ACJC 2023 H2 Market Failure Tutorial Answers (Case Study and Essays)

©ACJC Econs Dept/2023/Market Failure & Government Intervention Tutorial Worksheet 1 H2 Market Failure Tutorial 2023: Suggested Answers Question 4: Policies for health improvement (Adapted from H2 A Level 2018) (a)(i) Using the information in Extract 1, calculate the value of the price elasticity of demand for sugar-sweetened beverages (SSBs). [2] Question approach & marks scheme:  Apply the formula of PED to calculate the PED value of SSBs.  1m: formula of PED  1m: value Suggested answer:  Price Elasticity of Demand measures the degree of responsiveness of consumers to a change in the price of the good, ceteris paribus. It can be calculated using the formula: % change in quantity demanded / % change in price of the good.  Using Extract 1, PED value of SSBs = | (-24%) / (+20%) | = 1.2 (a)(ii) Explain one possible factor that could lead to this value. [2] Question approach:  Using Extract 1, identify one possible factor and explain how it causes PED value > 1. Suggested answer:  There is a large number of substitutes for SSBs such as fruit juice and healthier beverages.  Therefore, the demand for SSBs is price elastic as consumers would readily switch to consuming these substitutes when the price of SSBs increase. Note: Other acceptable answers include the high proportion of spending on SSBs by low - income and younger consumers OR SSBs not being considered as a necessity by consumers. (b)(i) State the economic concept you would use to measure the relationship between the change in the price of SSBs as sales taxes are imposed and the resulting change in the demand for bottled water. [1] Suggested answer:  Cross Elasticity of Demand (XED). (b)(ii) Explain the value you would expect to get from this measurement. [3] Question approach and mark scheme:  1m: positive sign of XED  1m: magnitude of XED  1m: explain why the sign and magnitude

©ACJC Econs Dept/2023/Market Failure & Government Intervention Tutorial Worksheet 2 Suggested answer:  Sign of XED value: The XED value obtained will be positive because bottled water and SSBs are substitutes. As price of SSBs to increase  quantity demanded of SSBs decreases  increase in demand for bottled water when SSBs consumers switch over.  Magnitude of XED value: The greater the magnitude of the value, the stronger the relationship between the two products in terms of their substitutability.  In this case, bottled water and SSBs cannot be considered as close substitutes as one contains sugar but bottled water does not. Hence, even though they are both beverages, they give different level of satisfactions to the consumers. This will result in only a small proportion of consumers switching over to bottled water when price of SSBs increase. Hence, XED value between bottled water and SSBs is likely to be less than 1 in magnitude. (c) Discuss whether consumers would ever make rational decisions regar