TMJC 2022 A Level H2 CSQ2

2022 A Level H2 Economics Suggested Answers to Paper 1 CSQ2 © TAMPINES MERIDIAN JUNIOR COLLEGE Question 2: Innovation is the key to prosperity in an age of new technologies (a) Distinguish between a rise in total output and a rise in productivity. [2] A rise in total output refers to an increase in the overall value or level of final goods and services produced in an economy [1] whereas a rise in productivity refers to an increase in the output per man-hour [1]. (b) Explain one reason why a firm with significant market power and long -run excess profits might choose to spend large sums on research and development (R&D). [2] Any one possible reason (with or without evidence) is acceptable. Contestability Based on the contestable market theory, the firm may engage in R&D due to the threat of potential competition . For instance, with more “localised production” (Extract 6), there could be transference of knowledge and technology, allowing potential new players from China and US to compete in car manufacturing. Hence, incumbent firms may engage in process innovation to lower their costs of production and remain price competitive relative to their potential competitors, thus allowing them to retain their supernormal profits and their market share. Alternative: Product development to keep the firm’s AR high and relatively price inelastic, allowing them to continue charging high prices without losing revenue, and thus their supernormal profits. OR Government Regulation The firm may engage in R&D due to government regulation. For instance, if the fines incurred (Extract 6) due to production of traditional cars significantly reduces the car maker’s supernormal profits , the car maker may find it more profitable to engage in R&D and switch to producing electric vehicles. Though expensive in the short term, such successful product development may keep the firm’s DD/AR high and relatively price inelastic , ensuring high revenue without having to pay fines. Thus, this may increase the firm’s overall profits. (c) Explain, with reference to Extract 8, what might be the opportunity cost of the $19 billion invested by the Singapore government to build the country into a global R&D hub. [2] “Although it has an abundance of capital, Singapore has faced talent shortages…” (Extract 8) suggests that the $19 billion invested in infrastructure and technologies could have resulted in less funds allocated for skills training and education. Hence the opportunity cost which is defined as the value of the next best alternative forgone [1] could be the potential investment revenue for Singapore because of more training and skills upgrading of local talent that is foregone. [1]

2022 A Level H2 Economics Suggested Answers to Paper 1 CSQ2 © TAMPINES MERIDIAN JUNIOR COLLEGE Any other potential area of government expenditure is also acceptable as the next best alternative foregone (d) Explain how the creation of an innovation culture in Singapore is likely to have benefited the Singapore economy. [6] The creation of an innovation culture has led to a rise in government expenditure (G), as well as influx of foreign direct investments (I). Investments in advanced technology sectors having made Singapore a base for high -end manufacturing would have also i ncreased the value and demand of exports, and thus export revenue (X). Actual Growth: Explain macro adjustment process (ISSUE): [Initial equilibrium]: As shown in the diagram below, assuming the economy is operating with limited spare capacity and the initial equilibrium is at E1. The initial GPL and real output are at P1 and Y1 respectively. [Shift in AD]: An increase in AD arising from a rise in G & I would cause total spending to exceed total output, resulting in a shortage at the original GPL P1. [Adjustment process]: This leads to a fall in inventories which provides an incentive for producers to step up on production to meet demand. As there is limited spare capacity in the economy, and because producers hire more factors of production, this will bid up factor prices, leading to a rise in GPL. The hiring of factor inputs like labour will reduce demand-deficient unemployment too. There is a movement along the AD and AS curve. The rise in income arising from the initial rise in AD causes a rise in income -induced consumption that results in a further increase in AD. As one’s spending becomes another’s income, there will be a multiple increase in AD until a new equilibrium is reached at E2 where AD2 = AS1. Real output increases by a multiplied amount from Y1 to Y2. [State the multiplier effect]: The rise in real output will be by a multiplied amount due to the working of the multiplier where one’s spending becomes another’s income. In the case of limited spare capacity, the reduced/ dampened multiplier effect will occur. [Link to economic growth & lower unemployment ]: Actual growth occurs and is represented by the increase in real output from Y 1 to Y2. Lower unemployment also results due to lower demand-deficient unemployment.

2022 A Level H2 Economics Suggested Answers to Paper 1 CSQ2 © TAMPINES MERIDIAN JUNIOR COLLEGE Potential growth: In the long run, the rise in G and I would have also led to more advanced technology, increase in capital investments via capita accumulation and a more productive workforce. The rise in quantity of capital goods, quality of labour and state of technology leads to increase in productive capacity of the economy. Aggregate Supply (AS) shifts to the right from AS1 to AS2, and potential growth is achieved as illustrated by the rise in the full employment level of output from Yf to Yf1. As shown in the diagram above, given that AD is sufficiently high, there would be further increases in real output from Yf to Y2 resulting in further actual growth, and a fall in GPL from P3 to P2, keeping inflation low and stable. Address the question on benefits to Singapore economy: The continual rise in real output and stable GPL suggests sustained economic growth (with a rise in actual and potential growth) for the Singapore economy. If the rate of increase in real national income outweighs the rate of population growth, there would be a rise in real income per capita, and hence the average citizen’s ability to consume more goods and services. Material well -being increases, improving standard of living, ceteris paribus. The rise in export revenue, ceteris paribus would have contributed to a healthier balance of trade as trade surplus increases. Shift in AD – 2m Shift in AS – 2m Impact on SG – 2m Diagram is not required for this question P3 Yf1

2022 A Level H2 Economics Suggested Answers to Paper 1 CSQ2 © TAMPINES MERIDIAN JUNIOR COLLEGE (e) Discuss whether subsidising the purchase of electric cars would improve the efficiency of resource allocation in the market for transport in Singapore. [8] Introduction: Governments aim to maximise societal welfare, and in this context, achieve microeconomic goals such as efficiency and equity. Body / Development 1: Market failure in the transport market Negative externalities in production refer to the harmful effect on third parties resulting from the production of a good or service, which are not compensated for. In this context, as suggested by Extract 5, transport via petrol- and diesel-powered vehicles generates negative externalities. Pedestrians incur medical costs from breathing in air that is polluted by the exhaust from petrol and diesel cars. In addition, traffic congestion also causes allocative inefficiency in the transport market as it generates 3rd-party cost in the form of reduced profits of firms due to reduced productivity of employees who are late for work or miss deal closure meetings due to congestion. The negative externalities pre