2016 J1 H2 Promo Exam Ans for sharing v2

JURONG JUNIOR COLLEGE 2016 JC1 ECONOMICS 9757 (H2) PROMOTIONAL EXAMINATION ANSWER BOOKLET © Jurong Junior College 2016 (H2)

2 2016 J1 H2 Promo Case Study Answers (a) (i) With reference to Table 1, compare the change in the share of total business car -hire rides among car rentals, taxis and private-hire cars between 2014 and 2016. [2] • Difference: In general, the share of total business car -hire rides among car rentals and taxis decreased between 2014 and 2016 whereas the share of total business car -hire rides for ride - hailing increased between 2014 and 2016. [1] • Difference: Among car rentals, taxis and private -hire cars, private -hire cars experienced the greatest change in market share (38%) as compared to taxis (-23%) and car rentals (-15%). [1] (b) (i) With reference to Figure 2, explain the market structure that the traditional taxi industry in Singapore currently operates in. [2] • The traditional taxi industry in Singapore is an oligopoly. [1] • Based on Figure 2, the four-firm concentration ratio of the traditional taxi industry in Singapore is 90.2%, which suggests that a few large firms dominate the industry. [1] (b) (ii) With reference to Extract 1, explain how the characteristics of the traditional taxi industry influence prices in the industry. [4] Characteristic 1: High barriers to entry • There are high barriers to entry in the traditional taxi industry. Extract 1: High initial capital outlay in taxi industry • No competition to erode supernormal profits earned. • This prevents prices from being lowered. Characteristic 2: Mutual interdependence • Firms in an oligopoly are mutually interdependent. • In the traditional taxi industry, the taxi operators engage in tacit collusion in the form of price leadership. In this case, the firms in the industry look to one firm, raising and lowering their prices when it does. As seen in Extract 1, taxi operators followed industry leader ComfortDe lGro when it implemented a fare hike in 2011. (Only 1 mark to be awarded if candidate merely states price leadership without making reference to the extract) (c) (i) Explain how market failure may arise due to asymmetric information when drivers purchase used cars from used car dealers. [4] • Market failure may arise in the used car market due to asymmetric information in the form of adverse selection against higher quality used cars in favour of used cars of a lower quality. • Sellers in the used car market have more information than buyers regarding the actual quality of the car. In order to profit more from the sale, sellers may conceal crucial information about the condition of the car from potential buyers.

3 • Taking this into consideration, potential buyers of used cars tend to lower the price that they are willing to pay for used cars. • At this lower price, sellers with used cars in good condition are unwi