TJC H2 Prelim 2024 P2 Suggested Answers

2024 TJC JC2 H2 Prelim Suggested Answer with Comments 1 Question 1 On the back of a weaker yen, the prices of hotel accommodation have surged as more tourists are visiting popular attractions such as islands and heritage sites in Japan. In response, local governments in Japan are considering implementing a tourist tax on these places to help deal with overtourism. (a) Explain two possible reasons for this surge in the prices of hotel accommodation in Japan. [10] (b) Assess the combined effects of the implementation of a tourist tax and a rise in incomes on consumer expenditure of different types of hotel accommodations. A [15] Part (a) Question interpretation Command word/ phrase Explain To account for, using economic reasoning and tools of analysis Content Two possible reasons… surge in the prices To explain the surge (very large increase in price), demand, supply and elasticity factors are relevant. Given that the weaker yen (from preamble) is a demand factor to explain the price increase, the relevant elasticity concept to explain the extent of the increase is PES. Context Hotel accommodation in Japan To apply to the hotel accommodation in a foreign country Japan by using information from the question stem (preamble). This question requires students to explain two reasons for the surge in price using weaker yen as a demand factor and the elasticity concept PES. The recognition that tourism and hotel accommodation are complementary goods is needed, and relevant diagram(s) should be included. Introduction [Outline approach] To explain the surge in the prices of the hotel accommodation, concepts of demand and supply, and elasticity factors are relevant. The weakening of the yen from the preamble is one possible demand factor that can explain the increase in the price of hotel accommodation in Japan, and the price inelastic supply of Japan’s hotel accommodation will explain the large increase in price. • Key Argument 1: One reason to explain the increase in the prices of the hotel accommodation in Japan is the rise in demand for hotels given the weaker yen. • Demand is the willingness and ability of consumers to purchase a good at a specific price per period of time. • With a weaker yen, foreigners will now find their currencies to have appreciated relative to Yen. As the prices of domestic price of goods and services are now cheaper in Japan compared to the rest of the world, tourists have higher purchasing power, and m ore tourists will visit Japan as it is cheaper to travel there.

2024 TJC JC2 H2 Prelim Suggested Answer with Comments 2 • Tourism and hotel accommodation are complementary goods (goods in joint demand), which tends to be consumed together, and brings higher combined utility than when consumed individually. Thus, as prices of tourism fell, there will be an increase in the demand for hotel accommodation as shown by a rightward shift of the demand curve from D0 to D1. • [Explain the M.A.P] At the initial equilibrium price P0, the quantity demanded (Q3) will exceed quantity supplied (Q0), leading to a shortage of Q3 – Q0 units of hotel accommodations in Japan. • The shortage will lead to an upward pressure on price as consumers bid higher prices for the hotel accommodation given the shortage. • As price increases from P0 to P2, hotel operators will increase quantity supplied, while consumers will reduce quantity demanded, until the new equilibrium price and quantity is reached at the higher price of P2 and Q2 respectively. • This thus explains the increase in prices of hotel accommodation in Japan. • Key Argument 2: The second reason to explain the surge in the prices of hotel accommodation in Japan is the price inelastic supply of hotel accommodation. • Price elasticity of supply measures the degree of responsiveness of quantity supplied of a good to a change in its price, ceteris paribus.  • Supply of hotel accommodation is likely to be price inelastic (0 < PES < 1) as it takes time to apply for license, find a suitable place and to construct the hotels. This is shown by a steeper supply curve S0. • Therefore, an increase in the price of hotel accommodation from the earlier rise in demand will lead to a less than proportionate increase in the quantity supplied of this good as producers are less responsive to the increase in price. • For the same increase in demand from D0 to D1, the increase in price is more significant for a price inelastic supply (increase from P0 to P2) instead of P0 to P1 where supply is more price elastic. • This thus explains the surge in prices of hotel accommodation in Japan. Figure 1: Surge in price of hotel accommodation Conclusion (optional)

2024 TJC JC2 H2 Prelim Suggested Answer with Comments 3 • In conclusion, the two possible reasons are the weakening of the yen that explains the increase in demand for hotel accommodation in Japan as more foreigners are now choosing Japan as a popular travel destination as compared to other Asia countries such as Taiwan and South Korea, and the price inelastic supply of hotel accommodation is likely to be price inelastic due to the time period and complexity of the production process of building hotels. Part (a) Mark scheme Level Knowledge, Application/Understanding and Analysis Marks L3 For a well-developed answer that has: • good scope – analyses the increase in demand and PES <1 to explain the surge in prices; and • good rigour – utilises DD/SS analysis, diagram and Market Adjustment Process together with PES concept; and • good application to context – explains with examples (good use of preamble) related the market for hotel accommodation in Japan. 8 – 10 L2 For an under-developed answer that: • lacks scope – analyses the increase in demand without explaining joint demand and/or PES; and/or • lacks rigour – gives a descriptive explanation of how surging prices arise; and/or • lacks application to context – explains without application to context of the hotel accommodation market. 5 – 7 L1 For an answer that is largely descriptive, shows little or no application of economics, and contains conceptual errors. 1 – 4 (b) Assess the combined effects of the implementation of a tourist tax and a rise in incomes on consumer expenditure of different types of hotel accommodations. [15] Part (b) Question interpretation Command word/ phrase Assess…combined effects To consider different perspectives of the combined effects of a tourist tax and a rise in the incomes on consumer expenditure on different types of hotel accommodation and come to a reasoned judgement on the likely effect. Content   A tourist tax Rise in incomes Consumer expenditure Demand, XED and YED would be relevant concepts. Both implementation of a tourist tax and a rise in income influence the demand of hotel accommodations. Consumer expenditure (TE) = P X Q. The extent of impact on CE would depend on the XED and YED values of the different types of hotel accommodation. Context Different types of hotel Accommodation in Japan The different types of hotel accommodation can be categorised as such: 1. Weak/strong complements to tourism attractions to determine the XED values

2024 TJC JC2 H2 Prelim Suggested Answer with Comments 4 2. Nature of the good to determine the YED values; 5-stars hotels can be considered as (normal) luxury hotels while business can be considered as (normal) necessities. Budget/capsule hotels can be perce