2023 ACJC Central Economic Problem Tutorial Suggested Answers

©Property of ACJC Economics Dept./H1H2 EC 2023/The Central Economic Problem Page 1 ANGLO-CHINESE JUNIOR COLLEGE JC1 Economics 2023 H1 H2 CENTRAL ECONOMIC PROBLEM Tutorial Worksheet: Suggested Answers Section A: Discussion Questions Question 1: Rational Decision Making (Adapted from 2021 H2 A Levels Question 1) (a) Explain how consumers act rationally to decide whether or not to buy a bicycle. Consumers aim to maximize utility when deciding to buy a bicycle or not. Main Point 1: Decision Making Framework Topic Sentence: Consumers determine whether buying a bicycle is beneficial and feasible by comparing the benefits, costs, and constraints. Constraints: The amount of savings and budget the consumer has accumulated for the bicycle. Benefits:  The satisfaction gained from using the bicycle  Improvement of health due to riding the bicycle for exercise Costs:  Explicit Cost – the monetary cost of purchasing the bicycle  Opportunity cost - Net benefit of next best alternative foregone: Potential satisfaction derived from the consumption of the alternative / i.e. another good or service (beside bicycle) Buying a bicycle is beneficial if the benefits outweigh the costs, and feasible if the costs are within the benefits. In addition, the consumer may also consider:  Information – Availability of information on the type of bicycles that suit the lifestyle of the consumer best (E.g. should one use a folding bicycle or a road bicycle to commute to work etc.)  Perspectives – His family members who may be sharing the bicycle with him or helping to pay for it. Main Point 2: Weighing of costs and benefits

©Property of ACJC Economics Dept./H1H2 EC 2023/The Central Economic Problem Page 2 Topic sentence: To maximise utility, consumers consume bicycles up the the point where marginal benefit = marginal cost. Explanation:  To maximize self-interest, consumers would increase consumption when the additional unit consumed generates additional net benefit (i.e. marginal benefit exceeds marginal cost).  For instance, for a consumer to maximize utility, every dollar spent by the consumer on a good or service (in this case, purchase of a bicycle) must bring additional net benefit (MB>MC), in such case, the consumer should buy an additional bicycle (i.e. Q1th unit). In so doing, the additional net benefits would lead to an increase in the total net benefit.  If the additional dollar brings additional net cost (MB<MC), the consumer should not spend on an additional bicycle (i.e. Q 2th unit). In so doing, the additional net costs would lead to a decrease in the total net benefit.  Hence in the market of a bicycle, the optimal spending amount is attained when the MB equals MC (MB = MC) which suggests that additional spending can no longer yield additional net benefit.  At this point where MC=MB, the total net benefit is the maximum possible.   This process of examining the additional benefits continues until MB = MC , at this point of output consumed or produced would have maximized the total consumers’ utility. (b) Explain how producers of bicycles act rationally to determine their level of output. Producers aim to maximize profit when deciding which output level (number of bicycle) to produce up to. Main Point 1: Decision Making Framework Topic Sentence: Producers determine whether producing an additional bicycle is beneficial and feasible by comparing the benefits, costs, and constraints. Constraints: The amount of financial capital or reserves the producer has accumulated. Benefits:  The revenue earned from selling an additional bicycle Costs:  Explicit Cost – Cost per unit incurred by producer for manufacturing an additional bicycle Note: You will learn this diagram in the next topic, “Price Mechanism”.

©Property of ACJC Economics Dept./H1H2 EC 2023/The Central Economic Problem Page 3  Opportunity cost - Net benefit of next best alternative foregone: Potential additional revenue earned from selling an alternative good e.g. a scooter Producing an additional bicycle is beneficial if the benefits outweigh the costs, and feasible if the costs are within the benefits. In addition, the producer may also consider:  Information – Availability of updated information on consumers taste and preferences (E.g. foldable bicycles, road bikes, mountain bikes, cruiser, BMX, electric bikes etc.)  Perspectives – The perspectives of other stakeholders of the firm or other bicycle producing firms. Main Point 2: Weighing of costs and benefits Topic sentence: To maximise profits, producers produce bicycles up the the point where marginal benefit = marginal cost. Explanation:  For a producer to maximise the profits, one should proceed to produce an additional bicycle should MB> MC while if MB < MC, the additional bicycle should not be produced. Otherwise, the total net benefit would not be maximised. Hence, producers too would aim to produce up to the output level where MB=MC (i.e. output level at Qe).  This process of examining the additional benefits continues until MB = MC, at this point of output produced would have maximized the total producers’ profits. Question 2: The China Economy Assume that China is only producing capital goods and consumer goods. Currently, the PPC of China is AA’, and China is producing at point X. Each question starts with curve AA’ as the initial PPC. (a) China’s production moves from point S to X, explain what happens to the resources in China and the amount of goods produced.  China is producing more of both capital and consumer goods.  In order to increase production, more resources such as land and labour are utilised. Thus, there is greater employment of resources in China. (b) Explain one possible way for China to increase its production from point S to point Y.  At point S, there is unemployment (presence of idle resources; not at full employment)

©Property of ACJC Economics Dept./H1H2 EC 2023/The Central Economic Problem Page 4  To move from S to Y, China needs to (i) get from a point within the PPC to a point on the PPC, and (ii) shift its PPC outwards.  (i) China can mobilize its unemployed labour and seek ways to encourage households to consume more goods, and firms to invest in machines (increase in capital goods & consumer goods). This may move the country from point S towards point X on PPC AA’.  (ii) China can increase the amount of factors of production (e.g. labour, raw materials), the quality of its factors of production (e.g. increase education and retraining), and improve its level of technology (e.g. new methods of production) (c) For each of the scenario below, illustrate how China PPC and/ or production point may change and explain the change. i. Massive new sources of oil and land are discovered. The PPC should shift outwards. Having more factors of production allows China to produce more capital and consumer goods. The outward shift of th e PPC represents an increased productive capacity. ii. There is a major technological breakthrough in the consumer goods industry The PPC should shifts outwards, pivoting on point A. The PPC should intersect the axis for consumer goods further right because the technological breakthrough for consumer goods allows China to produce more consumer goods. However, the technological breakthrough does not apply for capital goods, implying that there is no change in the amount of capital goods China can produce. Therefore, the PPC should still intersect the axis for capital goods at A.

©Property of ACJC Economics Dept./H1H2 EC 2023/The Central Economic Problem Page 5 iii. There has been a rise in unemployment rate over the pandemic years in China. As unemployment increases, fewer resources are being used for production. This is represented by a movement fr