EJC H1 Prelim 2024 Solutions

EJC2024H1PrelimSAMS 2024EJCH1EconomicsPrelimExamPaper 1SAMS Question1: TowardsSustainableFashion (a) UsingTable1,explainhowtheworldpriceofcottonwouldchangefrom2021to2022. [2] Theproductionofcottonhasincreasedwhileitsconsumptionhasfallenovertheperiod.Thisresultsinasurplusofcotton[1],suggestingthatthepriceofcottonfell[1]from2021to2022. Or In2022,thereisasurplusasproductionismorethanconsumption[1].Asurplusresultinadownwardpressureonpricehenceoverallpriceofcottonin2022fell[1]. (b) ExplainwhycottonproducedinBrazilisnotlikelytobeapublicgood. [3] Thekeycharacteristicsofapublicgoodarenon-excludableandnon-rivalrous.Cottonisnotlikelytobeapublicgoodasitisexcludableandrivalrous[1]. Excludability it is possible to excludenon-payersfromconsumingthegoodafter it hasbeenprovided. If consumersarenot willingor abletopayfor cotton, thentheycanbeexcludedfrompurchasingthegood.[1] Rivalroushavinganotheradditionalconsumerofthegooddiminishesthequantityand/orqualityavailabletoother consumers. Withafiniteamountofcottonsoldinthemarket,aconsumerwhopurchasescottonleaveslessquantityofcottonavailableforpurchase.[1] (c) WithreferencetoExtract1andusingadiagram,explainhowachangein onesupplyfactormightaccountforariseincottonproductioninBrazil. [3] Diagram[1] LowpricesforcornhavepushedfarmersinBraziltoplantcottoninstead(Extract1):Fallindemandforcorn Fallsinbothpriceofcornanditsquantitysupplied Riseinsupplyofcottonsincecornandcottonaregoodsincompetitivesupply[1] RiseincottonproductioninBrazil EquilibriumquantityofcottonincreasesfromQotoQ1[1] (d) Usingtheconceptofpriceelasticityofdemand,discusstheviewthat‘establishingaminimumsupportpriceinthecottonmarketisdesirableforfarmers’(Extract2). [8] 1

EJC2024H1PrelimSAMS Desirableforfarmerscottonfarmersearnahighertotalrevenue. R1: Establishingaminimumsupport priceinthecottonmarket isdesirablefor farmers. ● RiseinTRforfarmers(caseofPED<1) Apricefloorisalegallyestablishedminimumprice.Apricefloorisonlyeffectiveifitissetabovetheequilibriumprice. Withtheimplementationofpricefloor,priceofcottonincreasefromPtoPf.QuantitydemandfellfromQtoQ1 andquantitysuppliedincreasesfromQtoQ2. ThereisasurplusofQ1 Q2 .Initiallythefarmersincomeis0PEQ.Consideringthatthedemandofcottonisgenerallypriceinelasticwhencottonisregardedasanessentialorkeyresourceinmanufacturingfabrics,Theincreaseinprice,becauseofthepricefloor,decreasesquantitydemandlessthanproportionately.Overallincomeoffarmerswillincreaseto0Pf AQ1 .[Optional:Furthermore,assumingthegovernmentbuysbackthesurplusQ1 Q2 ,theincomeoffarmersincreasesto0Pf BQ2 .] R2: Establishing a minimum support price in the cotton market might not be desirable forfarmers. ● FallinTRforfarmers(caseofPED>1) However,ifthereisalargeavailabilityofsubstitutesforcottonsuchas‘polyesterandotherman-madepetroleumproducts’formanufacturingfabrics,thedemandforcottonmightbepriceelasticinreality.Theincreaseinpriceduetothepricefloorwouldleadtoalessthanproportionatedecreaseinitsquantitydemand,suchthatoverallincomeoffarmersfallsinstead. [Acceptotherpo