2025 TJC P1 Prelim Mark Scheme H2 Econs

2025 TJC H2 Economics Prelim Paper 1 Suggested Answers 1 H2 Question 1: The Economics of Tea Suggested Answers (a) Compare the volume and value of Kenyan tea exports from 2020 to 2024. [2] • Similarity: The volume and of value of Kenyan tea exports have both risen from 2020 to 2024. [1] • Difference: The value of Kenyan tea exports rose consistently throughout, but the volume of tea exports experienced a fall in 2022. [1] OR The value of Kenya tea exports increased more rapidly/at a faster rate compared to the volume of Kenyan tea exports during the same time period. [1] (b) Using the concept of price elasticity of demand, explain how Figure 1 and 2 can explain the rise in Kenyan tea export revenue from 2022 to 2023. [5] • Export revenue is determined by the product of the price of exports and the quantity of exports sold. [1] An increase in export revenue from 2022 to 2023 could be due to a rise in price and/or quantity (volume) of Kenyan tea sold. • Figure 1 shows an increase in the volume of Kenyan tea, but Figure 2 shows a fall in the price of Kenyan tea. [1] • The demand for Kenyan tea is likely to be price elastic due to the availability of close substitutes like Chinese tea. [1] • Therefore. the fall in price leads to a more than proportionate increase in the quantity demanded for Kenyan tea. [1] • The rise in revenue due to the rise in quantity outweighs the fall in revenue from the fall in price. Overall, export revenue for Kenyan tea rises. [1] (c) With reference to Extract 1, explain the possible value of the cross price elasticity of demand between Kenyan tea and Chinese tea. [2] • Kenyan tea and Chinese tea are substitutes with positive cross price elasticity of demand. As the price of Kenyan tea rises, the demand for Chinese tea will increase. [1] • They are likely weak substitutes because even though China is one of the largest producer of tea, it has increased its import of Kenya tea over the years (Extract 1). Hence the likely value is a small positive number less than 1. [1] (d) On a production possibilities diagram, explain how ‘eutrophication’ (Extract 2) would affect the amount of tea and seafood produced. [3] • Eutrophication arises because of the extensive use of fertilisers in the cultivation of Kenyan tea. With eutrophication, fish populations will be adversely affected, leading to less seafood being produced. • As there is less fish stock in the oceans, this will shift the production possibilities curve inwards from PPC1 to PPC2 as seen in Figure 1 below. [1] • There is less seafood that can be produced, but no change in the amount of tea produced. [1]

2025 TJC H2 Economics Prelim Paper 1 Suggested Answers 2 [1] for fully labelled and accurately drawn diagram. Figure 1: Production Possibilities Curve (e) Discuss whether greater efficiency would be achieved with the merger of Lipton and Browns. [8] Question Interpretation Command phrase Discuss whether This question requires a balanced discussion on whether the merger between these two firms will improve the efficiency. Content Merger Greater efficiency Two firms merging to become a bigger firm à increase demand (AR and MR) Allocative, productive and dynamic efficiency Context Lipton and Browns Context of the merger of these two firms Introduction • Lipton and Browns are both firms producing tea, so a merger between the two firms would be considered as a horizontal merger. • The effects would be that firms will form a larger firm. This essay will examine whether the merger will result in greater or lower efficiency. • KA1 – The merger of Lipton and Browns will result in lower allocative and productive efficiency. • The merger of Lipton and Browns will make the firm a larger one, resulting in greater market share. It also reduces the number of competitors in the tea market. • As there are fewer competitors selling tea, the demand for the merged firm will increase and become more price inelastic (from AR0 to AR1). • At profit maximization MR = MC, the newly merged firm will produce output Q1 and charge a higher price, P1, for tea. • On the other hand, allocative efficiency is attained where output corresponds to P = MC. • Before merger, the profit maximising firm will charge P0, which is higher than MC0 and is allocative inefficient. Consumers’ benefit from the last unit of the product is greater than the opportunity costs incurred in producing that last unit. However, the gap between price P0 and marginal cost MC0 is relatively small, and the resulting deadweight loss (dark shaded area) is smaller. • However, after the merger, the merged firm charges P1 which is substantially higher than MC1. The gap between the new price (P1) and new marginal cost (MC1) is even larger than before.

2025 TJC H2 Economics Prelim Paper 1 Suggested Answers 3 • There is a greater extent of underproduction, which is more allocative inefficient. This is illustrated by the larger lighted shaded area. Figure 2: Effect of merger • Furthermore, due to the reduced competition, the merged firm may not have incentive to be producing at the lowest point of its LRAC since it is likely making more supernormal profits than before. Therefore the outcome may also be productively inefficient, from society’s point of view. This is also known as x-inefficiency. • Even if the merged firm is not x-inefficient, there is a chance that the combined production of the new firm caused the production output to correspond to the upward sloping portion of LRAC. This means that the merged firm experienced internal diseconomies of scale, which is also a display of productive inefficiency. • Give brief examples of internal diseconomies of scale applied to the context. • KA2 – The merger of Lipton and Browns will result in greater dynamic efficiency. • The merged firm will earn greater profits as seen from the figure above. Before merger, the firm was assumed to be earning normal profits, producing Q0 units and charging a price of P0. However, the AC was at AC0, which equates to P0, thus earning normal profits. • After the merger, assuming LRAC is constant, the merged firm now has a higher demand and MR, thus charging a price of P1, and producing Q1 units at AC = AC1. • The fall from AC from AC0 to AC1 is the result of the merged firm enjoying internal economies of scale as the scale of production increase. The firm enjoys cost advantages depicted by the movement along the downward-sloping portion of AC. • Give brief examples of internal economies of scale applied to the context. • The merged firm thus has higher profits and has greater ability to engage in R&D for product innovation to create better quality products, thus achieving greater dynamic efficiency. • This can also be seen from extract 3, where the merged firm will be establishing a “state - of-the-art” tea specific fertiliser plant which may mean greater innovation and dynamic efficiency. Evaluative Conclusion • [Stand + Situation] On the overall, it is likely that the merger will result in greater efficiency. While there are indeed concerns over lower allocative and productive efficiency as a result of the merger, the competition regular in Kenya has given the green light for the me rger. This suggests that the merger is assessed to not have an overall negative impact for consumers.

2025 TJC H2 Economics Prelim Paper 1 Suggested Answers 4 • [Magnitude] Furthermore, there are other ‘formidable competitors’ like Kenya Tea development agencies (KTDA), Eastern Produce Kenya Ltd. and Williamson Tea, suggesting that the merged firm will still have significant competition and therefore unlikely to suffer from a great extent of productive and allocative inefficiency. Mark scheme Level Knowledge, Application, Understanding and Analysis Marks L2 For a