2023 RI H2Econs Prelims Answers

ECONOMICS Higher 2 Syllabus 9570 Examiner’s Report Year 6 Preliminary Examination 2023 R a f f l e s I n s t i t u t i o n N u r t u r i n g t h e T h i n k e r , L e a d e r & P i o n e e r TEL: 65 6419 9888 ● FAX: 65 6419 9898 http://www.ri.edu.sg ● One Raffles Institution Lane, SINGAPORE 575954

Y6/9570/Prelims/2023 2 © RI 2023 [Turn Over ECONOMICS Y6 H2 Preliminary Examination 2023 Paper 9570/01 Paper 1 Question 1 The Cotton Market (a) (i) With reference to Figure 1, identify the y ear in which cotton prices rose the most. [1] Cotton prices rose the most in 2021. Mark Scheme: - Correct identification – 1m (ii) Using a diagram, explain the reason for such a change in price. [3] - Prices rose most significantly in 2021. - From Extract 1, there were heavy rainfalls in Ind ia in 2021. This led to a fall in world supply, causing the supply curve to shift leftwards from S0 to S1, as shown in Figure 1. A shortage results, and prices are bided up. - From Figure 2, India is the world’s second larges t producer of cotton. The fall in supply will have a huge impact on the total world supply. In this reg ard, the huge shortage that ensues will causes prices to rise very significantly in 2021. - Alternative Approach: Demand for cotton is price-inelastic as it is an essential input for clothing and furniture. As shown in Figure 1, the price is likely to rise more than proportionate from P0 to P1 compared to the fall in equilibrium quantity from Q0 to Q1. Mark Scheme: - use of case evidence to explain fall in supply - 1m - justify using either PED or Figure 2- 1m - diagram to show shift in supply curve - 1m - No brief adjustment process - Max 2 m Figure 1: World Market for Cotton

Y6/9570/Prelims/2023 3 © RI 2023 [Turn Over (b) Explain whether the use of subsidies can help the U S develop comparative advantage in cotton production. [5]  Comparative advantage in cotton production means t he country can produce cotton at a lower opportunity cost i.e. less of another good is foregone. Comparative advantage is dynamic and can be changed with government policies or with changes in quantity or quality of resources. Thesis:  As the US subsidises cotton production, its supply rises - causing prices to fall. But this ‘artificial’ reduction in price has nothing to do with improving comparative advantage  Comparative advantage may be developed if the firm s were to use the excess profits arising from the subsidies or from the rise in quantity dem anded for exports (due to fall in price) to invest in research and development. This may facili tate the development of new technology and lead to better production processes and even cu ltivation that uses less water and land. The subsequent fall in MC and AC for firms leads to a fall in production cost for the US and allow it to gain comparative advantage in cotton production.  From another perspective, if the subsidies by the government are directed towards firms’ R&D efforts, the effect on comparative advantage can be more effectively enhanced. Anti-thesis: [any 1 idea]  Idea 1: US does not have a comparative advantage hence the need for US to subsidise in the first place – reason being that it may lack the amount of arable land and conducive climate as compared to India. Moreover, cotton production seems to be labour-intensive.  In Extract 2, in India there are ‘5.8 million farm ers, the majority of whom are small-scale farmers cultivating land less than 2 hectares in size’. In this regard, US may be unable to compete in cotton production, given that its wages are much higher due perhaps to a smaller pool of unskilled workers and farmers.  Idea 2: With huge government subsidies, firms are less likely to have the incentive to find their own ways to be cost-effective. Over the years, they are likely to be X-inefficient - operating at a point above their LRAC curve. Moreover, they are less likely to have the incentive to engage in process innovation to reduce costs. As a result, the higher cost of production will not allow the US to develop comparative advantage. Synthesis/Judgement:  All things being considered, subsidies are unlikel y to help the US develop comparative advantage - even into the long run. From Extract 2 , the US has been subsidising cotton production way before 2007 and the size of the subs idies seems to have increased – accounting or half or more of a grower’s cotton revenue.  A need for subsidies for such a long period of tim e simply shows that the US does not and will not have comparative advantage. Perhaps, the US ma y have other reasons for continuing cotton production - reducing reliance on other coun tries being the reason – since cotton is an essential input. Mark Scheme - Thesis- 2m - Anti-thesis - 2m - Synthesised Conclusion - 1m - No reference to case material - Max 3

Y6/9570/Prelims/2023 4 © RI 2023 [Turn Over (c) With reference to Extract 3: (i) Explain how the pandemic is ‘potentially more d amaging’ for clothing boutique businesses than food businesses. [3]\  Extract 3 states that ‘the consumption of apparel is more income responsive than the consumption of food commodities. This means that apparel has a higher YED value.  Reason for difference in YED value: While people n eed food for survival, they may not need new apparel as much especially in times of trying economic circumstances.  It is also implied in Extract 3 that the pandemic may have led to a fall in incomes, causing the demand for normal goods like apparel and food to fall.  The fall in income is likely to cause the demand f or apparel to fall more than the demand for food – given its higher YED value. The larger fall in d emand will cause the total revenue for clothing boutiques to fall – as equilibrium price and quanti ty decrease more significantly. This thus has a more damaging effect. Mark scheme: - 1 m for explaining and justifying YED value - 1 m for linking fall in income to fall in demand/AR - 1 m for examining effect on TR/profits (ii) Given the market structure which clothing bout ique firms operate in, discuss whether measures to increase revenue are better than cost-cutting measures to ensure the survival of these firms. [8] Requirement:  1 Revenue and 1 Cost strategy  Thesis (how it works) and AT (limitation) for each measure Introduction:  Market structure is likely monopolistic competitio n. Extract 3 stated there are 178,366 clothing boutiques in the US and this is possibly representative of the market structure around the world.  The industry is mostly likely characterised by low entry cost as the start-up cost and rental is relatively lower than -for example- to set up an airlines. It is also rather low-technology in nature in that it is just about the purchase of clothing and the know-how of making clothing.  With such low entry barriers, the firms are only a ble to make LR normal profits. This poses a constraint on the strategies they can use to survive.  As stated in Extract 3, the firms are facing harsh conditions of rising cotton prices which affect MC and AC as well as uncertain demand due to falling incomes which threaten to reduce AR.  To survive in the industry amidst such adverse con ditions, the firm have to make at least normal profits in the LR where AR=AC. In the SR, insofar as the AR>AVC, they can still continue to operate despite the loss. The table below shows some strategies that can be u sed. Some strategies do increase revenue and reduce cost at the same time. Revenue Strategies 1. increase range of apparel to include non-cotton app arel; or even sell ‘budget line of clothing’ which may be inferior goods. [This can also be used as a cost strategy]

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