JPJC H1 Prelim 2024 Solutions

2024JPJCJC2PrelimH1P1SuggestedAnswer Question1: RiceandFoodSecurity (a) (i) WithreferencetoFigure1,describethechangesintheworldfoodpricefortheperiodfromJanuary2020toJanuary2023. [2] Suggestedanswer:Overall,worldfoodpricehasrisenfortheperiodfromJanuary2020toJanuary2023.However,thedatashowsareversaloftrendafterMarch2021(foodpricefallsafterMarch2022). (a) (ii) Withtheaidofadiagram,accountfortheextentofthechangeinworldpricefoodinMarch2022. [5] Suggestedanswer:Version1:Theextentoftheriseinworldfoodpricesin2022isattributedto(i)afallinsupply(ii)ariseindemandand(iii)demandforfoodispriceinelastic. Supplyfactor:RussiaandUkrainearekeyexportersofwheat,corn,barley,andsunfloweroil,whicharecrucialfoodcommoditiesglobally.Theinvasiondisruptedtheproductionandexport of thesegoods, especiallythroughtheBlackSea,amajorrouteforglobaltrade.ThestallingofUkrainianexportssignificantlyreducedtheglobal supplyof theseessential fooditems riseincost of production

reducesprofitsoffoodproducers fallinmarketsupply. Demandfactor:AstheconflictbetweenRussiaandUkraineheightenedfearsofsustainedsupplydisruptions,expectationsofrisingpricesmayhavetriggeredanincreaseindemandforthesecommodities,drivenbypanicbuyingandstockpilingbehaviour. Afall inmarket supplywithariseinmarketdemand ashortageattheinitial marketequilibriumprice upwardpressureinmarketprice.Thus,theextentoftheriseinworldfoodpricein2022isduetoreinforcingeffectofafallinsupplyandriseindemandforfoodasseeninFigure1. Figure1 Version2:Theextentoftheriseinworldfoodpricesin2022isattributedto(i)afallinsupplyand(iii)demandforfoodispriceinelastic. Supplyfactor:RussiaandUkrainearekeyexportersofwheat,corn,barley,andsunfloweroil,whicharecrucialfoodcommoditiesglobally.Theinvasiondisrupted 1

theproductionandexport of thesegoods, especiallythroughtheBlackSea,amajorrouteforglobaltrade.ThestallingofUkrainianexportssignificantlyreducedtheglobal supplyof theseessential fooditems riseincost of production

reducesprofitsoffoodproducers fallinmarketsupply. Attheoriginalmarketequilibriumprice,therewillbeashortagearisingfromthefallinmarket supply upwardpressureonmarketprice.Demandforfoodispriceinelastic due to (i) it is a necessity (ii) a broadly defined goodwhichlackssubstitutes.Duetoafallinmarketsupply,coupledwithapriceinelasticdemandforfood,marketpricewillrisebyalargeextentasshowninFigure1a. Figure1a (b) UsingtheconceptofProductionPossibilityCurve(PPC),explainthelikelyimpactof‘severeflooding’(Extract4)onthePakistaneconomy. [4] Suggestedanswer:ProductionPossibilityCurve(PPC)showsthemaximumcombinationoftwogoodsorserviceswhichtheeconomycanproducewithagivenquantityandqualityofresources,assuming all resources are fully and efficiently utilised, and a particular state oftechnology. TheseverefloodinginPakistanhasdestroyedricefields,landandinfrastructure,affectingmostpartsofthecountry.Thiscausesafallinquantityoflandandcapital,resultinginafallinproductivecapacityandaninwardshift of thePPCfromPPC1 toPPC2 asshowninFigure2. AsPakistanrepresents7.6%ofglobalricetrade,theseverefloodingaffectingriceyieldswillcauseafallinexportrevenueandhencenetexports.Togetherwith the fall in business activities (investmentexpenditure),therewillbelesserproductionofgoodsandservices,loweringthederiveddemandforresources.Thereishigherunemployment,representinglesserutilisationofPakistan’sresources.ThecountrymovesfromapointwithinthePPC(Pointa)toapointfurtheraway(Pointb)wherethereishigherunemploymentasshowninFigure2. (c) Extract2mentionsthatThailandandVietnamareintalksonapacttoraisethepriceoftheirriceexportstoimprovefarmerincomes(profits). Commentontheeffectofanincreaseinpricesofriceexportsonfarmerincomes,takingintoaccount therisingcostsof productionandtheimplicationsof priceelasticityofdemand. [6] 2

