YIJC 2024 JC2 H2 Prelim Essay Q2 Suggested Answer

Suggested Answer for Q2 Suggested answer for (a) Introduction Firms can pursue 2 types of growth - internal expansion and external expansion. An external expansion may occur in the form of a merger which is the result of a mutual agreement of two firms to come together. With a primary objective to raise profits, Strides Taxi and Premier Taxis decided to merge to raise the TR or reduce the TC for both firms to achieve this aim. R1: Explain how merger between the 2 firms can lead to a rise in TR A merger between Strides Taxi and premier Taxis can lead to a rise in total revenue. With the merger, the firms now become one firm and faces a larger demand due to an increase in market share. This rise in demand brings about an increase in both the price and quantity for the firm. At the same time, gaining market share also means fewer competitors in the market so the firm will then face a more price inelastic demand. This allows the firm to raise prices or to engage in some form of price discrimination. The quantity demanded will decrease less than proportionate to the price increase and total revenue will increase. 2 Strides Taxi and Premier Taxis have merged to form Strides Premier, now Singapore's second-largest taxi operator with 2,500 taxis, behind ComfortDelGro's 8,700 taxis. Unlike the 2018 Grab-Uber merger, which led to a S$13 million fine, the Strides Premier merger raised no concerns from the Competition and Consumer Commission of Singapore (CCCS). (a) Explain two reasons why Strides Taxi and Premier Taxis decided to merge . [10] (b) Discuss the factors that governments should consider in its decision to intervene in a merger. [15] 1st Requirement: Candidates are to e xplain how merger between the 2 firms can lead to a rise in TR 2nd Requirement: Candidates are to explain how merger between the 2 firms can lead to a fall in TC Figure 1

With reference to Figure 1 above, the merger increases the AR from AR0 to AR1 and at the same time making it less price elastic. Assuming MC and AC to be constant, the increase in AR from AR0 to AR1 leads to an increase in total revenue from 0P0bQ0 to 0P1fQ1. As a result, total profits increases from P0AC0cb to P1fgAC1. R2: Explain how merger between the 2 firms can lead to a fall in TC A merger between Strides Taxi and premier Taxis can lead to a fall in total cost. This is due to the fact that the firm can increase its scale of production, which could allow it to reap more internal economies of scale and lower average cost of production. In the taxi industry, with an increase in output, the merged firm would be able to enjoy the various economies of scale such as financial economies of scale where the merged firm will be able to get bank loans at lower rate of interest compared to when they were smaller in scale. This is because banks and finance companies generally consider larger firms to be less risky as they can provide more assets as collateral and have higher creditworthiness. Larger firms can hence negotiate loans more easily and at more favourable rates. These leads to lower cost of borrowing. When this happens, the firm’s average cost of production falls. With reference to Figure 2 above, lower average cost of production will lead to a fall in MC and AC from MC0 and AC0 to MC1 and AC1. The firm originally earns a subnormal profit of AC0GIP0 as TR 0P0IQ0 is lesser than AC0GQ0. Assuming constant AR and MR, the fall in TC will lead to a rise in total profits from subnormal profit of AC0GIP0 to supernormal profits of P1JKAC1. Level of Response Mark Scheme (LORMS) Level Descriptor Mark L3 Analysis & Application For an analytical answer that addresses the question thoroughly with clear explanation well supported by tools of analysis using the firm’s diagram . There’s clear and thorough explanation of how merger leads to a rise in total revenue and fall in total cost, leading to a rise in total profits. [8 – 10] [A+A: 10] [A+C: 8-9] G AC0 P0 MC0 AR0 MR0 0 Q0 Q1 Quantity Price, Revenue, Cost I J MC1 AC1 AC0 P1 AC1 K Figure 2

There is good ability to organise ideas or discriminate between relevant and irrelevant factors. Answer is well-focused on question , (e.g., the taxi industry) with the good use of economic concepts, theories or principles. Knowledge & Understanding For an answer that demonstrates an accurate knowledge and understanding of economic concepts, theories related to question, e.g., firms and decision concepts L2 Analysis & Application For an under-developed answer that attempts to address the question and explain how the merger will lead to a rise in total revenue and fall in total cost resulting in a rise in profits. Answers may be descriptive, lack an analytical approach (e.g., not supported with tools of analysis, incomplete use of graph) or is incompletely explained with gaps in analysis. [Or For a one-sided analytical answer that address only one of the two question requirements, i.e., explanation of either a rise in TR or fall in TC only] For an answer that is supported with some application to the context of the question (e.g., the taxi industry). There is limited ability to organise ideas or discriminate between relevant and irrelevant materials. Answer has some relevance to the question context but is generic (e.g., pre -learnt answer that is not focused on addressing the question specifically). Knowledge & Understanding For an answer that demonstrates largely accurate knowledge and understanding of economic concepts, theories related to question, e.g., market failure analysis (i.e., no major conceptual errors). [5 – 7] [A+K: 7] [C+C: 6-7] [A+0: 6] [K+C: 5-6] L1 Knowledge & Understanding For an answer that shows limited knowledge and understanding of relevant economic concepts and theories (e.g., basic description or definitions). Few valid points made which are scant and inadequately explained. Answers are mostly irrelevant and inaccurate. Answer demonstrates that the meaning of question is not properly grasped or may contain basic errors of theory. [1 – 4] [C+0: 4] [K+K: 2-4] [K+0: 1-2] Marker’s Comments This question is reasonably performed by the students who attempted the question. Most students understood the concepts the requirements of the question and are able to link the impact of merger on TR and TC of the merged firm. However, most analysis presented are cursory and did not present clear explanation that is well supported by tools of analysis using a firm’s diagram

Suggested answer for (b) Introduction The reasons why government intervene in markets is to achieve higher social welfare. It is necessary to intervene in mergers as mergers can lead to monopolies with huge market power which will reduce the allocative, productive and dynamic efficiency in the market, as well as consumers’ welfare. R1: Explain how the government considers the benefit to the society on the intervention in a merger. Governments may choose to intervene in a merger for several reasons, primarily to ensure that the merger aligns with public interest and economic policy objectives. Here are some of the key benefits to government intervention in a merger . Some examples include promotion of fair competition and protecting consumers. In the case of taxi industry, a monopoly firm can result in very high taxi price and low quantity as well as incur allocative inefficiency. This is because a profit maximising monopolist will restrict output to raise price, producing at MR = Rising MC. By doing so, allocative