2023 VJC H2 Economics Preliminary Examination answers

2023 H2 Economics VJC Economics Department 1 Suggested Responses to 2023 VJC H2 Economics Preliminary Examination Paper 1 — Case Studies CSQ1: The evolving demand for commodities (a) Using a relevant elasticity concept, explain the relationship between t he price of lithium-ion batteries and demand for sodium-ion batteries. Lithium-ion batteries and sodium-ion batteries are substitutes as they are both used as energy storages for electronic devices such as electric vehicles. [1] This means that their XED value is positive and when the price of lit hium-ion battery rises, it will cause a rise in demand for sodium-ion battery. Hence, pr ice of lithium-ion batteries and demand for sodium-ion batteries have a positive relationship. [1] [2] (b) Explain how the trend of lithium prices in Figure 1 would have impacted the total revenue of lithium-ion battery producers. According to Figure 1, lithium prices have fallen over the years. Since li thium is a factor input for lithium-ion batteries, this will lead to a fall in marginal cost of production for lithium-ion batteries. [1] The fall in MCOP will lead to a rise in supply for lithium-ion batter ies, creating a surplus at the initial price level and put a downward pressure on its price. [1] The demand for lithium-ion battery is likely to be price inelastic, since there are not many close substitutes in terms of energy density. [1] Thus, the rise in SS leading to a fall in price will lead to a l ess than proportionate rise in quantity demanded, causing a fall in total revenue earned by lithium-ion producers. [1] [4] (c) Explain whether the invention of sodium-ion batteries would i ncrease the profit level of battery maker CATL. With the invention of sodium-ion batteries, a new alternative to existing bat teries such as lithium-ion batteries, demand for CATL’s products will li kely rise due to consumers switching to this new product. [1] The rise in DD and MR will lead to CATL producing at higher output levels and charging a higher price, causing a rise in total revenue earned. [1] However, CATL would have also incurred higher fixed costs when they conducted their research and development on the invention of sodium-ion batteries such as building labs and obtaining specialised equipment. [1] This rise in fixed cost would lead to a rise in total cost incurred by CATL. [1] Whether the profit level of CATL will rise depends on whether the rise in total costs from R&D outweighs the rise in total revenue from sales of the battery. [1] OR Since the energy density of sodium-ion batteries is not as good as lithium-ion batteries, the rise in demand may be marginal, causing a fall in total profits for CATL as t he rise in total cost likely outweighs the rise in total revenue. [1] [4]

2023 H2 Economics VJC Economics Department 2 Max 4 marks out of 5 possible marks (d) Explain why it may be worthwhile