefit of marketing  With the DD/AR and MR curves shifting from AR 1 and MR 1 to AR 2 and MR 2, Apple will then be able to charge higher prices P 2 and sell more output Q 2, hence earning higher revenue and higher profits P2DEC 2, assuming costs remain unchanged.  Innovation and R&D aimed at raising revenue also accepted OR  Apple engages in Innovation and R&D specifically p rocess innovation allows Apple to raise productivity and/or lower costs by finding more efficient methods of production. Hence, AC and MC falls. Assuming revenue remains unchanged, Apple’s profits will rise from area P 1abC 1 to P2deC 2.

3 © Eunoia Junior College Economics Department 2023 Figure 2: Benefit of process innovation Body Point 2: Costs of strategies   TR may not rise; TC may not fall   Profits may not rise  3 rd degree price discrimination – Revenue may not rise if Apple is unable to segment the market appropriately to prevent resale.  Marketing is expensive, i.e., costs incurred to en gage an advertising firm to conceptualise and run the advertising campaign, and result is not guaranteed.  R&D is expensive and a long-drawn process - revenu e may not rise and cost may not fall in the short run and result is not guaranteed.  Opportunity costs incurred Point 3: Constraints  3 rd degree price discrimination – Ability to fulfill all conditions to practice price discrimination.  Non-pricing strategies – Financial constraints (pr evious supernormal profits to tap on); resource constraints (availability of skilled labour and capital to engage in innovation, R&D); time constraint (of work processes or to witness the effects of strategies adopted). Conclusion As each strategy involves costs, Apple needs to make a rational decision by weighing the costs and the benefits to determine which strategy should be adopted. Apple will only carry out strategies if they expect rise in benefits to exceed the rise in costs, in other words, MR > MC. Price/revenue/cost f

4 © Eunoia Junior College Economics Department 2023 Part (b) – Question Analysis Question Analysis Framework Details Approach Command word Discuss the extent – Balanced answer with evaluation Start point Negative impact of firms’ strategies End point Extent of negative impact Content & Context Content (Scope of coverage) Impact of firms’ strategies on:  Consumers – Consumer surplus (price); Consumer welfare (quality, variety, choice)  Other firms – Revenue, costs and profits Revenue and costs analysis Context Apple’s dominance in the tablet market Introduction Apple’s dominance in the tablet market brings about negative impacts on consumers as well as other firms. The extent to which consumers and other firms are affected negatively depends on a few factors. Negative impact of Apple’s dominance on consumers Fall in consumer surplus Apple’s dominance in the tablet market allows the firm to enjoy long run supernormal profits, which would be channelled to engaging marketing strategie s by tapping on salience bias (website, advertising campaigns)  Further strengthens Apple’s market power/market do minance as demand rises, and becomes more price inelastic sinc e brand loyalty rises  Greater ability to restrict output and raise prices as barriers to entry rises as well  ↓ Consumer surplus Consumer surplus may not fall/Consumer surplus may rise However, Apple’s dominance enables it to engage in innovation and R&D. Process innovation such as new/improved production processes allow Apple to raise productivity and lower costs by find more efficient methods of production  AC and MC falls from AC 1 and MC 1 to AC 2 and MC 2 respectively  Assuming Apple passes on the cost savings by lower ing prices of iPads  ↑ Consumer surplus from P 1fa to P 2df Figure 3: Impact of App