JJC_H1_Economics_Solution

1    1      JURONG JUNIOR COLLEGE 2014 JC2 ECONOMICS 8819 (H1) PRELIMINARY EXAMINATION ANSWER BOOKLET

2    2    Answers to 2014 Preliminary Examination Case Study Question 1 (a) Compare the prices of gas and coal & smokeless fuel in the UK between 2008 and 2013. [2] The price of gas and coal and smokeless fuel rose in UK between 2008 and 2013. The price of gas rose by 70% much faster than the rise in price of coal & smokeless fuel which rose 30.5% in the same period. (b) Using information in Extract 1, explain one demand and one supply factor causing the price of gas to rise in the UK. [4] China has experienced rising GDP growth and this implied that there is a rise in purchasing power of the population. This will lead to a rise in demand for goods and services which in turn encourage production. Firms' demand for gas as an input in production will increase leading to a rise in the price of gas price. The power outage at a Norwegian gas plant and the leaking crude oil pipeline in Scotland blocking the supply of natural gas from fields further up the production chain reduce the supply of gas which in turn raise the price of gas in the UK. (c) According to Extract 1, UK consumers' domestic gas bill increased by 11.8% when the price of gas rose by 13.1%.between 2011 and 2012. Comment on what this might imply for the price elasticity of demand for gas. [4] The demand for gas is price inelastic. This means that when the price of gas increased, there will be a less than proportionate fall in quantity demanded for gas. Consumer expenditure on domestic gas rose as the percentage increase in price is greater than the percentage fall in quantity demanded. But the ceteris paribus assumption may not hold. The rise in consumer expenditure on domestic gas bill could be brought about by a rise in demand for gas. This could be due to longer period of winter which could use a lot of gas to heat homes. (d) Using economic analysis, explain why economists would support the burning of natural gas rather than coal in a country's power station. [4] As mentioned in extract 2, the burning of natural gas rather than coal in a country's power station is preferred by environmentalists as gas-powered plants emit less than half the carbon dioxide emitted compared to coal-fired plants. This implied that the amount of external costs generated in production by gas-powered plants could be reduced. Carbon emission by gas-powered plants could pollute the environment and cause a deterioration of air quality. Residents staying within the surrounding area could likely fall sick and subject to rising medical costs. The presence of external costs in production is indicated by the MSC curve that lies above the MPC curve.

3    3    MSC1 The figure above shows that the gas-powered station will equate MPC to MPB and will