Suggestedanswer:Farmerincome=Profit=TR-TC Anincreaseinthepricesofriceexports,asmentionedinExtract2,wouldlikelyhaveapositiveeffectonfarmers'profit,assumingotherfactorsremainconstant.IfweassumethatdemandforVietnam’sriceexportsintheworldmarketispriceinelastic,anincreaseinriceexportpriceresultsinlessthanproportionatefallinquantitydemand,leadingtoariseintotalrevenue.Assumethattotalrevenuerisesbyalargerextentthattheriseincostofproduction,Vietnamesefarmersexperienceariseinprofit(TotalRevenue–TotalCost). However,farmerincomesisalsoaffectedbytheextentofrisingcostofproduction.Iftotalrevenuerisesbyalargerextentthantheriseincostofproduction,farmerincome(profit)will rise. Hence, farmersinThailandandVietnamwill alsoneedtoconsiderhowtoreducetheextentofrisingcostinadditiontoraisingpriceoftheirriceexports. TheextenttowhichVietnamesericefarmerswillrealizeanincreaseinprofitdependsontwokeyfactors:(i)thevalueofpriceelasticityofdemandand(ii)therelativechangesintotalrevenueandtotalcostsforVietnamesericefarmers. (d) RicecultivationisoneofthemaincropsgrowninVietnam,whichisoneoftheworld’stopriceproducingcountries.WithreferencetoExtract5: (i) Explain whythereisaninefficient allocationof scarceresourcesinthemarketforrice. [5] Suggestedanswer:Inefficientallocationofresourcesoccurredwhenthemarginalsocialcostisgreaterthanthemarginalsocialbenefitsandthegreatermarginalsocialcostinthericemarketisduetothepresenceofnegativeexternalitiesinthecultivationofrice. Inthefreemarket,producerswillaimtomaximiseitsprofitsbyproducingatthelevelofoutputwherethemarginalprivatecost(MPC)isequaltothemarginalprivatebenefits(MPB),(MPC=MPB)atQmasshowninFigure3below.TheMPCistheadditionalcostsincurredinproducinganadditionalunitofoutput(rice)suchaswagesofthefarmers,utilities(waterusage)andotheroperationalcostsandtheMPBistheadditionalrevenuegainedfromproducinganadditionalunitofrice. Theproducersdonottakeintoaccountthepresenceofnegativeexternalitiesgiverisetoexternalcostsincurredby3 rd partieswhoarenotdirectlyinvolvedintheproductionofriceandtheseexternalcostsarenotreflectedinthepriceoftherice.Oneofthenegativeexternalitiesthatariseisduetohighlevelsofmethanethataregeneratedbybacteriathatgrowinfloodedricepaddieswhentheleftoverricestrawarelefttorotsinthefieldsafterharvest.Themethanetrapsheatintheatmospherecausingerraticclimaticchangeswhichdisruptseconomicactivitiesandresultsinlossofincometo3 rd partiessuchasothernon-ricefarmerswhosecropsarebeingdestroyedorotherworkersnotbeingabletoreportforworkduetotheunpredictableweather. Thesociallyoptimallevelofoutputrequiresthatthericefarmerstakeintoaccountstheexternal costsandproduceat thesociallyoptimal level ofoutputwherethemarginalsocial costs(MSC)isequal tothemarginal social benefits(MSB)atQsasshowninFigure3below.TheMSCisequaltoMPC+MEC.However,atthefreemarketlevelofoutputatQm,theMSCofriceproductionisgreaterthantheMSB(MSC>MSB)whichgiverisetoadeadweightlossequaltotheshadedareaasshowninFigure3.Thereisan 3

overproductionof rice(Qm>Qs)andhencethereisinefficiencyintheallocationofscarceresourcesinthemarketforrice. Thus, the inefficient allocation of resources inthemarket for ricenecessitatestheadoptionofappropriatepoliciesbythegovernmenttocorrectthemarketfailurethatisdeemedtohaveoccurredinthemarketforrice. (ii) Discusswhether thegovernment shouldsupport theproposedmethodofclimate-friendlystrawmanagementbytheprivateresearchinstitute. [8] Suggestedanswer:Duetothepresencenegativeexternalitiesandtheexternal coststhatarisefromthemethaneemissionasaresultoftheimproperdisposalofthericestraw,aclimatefriendlystrawmanagement hasbeenintroducedtothericefarmers.Whetherthegovernmentshould support the proposal would depend on its benefits, effectiveness, costs,constraintsandanyunintendedconsequencesoftheproposedmethod. TheclimatefriendlystrawmanagementmethodrequiresricefarmersinVietnamtouponharvestingtosoakthestrawbalesandlaidouttogrowandsoldthestrawmushroomsbeforeputtingthestrawbalesintoacompostingmachine.Thericestrawafterharvestingarethusbeingputintogooduseinsteadofleavingittorotinthericefieldsforbacteriatothriveandreleasingmethaneintotheatmosphere. Thishelpstoreducethenegativeexternalitiesandhenceexternalcostsassociatedwithricecultivation.AsshowninFigure4below,areductioninthemarginalexternalcostsfromMEC0 toMEC1 willreducethedivergence