MI 2024 PU3 H2 Econs Prelim P1 Suggested Ans for Sharing

2024 PU3 H2 Economics (9570) Prelim Paper 1 Suggested Answers [Turn over Question 1 (a)(i) With reference to Figure 1, state the change in the number of street-hail trips and ride-hail trips from 2021 to 2023. [1] The quantity of street-hail trips has decreased while the quantity of ride-hail trips has increased [1]. (a)(ii) Using Extract 1 and a demand and supply diagram, give two reasons for the trend observed in the ride-hailing market in (a)(i). [4] Demand for ride -hail rides ha s increased due to changes in consumers’ taste and preferences. Consumers prefer knowing the fare in advance for ride-hail rides as compared to the uncertainty of fares for street-hail rides. [1] OR The increase in surcharges for street -hail rides led to an increase in demand for ride - hail rides, given that street -hail rides and ride -hail rides are substitutes (in demand), with their cross-price elasticity of demand (XED) > 0. Supply of ride -hailing rides ha s also increased, as more drivers are also choosing ride - hailing due to the cheaper rental of a private car as compared to a taxi. [1] The changes in demand and supply are illustrated by a rightward shift in the demand curve from D0 to D1 and a rightward shift of the supply curve from S 0 to S1, as shown in Figure 1 below. [1] The combined changes in demand and supply results in a change from the original equilibrium (P 0, Q 0) to the new equilibrium (P 0, Q 1) with a larger equilibrium quantity, corresponding to the observed trend of a larger quantity of ride-hail trips. [1] Figure 1: Market for ride-hailing in Singapore 2m for explaining any two DD or SS factors. 2m for DD/SS diagram showing shift in DD/SS and explaining change in quantity. (b) Define price discrimination and explain why imposing location surcharges for taxi rides can be considered a form of 3rd degree price discrimination. [3] Price discrimination occurs when a producer charges different prices for the same product for reasons not associated with differences in cost. [1] Price Quantity D1 O Q0 Q1 D0 S1 S0 P0

2024 PU3 H2 Economics (9570) Prelim Paper 1 Suggested Answers 9570/01/EYE/MI/24 [Turn over Location surcharges are considered 3rd degree price discrimination as the taxi companies divide their consumers into different groups (by location and time) and charge a different price to each group. [1] In this case, a surcharge (i.e. different price) is levied on the first group of consumers who hail a ride to or from a specific location such as the airport, while those who hail a ride to other locations do not pay a surcharge. [1] (c) Using a diagram, explain how carbon emissions can cause market failure in the ride-hailing market. [4] The case of c arbon emissions in the ride -hailing market can cause negative externality , which is a form of market failure where resources are not being allocated efficiently. Negative externalities refer to the external spillover cost incurred without compensation by third parties , who are neither consumer or producer, arising from the production or consumption of a good. [1] For instance, carbon emissions from vehicles used in ride -hailing contributes to global warming, which negatively affects third parties who are not compensated for their suffering. These third parties include residents who are not involved in consumption or production in the ride-hailing market. This contributes towards the marginal external costs (MEC) and as a result the marginal private costs (MPC) diverges from the marginal social costs (MSC) as MSC = MPC + MEC. [1] With reference to Figure 2, assum ing that there are no positive externalities in the consumption and production of ride-hailing, MPB is equal to MSB. When left to the free market, the consumption and production of ride-hailing would be at the level where MPB equates MPC (point E) at OQe. However, the socially optimum level of consumption and production of ride-hailing is at OQs, where MSB equates MSC (point D). Since OQe > OQs, there is overproduction and overconsumption at the free market equilibrium. For the quantity in between Qs and Qe, MSC is greater than MSB, suggesting that the cost to society is greater than the benefit received from the consumption and production of ride- hailing. This overproduction and overconsumption of ride-hailing due to negative externality results in a deadweight loss, which is indicated by the shaded area CDE. [2] Figure 2: Negative externality (d) Discuss whether rival firms will be disadvantaged by Grab's proposed takeover of Trans-Cab. [8] Cost/Benefits Quantity of rides C D E O Qs Qe MPB = MSB MPC MSC = MPC + MEC

2024 PU3 H2 Economics (9570) Prelim Paper 1 Suggested Answers 9570/01/EYE/MI/24 [Turn over Command word Discuss – present 2 sides with an evaluative conclusion Concept How rival firms will be disadvantaged by lower profits (i.e. lower TR or higher TC) Context Ride-hailing industry R1: Rival firms will be disadvantaged due to lower demand, lower AR/MR and hence lower profits. R2: Rival firms will be disadvantaged due to higher AC/MC and hence lower profits. Evaluative conclusion: Substantiated judgment on whether rival firms will be disadvantaged. Requirement Suggested Answer Introduction • Firms are assumed to be profit-maximisers. • Rival firms include other ride-hailing providers and taxi companies. • Grab’s takeover of Trans-Cab will affect profits of rival firms through reduced revenue and higher costs R1: Rival firms will face lower demand, lower revenues and hence lower profits (TR – TC). • Grab becoming a larger firm will mean they have greater economies of scale resulting in a lower unit cost of production. • This is due to cost savings by having their maintenance workshops service a larger fleet of vehicles , or spreading out their advertising costs over a larger fleet of vehicles. • This would allow Grab to offer rides for a lower price and be more readily available to respond to customers’ ride-hailing requests. Over time, customers would prefer to hail a ride from Grab, given the greater certainty of securing a ride. • This would reduce demand for ride -hailing services offered by rival firms, resulting in a fall in average revenue (AR). • The demand for ride-hailing services offered by rival firms would decrease and also become more price elastic , due to the better substitute product offered by Grab (D0 to D1 in Figure 3 below). • As shown in Figure 3, the original market equilibrium of P0 and Q0 is determined by the profit -maximising condition of MC=MR. With the decrease in demand, the demand or AR curve shifts leftwards and becomes less steep, since demand has also become more price elastic. This would cause the price charged and output produced by each rival firm to then decrease (P0 and Q0 to P1 and Q1). Since price and output has decreased, the amount of profits has also fallen from the larger shaded area (P 0 – AC0 x Q0) to the smaller shaded area (P1 – AC1 x Q1). • Evidence: “The shortage of drivers as well as the high costs of maintaining a large vehicle fleet affect the ability of rival platforms to fulfil trip requests and, over time, make them less attractive to passengers and drivers.”

2024 PU3 H2 Economics (9570) Prelim Paper 1 Suggested Answers 9570/01/EYE/MI/24 [Turn over Figure 3: Fall in DD/AR/MR resulting in lower profits R2: Rival firms will face higher costs and hence lower profits (TR – TC). • Grab’s acquisition of Trans -Cab may “restrict rival firms’ access to Trans-Cab drivers”. • This means that Trans-Cab drivers may choose not to drive for rival ride-hailing providers • Grab being a larger firm may also mean drivers from their rival firms may choose to drive for Grab instead, given the greater demand f