RI T2W8Price+Mechanism+and+FirmsMark+Schemes

Y5 H2 Economics 2024 T2W4 Class Test 1 – Price Mechamism and its Applications (Mark Schemes) © Raffles Institution Economics Department 1 Case Study 1 (Housing) (a) Using examples from the case material, explain the difference between fixed costs and variable costs. [4] Suggested Answer: Fixed costs are costs that do not vary with output while variable costs are costs that vary directly with output. One example of fixed costs is the cost of land purchase, as the developer can vary the number of housing units on the same plot of land yet the cost of the land will remain fixed/constant. And even if the developer did not develop the land and build any housing units, the cost of land will still need to be incurred. On the other hand, an example of variable cost is the ‘average hourly wages’ of construction workers. By choosing to build more housing units, the developer will need to hire more workers or require workers to work longer hours thus incurring more costs in terms of total wages paid to these workers. These costs rise as the number of housing unit rises, and will not be incurred when production is zero. Mark Scheme - 2m for correct explanation of the difference between fixed vs variable cost . - 2m for relevant explanation of how the examples given are fixed and variable (1m for each type of cost) - Note: Typically, an explain the “difference”-type question requires explicit comparison of fixed cost vs variable cost – if the students did not use comparison words such as “however”, “but”, “while” – max 3m. (b) With reference to Extract 2, explain one type of economies of scale experienced by Hong Kong’s real estate developers. [2] Suggested Answer: i) Marketing IEOS As the developers have a large market share (Ext 2: dominated by few local giants) and hence high level of output production, they will buy their raw materials and components in bulk. This gives them significant bargaining power and are often accorded preferential treatment by their suppliers such a s discounts. As indicated in Ext 2, the ‘long term contracts with suppliers’ allows developers to purchase materials such as sand and cement at lower cost. As the rise in TC is spread over large output → this lowers the firm’s long run average/unit cost. OR ii) Financial IEOS Due to the large scale of production, these developers hold larger land reserves (Ext 2), which enables them to use these land reserves as greater collateral when they apply for loans with banks. Such collaterals enhance the credit worthiness of the developers as they are now perceived as low risk borrowers. Hence, developers are able to secure larger loans at lower interest rates→ cheaper cost of borrowing →As the cost of financing is spread over large output where rise in TC < rise in output → this lower firm’s long run average/unit cost. Mark Scheme: - 2m for c