2026 ASRJC H2 Econs P1 Prelim ANS

1 H2 Economics ASRJC Preliminary Examination 2024 Suggested Answers and Markers’ Comments Question 1: Impacts of the Electric Vehicle Industry aWith reference to Figure 1, compare consumer and government spending on electric cars between 2016 to 2021. [2] Similarity: Both increased between 2016 to 2021. Difference: Consumer spending is always higher or increased by a larger extent than government spending on electric cars between 2016 to 2021. bExplain two reasons why electric vehicle charging points are not public goods. [4] Public goods are defined by its two key characteristics of non-excludability and non- rivalrous in consumption. In addition, once provided, an additional trait is that it cannot be rejected by the consumers, which means it is also non-rejectable. Charging points are not considered as public good because they are rivalrous in consumption. This means that the benefits will be depleted by additional users. When one driver uses one charging point, it will not be available for charging for the other user and he will have to queue for it, thus making the usage of charging point rivalrous in consumption. Charging points are not considered as public goods because they are excludable in consumption. This means that non-payers can be excluded from using the charging points as users will have to pay a fee to operate the charging points such as having security feature in the device to only allow usage upon payment/ easy to set up payment mode to prevent non-payers from using the charging points. Charging points are not considered as public goods because they are rejectable in consumption. This means that consumers can choose not to consume it once it has been produced. It is possible for consumers to reject the benefits of charging points (i.e. benefits of driving a fully powered electric vehicles) that have been provided for as they have the right to reject, subject to taste and preferences. For example, they can choose not to use it and use petrol for the ICE cars if they prefer. Hence, charging points are not public good. cWith reference to Extract 3, (i) State the economic concept you would use to measure the relationship between the fall in price of Tesla’s electric vehicle and the resulting change in demand for Li Auto’s electric vehicle. [1] Cross elasticity of demand Marker’s comments Most students could score for this question. (ii) Explain the value you would expect to get from this measurement. [3] Cross elasticity of demand measures the degree of responsiveness of the

2 demand for China’s Li Auto to a change in price of Tesla, ceteris paribus. Since Tesla and Li Auto are substitutes, the two goods have a positive XED value. The size of the XED coefficient between Tesla and Li Auto is also likely to be large as the two goods are close substitutes. This is evident in Extract 3: Li Auto’s response in providing discounts when Tesla decreased their price. When price of Tesla falls, there will be a rise in quantity demanded for Tesla and consumers will switch away from the relatively more expensive Li Auto. Demand for Li Auto will hence fall more than proportionately. dImagine that you are a potential new firm trying to enter the electric vehicle market in China. Considering the developments described in Extracts 2 and 3, discuss whether you should enter the electric vehicle market in China. [8] The objective of the potential new firm is to maximise profits. It should consider costs and benefits of entering the market. In this case, the firm should consider cost and revenue advantages of entering the electric vehicle market. R1: New firm could consider entering the market due to relatively low BTE and prospect for profits since the electric vehicle market is booming. With an increase in trends towards sustainability and usage of electric vehicles (Extract 2: “China's supremacy in the electric vehicle (EV) industry and its exports are reshaping the global automotive landscape”), demand is likely to increase from domestic or overseas markets, especially if China has a large export of electric vehicles to overseas markets. Thus, demand for the new firm will likely increase, shifting the AR and MR curves to the right from AR & MR to AR1 to MR1, as shown in Figure 1. Thus, equilibrium price and quantity increase from Pe and Qe to P1 and Q1. Supernormal profit increases from area PeBGC to P1DEF.

3 MR1 MR1 AR1= DD MC AC Price, Revenue, cost P1 Q10 Qe Pe Quantity of electric vehicles AR1 B F C D E G Figure 1: Increase in profit during to increase in DD In addition, there is low barrier to entry and relatively lower fixed costs since infrastructure exists and potential economics of scale to be enjoyed (Extract 2: “absence of significant entry barriers or bottlenecks”, “EV production involves readily available technology and less complex manufacturing processes”). Thus, the new firm could tap on the economics of scale and enjoy cost savings, the average costs is low and there is opportunity to earn profits. Hence a new firm should enter. Moreover, technological enhancement and less complex manufacturing process from EV, firms producing EV benefit from lower average costs. Hence, profit could increase from area (P0-C0)*Q0 to (P1-C1)*Q1. Hence the greater profit propect should encourage new firms to enter. Figure 2: Increase in profit during to fall in costs R2: However, new firm may need to consider the difficulty in earning profits since competition is quite stiff. For example, China EV’s price war (Extract 3: “Tesla’s price cuts in China could cost the carmaker the entirety of its operating profit in the world’s biggest electric-vehicle market”). With the fall in price of Tesla, demand

4 for close substitutes such as the new firm will likely fall by a greater extent (shift of AR and MR curves to the left from AR, MR to AR1, MR1 as shown in Figure 3), leading to a fall in price and quantity. Profit will also fall from area PeDEF to area P1BGC. MR1 MR AR= DD MC AC Price, Revenue, cost Pe Qe0 Q1 P1 Quantity of electric vehicles AR1 B F C D E G Figure 3: Decrease in profit during to fall in DD To beat the competition, significant cuts in prices by the new firms is necessary to match Tesla’s price cut which may lead to greater fall in profit for the new firm. Hence, it is not sustainable to continue with price cut over the longer term. EV: Whether the potential new firm will decide to enter the electric vehicle market in China depends on the marginal benefits vs marginal costs. The firm may decide to enter if marginal benefit is more than or equal to marginal cost or will not go ahead if marginal cost is more than marginal benefit. In this case, the benefits may outweigh the costs. For example, the costs incurred by new firm deciding to enter the electric vehicles market may not be as high due to current infrastructure/ inventory of firm to switch production (Extract 3: “China's automakers can leverage their existing production facilities and skilled labour force to scale up EV production rapidly”). Thus, the potential new firm may want to go ahead with the decision. OR The costs may outweigh the benefits. For example, the competition is very stiff since even established firms are not meeting sales targets. Moreover, demand may not be as strong as expected as the incumbent firms already establish reputation and brand loyalty, thus consumers may not switch easily to other substitutes like the new firm. Furthermore, competition “has shown little sign of abating this year” (Extract 3), thus it is unlikely for the new firm to be able to sustain and enter the market if they are likely to make losses at the start, unlike those incumbent firms with past profits as buffer. Thus, the potential new firm may not want to go ahead with the decision.

5 Knowledge, Application, Understanding and Analysis L2Answers in this level will provide detailed explanation on revenue and co