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. [Acceptotherpossiblereasonsforwhyfarmersmightbeworseoff.] Conclusion Theextentofdesirabilityofaminimumpricesupportforcottonfarmersdependsonhowpriceelasticthedemandforcottonis.Themorepriceelasticdemandforcottonis,duetotheincreasingnumberofman-madesubstitutesforcottonduetofirms’R&Defforts,wouldmeanamoresignificantfallintotal 2

EJC2024H1PrelimSAMS revenue, whichisthusundesirableforfarmerswhentheminimumpricesupportisimposedinthecottonmarket. MarksScheme: Level Descriptor Marks L2 Forananswerthatprovidesrigorousandcoherentexplanationonthe possiblechangesinfarmers’ total revenueusingthePEDconceptandinviewofapricefloorinthemarketforcotton. 4–6 L1 Forananswerthatshowsasmatteringofpointsdisplayingsomerecognition of howa price floor couldbedesirablefor cottonfarmersduetoachangeintheirtotalrevenue. For an underdeveloped answer that provides a superficialanalysisoronelackinginscope. Inaccuraciesarepresent. 1–3 E2 OneevaluativestatementthatisreasonedORtwounsupportedevaluativestatements 2 E1 OneunsupportedevaluativestatementUnexplainedornotsupportedbyargumentsinanswer 1 (e) (i) WithreferencetoFigure1,explainhowonecomponentofaggregatedemandmightbeaffectedbythechangeinprivatefundingforsustainablefashion. [2] The rise in privatefundingfor sustainablefashionasshowninFig. 1[1] couldreflect ariseininvestment spending (I) as fashion firms are more able to engage in R&Dto lower costs inmanufacturingenvironmentallyfriendlyclothing[1]. (Note:Acceptalternativeanswersthatarecorrectlyexplained.RiseinGisnotacceptableasFigure1showschangeinprivatefunding.) (ii) CommentonthelikelyimpactonunemploymentinIndiaifthecountrydevelopsinto‘aglobalhubforsustainablefashion’(Extract3). [6] OneofkeymacroeconomicaimsofIndiangovernmentachievelowunemploymentrate. R1: Positiveimpact onUNN[2] Indiadevelopsinto‘aglobalhubforsustainablefashion’ Riseinpriceand/ornon-pricecompetitivenessofsustainableclothingproducedbyfirmsinIndia RiseinDDforIndia’ssustainableclothing RiseinX(India’sambitioustargetof100billionUSDforcottonandtextileexportsby2025-26(Extract3)) 3

EJC2024H1PrelimSAMS RiseinAD Unplannedfallinfirms’inventories Firmshiremorefactorsofproduction(includinglabour)toproducemoreoutput Riseindemandforworkersinthesustainablefashionindustry Fallindemand-deficientUNN,assumingthatsustainablefashionisakeyindustryinIndia R2: Negativeimpact onUNN[2] R&D,technologicaldevelopmentsareimportantaspectsofsustainablemanufacturing(Extract3) Riseindemandforskilledworkersinsustainableclothingsector Lessskilledworkerswhobecomeunemployedinthecontractingnon-sustainableclothingsector arenot findalternativeemployment intheexpandingsustainableclothingsectorduetoaskillsmismatch RiseinstructuralUNNinIndia Conclusion[2] TheoverallimpactonunemploymentasIndiabecomesa‘globalhubinsustainablefashion’dependson the ability of the Indian government to manage the problemof structural unemployment viapromotingupskillingprogrammesforitsunemployedworkersduetoaskillsmismatch.Amoreintenseandrelevant upskillingprogrammeislikelytomoreeffectivelyreducestructuralunemploymentinIndia. (f) (i) Explainwhytheproductionofsustainableclothingmightbelessthansociallyoptimal.[6] Theproductionofsustainableclothingmightbelessthansociallyoptimalduetopositiveexternalityinproduction benefits enjoyed by third parties due to the production of sustainable clothing,uncompensatedfor.[1] Diagram[1] Whenfirmsproducesustainableclothing,theyincurprivatecostssuchasthemanufacturingcostsandenjoyprivatebenefitssuchasrevenueearnedfromthesaleofsustainableclothing.However, it doesnot takeintoaccount thefact thatthirdparties,suchasindividualswhodonotpurchasesustainableclothing,wouldenjoyexternalbenefitssuchasimprovedhealthconditionsand 4

EJC2024H1PrelimSAMS hencelower medical bills[1] duetolower incidenceof lungrelatedillnessesastheenvironmentbecomeslesspolluting,sincesustainableclothingisproducedfrom“eco-friendlymaterials”. Duetothepositiveexternalityinproduction,thesocialbenefitsofR&Darehigherthantheprivatebenefits(MSB>MPB)bytheMEB[1]asshowninabovefigure.Assumingnonegativeexternalities,themarginalprivatecostsisequaltomarginalsocialcosts(MSC). Assumingthatprofit-maximisingfirmsconsideronlytheirprivatebenefitsandcostswhenproducingsustainableclothing:● MarketequilibriumoutputoccursatQP,whereMPB=MPC● SociallyoptimaloutputisgivenbyQS,whereMSB=MSC● QP<QS firms under-produce sustainable clothing under-allocation ofresources[1]● BetweenQPandQS,MSB>MSCsocietalwelfarecouldhavebeengainedbyincreasingquantityofsustainableclothingtoQSdeadweightloss(areaABC)[1] (ii) Discusswhethercost-savingtechnologicalsolutions(Extract4)adoptedinIndiaisthebestmethodtoachieveasociallyoptimaloutcomeinthemarketforsustainableclothing.[10] ‘Best method’ most appropriate policy to achieve allocative efficiency inthemarket forsustainableclothing. R1: Cost-saving technological solutions could lead to allocative efficiency in the marketfor sustainableclothing. [H]Governmentpromotescost-savingtechnologiesIIndia FallinunitCOP FallinMPC(i.e.MPCshiftsrightwardstoMPC1) DWLiselimin