2025 NJC Mark Scheme H2 Econs

1 National Junior College Economics Department Preliminary Examinations 2025 Answer Booklet Senior High 2 H2 Economics (Syllabus 9570)

2 Paper 1 – Case Study Question 1 Questions & Suggested Answers (a) With reference to Extract 1 and using a demand and supply diagram, explain how the rise in the price of cocoa led to the change in the price of chocolates. [3] ● Increase in price of cocoa would lead to an increase in the cost of producing chocolate. This would result in a decrease in the quantity supplied of chocolate at each and every price, resulting in a leftward shift of the supply curve for chocolates. [1] ● As seen in the diagram below, the decrease in supply of chocolates would lead to an increase in price of chocolates from P0 to P1. [1m] ● [1m for diagram] (b) With reference to Extract 1, explain two strategies small confectioners, such as a boutique chocolatier, in Singapore used to increase revenue amid rising cocoa costs. [4] ● Strategy 1: 4 One strategy is where price is increased if demand for chocolate remains price inelastic. If consumers view chocolate as a small indulgence. [1] 4 Hence the increase in price will lead to an increase in the firm’s revenue. [1] ● Strategy 2: 4 The firm can aim to change consumers’ taste and preference from the off-the-shelf chocolates to the more customized and DIY chocolates that they could experience and learn to make to cater to their own preferences. [1] 4 This will create higher demand for firms’ chocolate sales, hence increase in total revenue. [1] (c) With reference to Extract 3, (i) explain one negative externality that could arise from the production of cocoa in West Africa. [2] ● According to Extract 3, current cocoa farming practices in West Africa involve extensive deforestation. “Land clearing increases emissions by releasing the carbon stored in forests; it also causes soil degradation, including the loss of organic matter, acidification, and loss of biodiversity”. [1] ● The deforestation caused by cocoa farming imposes negative externality such as carbon emissions, which contribute to climate change and result in higher public expenditure on Figure 1: Market for chocolates P0 P1 Q1 Price ($) Quantity 0 S1 S0 Q0 =QD D0

3 healthcare and disaster response. These external costs resulting, which can amount to billions globally, are not borne by cocoa producers. [1] (ii) explain why cocoa would be over-produced in a free market. [3] ● In a free market, producers only consider their marginal private benefits (MPB) and marginal private costs (MPC) from the production of cocoa. ● External costs arise from the production of cocoa and results in a divergence between the MPC and marginal social benefit (MSC), where MSC is higher than MPC. [1] ● The free -market equilibrium occurs where MPB = MPC, while the socially optimal outcome occurs where marginal private benefit (assuming marginal social benefit equals zero) equals marginal social costs (MSC). [1] ● There will be an over -production of cocoa, where the market output of cocoa is greater than the social optimum level of cocoa produced. [1] (d) ‘While this guarantee provides a fixed price for farmers, they lose out when prices are high.’ (Extract 2) Discuss the likely short -term and long -term impact of the fixed price scheme on cocoa producers in West Africa. [8] Introduction ● A fixed price scheme implemented by governments aims to guarantee a stable income for farmers. Similar to a price floor that is to guarantee a minimum price that is stable for farmers to support their incomes. ● This essay will explore both the short -run and long -run impacts of the fixed price scheme mentioned in Extract 2 on cocoa producers. Body KR1: Short term impact of fixed price scheme on producers of cocoa in West Africa. ● In the short term, the fixed price scheme provides income stability for cocoa producers, insulating them from volatile global price fluctuations. This guaranteed price acts similar to a price floor, offering a degree of certainty that can help farmers plan their finances and mitigate risks, especially when market prices are low. Figure 2: Effects of a fixed price on cocoa producers ● Without government intervention, the free -market equilibrium price and quantity would be at P0 and Q0 respectively as shown in Fig2.

4 ● Now, assume that the government sets a guaranteed price fixed at Pguaranteed to prevent the prices of cocoa from falling below a certain level to protect the incomes of the cocoa farmers. ● Given that the fixed price is set at Pguaranteed, cocoa farmers would get a revenue of area PguaranteedQFQD0 from selling in the market. At the guaranteed fixed price schème, a surplus of QSQD exists which the government will buy up to ensure that farmers will still receive a stable income. Hence total income receive by the farmers will be higher at PguaranteedJQS0. ● However, if the government faces financial difficulties and find it difficult to continue to buy up the surplus from the farmers at the guaranteed price, the farmers may not benefit. KR2: Long term impact of fixed price scheme on producers of cocoa in West Africa. ● In the long term, the fixed price scheme can limit the profitability of cocoa production, especially when global market prices rise. When global prices surge farmers under the fixed price scheme are unable to capitalise on the price spike. Farmers receive lower total income despite high global prices, leading to lower income than would be possible under free market prices. ● When producers are unable to benefit from higher world prices, their potential profits are capped. Persistently lower profits reduce the ability of farmers to reinvest in their farms. This leads to falling productivity and output. ● In contrast, producers in more liberalised markets enjoy higher profit margins during price booms. This enables them to expand production, invest in technology, and achieve greater efficiency, making their cocoa more competitive globally. ● Over time, global supply chains may shift away from West African producers towards countries with more profitable and productive cocoa sectors. If the fixed price scheme is maintained for too long without adaptation, West African producers risk being margi nalised, as they are less able to adjust their production methods or scale up investment in response to global price signals. Their cost structures remain inflexible, as the fixed price limits both revenue and the incentive to adopt more efficient, cost-saving technologies. Thus, while the fixed price scheme may offer short -term income stability, it can lead to long -term profit erosion, underinvestment, and a decline in global market share, unless complemented by reforms that improve productivity and cost competitiveness. ● However, given the volatility of agricultural prices, and changing consumers taste of preferences, cocoa prices might fall in the future. If the market price fall below the guaranteed price, farmers will stand to benefit from the income stability that the government has intended for the farmers. Conclusion ● Overall, while the fixed price scheme has short-term benefits in cushioning farmers from price collapses, its long-term consequences may be detrimental. ● Given the rising trend of cocoa prices, the fixed price scheme tends to bring about more negative longer term impact on producers than it would benefit them. (e) Discuss whether the ‘new EU law banning the import of commodities linked to deforestation’ is the best way to reduce carbon emissions due to ‘land clearing’ in the production of cocoa. [10] Introduction ● The European Union Deforestation Regulation (EUDR) aims to reduce carbon emissions by banning the imp