HCI H2 Prelim 2024 Paper 1 Mark Scheme

Question 1: Fast fashion and Food (a) Explain the relationship between world GDP and clothing sales volume from 2000 to 2015. [2] Explain the positive/direct [1] relationship between world GDP and clothing sales (Q): Demand for clothes is positive YED (normal good). As GDP increases implies increase in income and hence demand for clothes, quantity (Q) increase. [1] (b) With reference to Extract 1 and using a diagram, explain how the trend in figure 1 demonstrates that allocative inefficiency will worsen in the fast fashion market. [5] Figure 1 shows rising clothing sales i.e. increase demand. Production of fast fashion generates negative externalities. In extract 1, carbon emission and water pollution from textile dyeing cause external costs on third parties eg. Lower crop yield for farmers (reduced profits) due to climate change, health problems for residents (increased healthcare costs) around waterways. [1] These external costs are not factored in by producers and consumers of fast fashion. They will consume and produce up to MPB=MPC at Qm where they only consider their own cost and benefit. [1] The external cost however causes a divergence between MSC and MPC. The society is better off at MSC=MSB at Qse where allocation of resources is efficient. [1] There is over allocation of resources to fast fashion as at Qm, the cost to the society outweighs the benefit causing the deadweight loss, area A. [1] As the demand MPB to MPB1 for fast fashion increases, the deadweight loss grows even larger, area A to area B. [1] Price MSC=MPC+ MPB1=MSB1 B MPB=MSB MPC A

Fail to draw diagram, max 4m. (c) Using a diagram, explain one revenue or one cost reason for “fast fashion companies and retailers (to) have no incentives to change its current business model when it’s proven to be so profitable so far” (Extract 1). [3] Cost/revenue diagram expected. 1 diagram to show AR/MR increase resulting in increased profit due to ‘rapid design and marketing’ to appeal to taste and preference of consumers + explain [3] Or 1 diagram to show AC/MC fall resulting in increased profit due to ‘cutting production costs by using synthetic and chemically treated materials’ to reduce variable cost + explain [3]. If students failed to link to increase profit, max 2m Can accept answers which show profit of firms will fall if the firm changes its business model. (d) With reference to Extract 3, explain the type of market structure ultra-processed food (UPF) operates in. [2] Oligopoly [1]. A few large firms dominate the industry with high MCR evidence in Extract 3 eg. MCR for Soda is 93% for 3 firms [1]. (can accept other egs. in the case) (e) “It is up to consumers to actively choose to avoid fast fashion brands, and to support more sustainable and socially conscious labels in order to alleviate the devastating environmental impacts of the industry” (Extract 1). Discuss whether consumers could ever make rational decisions regarding their consumption of sustainable fashion. [8] R1: How consumers can make rational decision regarding consumption of sustainable fashion. Consumers find info on sustainable fashion regarding constraints, benefits and costs. Eg. of constraints – budget constraints, availability of sustainable fashion Eg. of benefits – clothes can last longer, better for the skin Output Qse Qm Qm1 Qse1

Eg. of cost – price of the good If constraints can be overcome then consumers will weigh costs vs benefits. Will buy sustainable fashion up to MPB=MPC. R2: Consumers are not able to make rational decision regarding consumption of sustainable fashion. Consumers’ demand is often clouded by the marketing tactics of the fashion brands and green washing. MPBperceived > MPBactual hence they may end up consuming from brands which are not sustainable but make unsupported claims on the sustainability of their brands. SC: Given that fast fashion companies are able to mislead the consumers into believing that the company is doing more to protect the environment. Unless governments can act to eliminate these false advertising, consumers may not be able to discern between the sustainable vs unsustainable brands. L2: 4- 6m ● Explains how rational decision is made. ● Explains how MPBactual deviates from MPBperceived leading to overconsumption of fast fashion or underconsumption of sustainable fashion. ● Answers in this level will make good use of case data L1: 1- 3m Lacking in any of the L2 criteria E: 1- 2m ● No stand or stand is made but no attempt to justify ● Stand is made with an attempt to justify ● Stand is made and well-justified (f) Discuss whether restriction of mergers and acquisitions in the UPF industry or regulation to improve saliency about the nutritional content of UPF is the better policy to improve the welfare of consumers. [10] R1: Restrict M&A to reduce monopoly power of UPF i) Reducing monopoly power of the firms/increasing competition will force firms to improve the quality of product. In this context, it is the nutritional value of the products. ii) Consumer surplus may increase with less monopoly power, firms cannot charge high prices. EV1: However, the large firms are able to charge low prices due to scale (iEOS) and control over supply chain. Helps low income to be able to have access to food.

R2: Regulate to improve information about nutritional content To address the information gap so that consumers can make more informed choice on what they are consuming and how healthy/unhealthy it is. In Extract 3, many regularly consume UPF without the knowledge that they are consuming UPF, eg. breakfast cereal and yogurts. It pushes the MPC perceived closer to the MPC actual of UPF. Or unaware of the nutritional value in UPF MPBperceived is higher than MPBactual. Information will allow MPBperceived to decrease going closer to MPBactual. EV2: Even with nutritional information, some consumers may still be unaware of what it means and the corresponding impact on their health. Hence more importantly there needs to be more education on helping the consumers understand the meaning of the information on their health. Low income consumers rely on UPF due to the low prices hence even with information, they will still consume as they have no choice given that healthier options are unaffordable. SC: Restricting M&A is not the best policy. The industry is already dominated by large companies, to reduce the monopoly, government needs to break up these companies. In addition, these big companies are able to produce food at a low cost and price them cheaply which actually helps the low income. Thus, regulating the information on nutrition may be a better policy as it forces the firms to improve on the nutritional content if they are forced to reveal it. This can help every consumer (be it high or low income households) to make more informed choices so as to have better health. L2: 4- 7m ● Explains how restricting M&A helps consumers’ welfare. ● Explains how information helps consumers’ welfare. ● Answers in this level will make good use of case data L1: 1- 3m Lacking in any of the L2 criteria E: 1- 3m ● No stand or stand is made but no attempt to justify ● Stand is made with an attempt to justify ● Stand is made and well-justified

Question 2 Answers (a) (i) With reference to Figure 1 , describe how the general price level has changed in Britain since 2021. [2] Figure 1: Change in consumer price index in United Kingdom (UK) General trend [1m] Since 2021, the general price level has been increasing. 1m (have correct timeframe): Since 2021, the general price level has been increasing. 1m (no explicit timeframe, give BOD): the general price level has been in