ASRJC H2 Prelim 2024 P1

1 © ASRJC Economics Department 9570 / JC2 Prelim / 2024 H2 Economics ASRJC Preliminary Examination 2024 Suggested Answers and Markers’ Comments Question 1: Impacts of the Electric Vehicle Industry a With reference to Figure 1, compare consumer and government spending on electric cars between 2016 to 2021. [2] Similarity: Both increased between 2016 to 2021. Difference: Consumer spending is always higher or increased by a larger extent than government spending on electric cars between 2016 to 2021. Marker’s comments • Most students could score for this question. • Students should take note to take the most obvious trend over the entire period, where possible. In this case, there are two obvious overall trends. Hence, students should not take the data for split years. • Some students were still reporting data, instead of showing intepretation such as using comparative words to show similarity or difference. b Explain two reasons why electric vehicle charging points are not public goods. [4] Public goods are defined by its two key characteristics of non -excludability and non - rivalrous in consumption. In addition, once provided, an additional trait is that it cannot be rejected by the consumers, which means it is also non-rejectable. Charging points are not considered a s public good because they are rivalrous in consumption. This means that the benefits will be depleted by additional users. When one driver uses one charging point, it will not be available for charging for the other user and he will have to queue for it , thus making the usage of charging point rivalrous in consumption. Charging points are not considered as public goods because they are excludable in consumption. This means that non -payers can be excluded from using the charging points as users will have to pay a fee to operate the charging points such as having security feature in the device to only allow usage upon payment/ easy to set up payment mode to prevent non-payers from using the charging points. Charging points are not considered as public goods because they are rejectable in consumption. This means that consumers can choose not to consume it once it has been produced. It is possible for consumers to reject the benefits of charging points (i.e. benefits of driving a fully powered electric vehicles) that have been provided for as they have the right to reject, subject to taste and preferences. For example, they can choose not to use it and use petrol for the ICE cars if they prefer. Hence, charging points are not public good. Marker’s comments • Most students could score at least 2m for this question. Instead of just stating the definition of characteristics in context, students should continue to elaborate how it coud be applied to the context.

2 © ASRJC Economics Department 9570 / JC2 Prelim / 2024 • Many students wrote that the characteristics were “not non -excludable” which should be phased as “excludable”. • Some students didn’t show understanding of the characteristics of public goods. • Some students wrote more than necessary and explained how the characteristics led to market failure which is not required. • Some students were confused between the explanation for excludable and rivalrous in consumption. • Some students explained excludable as exclusive which was wrong. • Some students explained excludable as only those with electric vehicles would require the charging points which is wrong. They should refer to the definition of this term in Economics, rather than in English. c With reference to Extract 3, (i) State the economic concept you would use to measure the relationship between the fall in price of Tesla’s electric vehicle and the resulting change in demand for Li Auto’s electric vehicle. [1] Cross elasticity of demand Marker’s comments Most students could score for this question. (ii) Explain the value you would expect to get from this measurement. [3] Cross elasticity of demand measures the degree of responsiveness of the demand for China’s Li Auto to a change in price of Tesla, ceteris paribus. Since Tesla and Li Auto are substitutes, the two goods have a positive XED value. The size of the XED coefficient between Tesla and Li Auto is also likely to be large as the two goods are close substitutes. This is evident in Extract 3: Li Auto’s response in providing discounts when Tesla decreased their price. When price of Tesla falls, there will be a rise in quantity demanded for Tesla and consumers will switch away from the relatively more expensive Li Auto. Demand for Li Auto will hence fall more than proportionately. Marker’s comments • Most students could score at least 2m for this question. They were able to identify that the question r equires th e value and magnitude to show relationship and closeness of relationship. • Part (i) and (ii) are linked. Thus, students should continue to explain how the fall in price of Tesla could affect the demand for Li’s Auto due to the relationship identified. • Some students wrongly stated that the quantity demanded for Li Auto was affected, instead of demand.

3 © ASRJC Economics Department 9570 / JC2 Prelim / 2024 d Imagine that you are a potential new firm trying to enter the electric vehicle market in China. Considering the developments described in Extracts 2 and 3, discuss whether you should enter the electric vehicle market in China. [8] The objective of the potential new firm is to maximise profits. It should consider costs and benefits of entering the market. In this case, the firm should consider cost and revenue advantages of entering the electric vehicle market. R1: New firm could consider entering the market due to relatively low BTE and prospect for profits since the electric vehicle market is booming. With an increase in trends towards sustainability and usage of electric vehicles (Extract 2: “ China's supremacy in the electric vehicle (EV) industry and its exports are reshaping the global automotive landscape ”), demand is likely to increase from domestic or overseas markets, especially if China has a large export of electric vehicles to overseas markets. Thus, demand for the new firm will likely increase, shifting the AR and MR curves to the right from AR & MR to AR 1 to MR1, as shown in Figure 1. Thus, equilibrium price and quantity increase from Pe and Qe to P1 and Q1. Supernormal profit increases from area PeBGC to P1DEF. Figure 1: Increase in profit during to increase in DD In addition, there is low barrier to entry and relatively lower fixed costs since infrastructure exists and potential economics of scale to be enjoyed (Extract 2 : “absence of significant entry barriers or bottlenecks ”, “EV production involves readily available technology and less complex manufacturing processes”). Thus, the new firm could tap on the economics of scale and enjoy cost savings, the average costs is low and there is opportunity to earn profits. Hence a new firm should enter. Moreover, technological enhancement and less complex manufacturing process from EV, firms producing EV benefit from lower average costs. Hence, profit could increase from area (P0-C0)*Q0 to (P1 -C1)*Q1. Hence the greater profit propect should encourage new firms to enter. MR1 MR1 AR1= DD MC AC Price, Revenue, cost P1 Q1 0 Qe Pe Quantity of electric vehicles AR1 B F C D E G

4 © ASRJC Economics Department 9570 / JC2 Prelim / 2024 Figure 2: Increase in profit during to fall in costs R2: However, new firm may need to consider the difficulty in earning profits since competition is quite stiff. For example, China EV’s price war (Extract 3: “Tesla’s price cuts in China could cost the carmaker the entirety of its operating profit in the world’s