RI 2024 H2 Y5 Promotion Examination - Examiner's Report

ECONOMICS Higher 2 Syllabus 9570 Examiner’s Report Year 5 Promotion Examination 2024 R a f f l e sI n s t i t u t i o n N u r t u r i n g t h e T h i n k e r , L e a d e r & P i o n e e r TEL: 65 6419 9888 ● FAX: 65 6419 9898 http://www.ri.edu.sg ● One Raffles Institution Lane, SINGAPORE 575954

Y5/9570/Promo/2024 2 © RI 2024 [Turn Over ECONOMICS Y5 H2 Promotion Examination 2024 Paper 9570/01 Paper 1 Case Study (a) With reference to Figure 1, state the month in which tourist arrivals to Japan were the highest. [1] Suggested Answer: ▪ February 2024 Mark Scheme: - Correct identification of the month – 1m Examiners’ Comments: - Far too many students did not get this question correct. It is important to note the distinction between percentage change s and absolute values in given data and respond to the question accordingly. (b) With reference to Extract 1: (i) Using a diagram, explain how price elasticity of supply can be used to account for the ‘spike in airfares’ in the market for US domestic air travel. [3] Suggested Answer: ▪ Price elasticity of supply (PES) is a measure of the degree of responsiveness of the quantity supplied of a good to a change in its price, ceteris paribus. ▪ Clarify PES of US domestic air travel: ▪ price inelastic since “ Ext.1: not enough pilots and flight attendants to run flights, seat capacity still down 6%” ▪ suggests low availability of factors of production / lack of spare capacity/factor immobility. ▪ Explain using a diagram: ▪ With rise in demand for air travel - “post COVID: travel demand comes roaring back” - due to changes in consumers’ tastes and preferences or due to rising income of consumers → shortage at prevailing price level→ upward pressure on price ▪ Given PES<1→ the increase in demand will lead to a ‘spike’ in price as it is relatively more difficult to increase quantity supplied of air travel → it requires a significant increase in price to clear the shortage. ▪ As shown in diagram below, when the demand curve shifts from D0 to D1, due to the price- inelastic supply, a significant increase in price is required to clear the shortage , OR the airfare will rise more than proportionate from P0 to P1 compared to the rise in equilibrium quantity from Q0 to Q1.

Y5/9570/Promo/2024 3 © RI 2024 [Turn Over ▪ Using a diagram: [1m] Mark Scheme: - State PES value – price-elastic or price-inelastic - Rise in DD, and explanation on significant increase in price – 1m - Accurate diagram - 1m Examiners’ Comments: - Most students could earn the full range of the marks for this question - using a well -drawn diagram to explain how the price -inelastic supply led to a greater extent of rise in price compared to the rise in equilibrium quantity. Such answers also demonstrated good use of case evidence and were able to point to the ‘lack of pilots and flight attendants’ as the reason for the low PES value. - However, there were numerous scripts that had gaps in analysis, including: o using own knowledge for PES such as time needed to build aircrafts instead of appropriate use of case evidence o inappropriate use of case evidence for PES such as a rise in jet fuel cost. This should be linked to a fall in supply, thereby causing a leftward shift in the supply curve, instead of a reason for the PES - which is the gradient of the supply curve. o not comparing the extent of change in price to the extent of change in equilibrium quantity or not stating that ‘a huge rise in price is necessary to clear the shortage’. o not knowing that PES should be applied to a change in demand i.e. a shift of the demand curve. These weaker scripts erroneously linked PES to a shift in the supply curve. o Poorly illustrated diagrams – missing labels, or SS is not price -inelastic, or the significant change in P is not made obvious. (ii) Explain one possible reason for the entry of low-cost carriers despite consolidation of market share by the five largest airlines. [3] Suggested Answer: ▪ Explain what is meant by consolidation of market share o increase in market concentration ratio of top 5 firms in the market implies increased market power of these dominant firms. This increases their ability tap on their substantial internal economies of scale and use limit pricing or other non-price strategies to block entry of low- cost carrier. P0 Price Q1 Q0 Qty SSinelastic 0 P1 DD1 DD0

Y5/9570/Promo/2024 4 © RI 2024 [Turn Over ▪ Explain how low-cost carriers can enter o low-cost carriers operate on a different cost structure – despite lower scale of production and less iEOS → enjoys lower costs as compared to large airlines. ▪ lowers AC and MC due to ‘no frills travel’ ▪ Extract 1: ‘no internet nor seatback entertainment’; ‘limit amenities to bare minimum’ o the lowered average costs allow these firms to make at least normal profits and survive the competition o moreover, if variable costs are lowered, the lower MC allows them to charge lower air fares. This is likely to increase their revenue if the demand by budget -conscious travellers is price-elastic (larger proportion of income) o In addition, charging for add-ons such as seat selection, food and luggage allows the firms to both increase revenue and cut cost as wastage is reduced, thereby increasing profits Mark Scheme: - Explain consolidation to increased market power / increased BTE – 1m - Reason linked to case evidence: Explanation linked to lower cost eg. No frills and thus higher profits and survival OR lower prices given lower cost to better able to compete with incumbents – 2m Examiners’ Comments: - Students who used case evidence to link to lower cost either resulting in higher profits or lower prices tended to be score better than answers that were purely descriptive without any attempt to link to outcomes for the low-cost carriers such as profits or lower price to allow them to compete. - Some answers did not score well as case evidence was not used. Such answers used their own reasons such as low -cost carriers’ ability to tap into markets by offering a lower fare for budget travel where consumers’ demand is price -elastic as a justification for entry into the market. Such responses did not link to why the airlines are able to charge lower airfare. - Flawed responses linked the entry of low -cost carriers to low entry barriers. Such an argument is not valid as there are definitely substantial entry barriers in the airlines industry. Some examples of such barriers include the cost of aircraft and the bra nd loyalty created through advertising and promotion as well as goodwill earned by these incumbent airlines. Moreover, the question also suggested that market consolidation is likely to further raise the entry barriers. The same flaw arose in answers that suggested a saucer-shaped LRAC curve to account for the co-existence of smaller low-cost carriers and large airlines. Such a response again ignores the huge economies of scale that exist in the airlines industry. - Most answers failed to respond to the second half of the question i.e. ‘consolidation of market share by the five largest airlines’. Good responses are expected to make a brief link/statement of how consolidation increases entry barriers for new firms. (c) Explain how the value of price elasticity of demand for Allegiant Air’s flight service may change when it taps on cognitive bias in its strategy. [3] Suggested Answer: ▪ State change in PED value: value may fall and demand becomes more price inelastic ▪ Explain strategy supported by case evidence: o Extract 2: loyalty programme for holders of Allways Visa Card - instant benefits such as early check in, boarding