RI Y5 Term 3 Remedial 4 (Student) 2023

Raffles Institution Term 3 Remedial 4 (Student) Kellogg’s recent acquisition of Pringles potato chips for US$2.7billion made it second only to PepsiCo Inc in the highly concentrated global snack food market, which consists of major players such as PepsiCo’s Frito-Lay, Kraft’s Nabisco and Diamond Foods. (a) Explain what is meant by productive efficiency and allocative efficiency. [10] Do only part (b) (b) Discuss whether having large companies like Kellogg and PepsiCo Inc in the snack food industry could be beneficial to society. [15] Suggested answer 1. Introduction ➢ Clarify that large firms such like Kellogg and Pepsico Inc in the snack food industry command a large proportion of the market share and have relatively high market power operating in an oligopolistic market structure → they have the ability to set price and are price setters → can bring about beneficial as well as undesirable impact to society. ➢ The creation of Kellogg/Pringles will make it the market leader. ➢ Identify the benchmarks used to assess desirability of such large companies o Society’s perspective: Efficiency (allocative, productive and dynamic) and Equity o Consumers’ perspective: Price/Qty, consumer choice, quality of product/service o Producers’ perspective: ability to raise TR to increase profits, cost savings 2. Body R1: Discuss whether large companies can be beneficial to society based on AE, PE → draw links to consumers R2: Discuss whether large companies can be beneficial to society based on DE → draw links to consumers R1: Discuss whether large companies can be beneficial to society based on AE, PE → draw links to consumers Thesis: Large companies such as Kellogg/Pringles and Pepsico Inc can be beneficial to society due to PE 1. Lower prices and higher output produced for consumers • Large firms can reap significant IEOS due to their large scale of production o Define IEOS – elaborate with examples • Use of theoretical framework (diagram) to illustrate & explain in relation to being closer to MES → more PE • Link benefits to consumers as result of cost savings from above Anti-thesis: Large companies such as Kellogg/Pringles and Pepsico Inc may not be beneficial to society 1. Consumers pay a higher price & greater inequity Explain how merger lead to ability to price way above MC & greater inequity 2. Explain allocative inefficiency to society using the diagram drawn for point 1. 3. Explain how large firms are X-inefficient due to complacency.

Evaluation: Possible Suggestions EV about prices: • Will the larger firm pass on cost savings or charge way higher prices? Explain your stand EV about AE & PE • Provide insight on how extent of allocative inefficiency may not be as large? • Provide insight on how they might be productive efficient or X-inefficient on th