MI_H1_ECONS_P1_Answer

2015 Millennia Institute H1 PU2 PE2 Answers CSQ 1 (a) (i) With reference to Table 1, describe the trend in farmgate milk prices in Aust ralia from July 2011 to January 2014. [2] Farmgate milk prices fell and then rose [1] with the minimum price in January 2013. [1] (ii) Explain one possible reason for the changes in Australian milk prices observed a b o v e . [ 2 ] Plausible reasons include  ↑DD – rising Y, lifestyle (taste/preference) or  ↓SS – rising cost of production (higher input prices such as animal feeds) (b) Explain why farmers “are complaining that they are being paid less’ in Extract 1. [4]  Bumper crop → oversupply  With ↑SS, Pe ↓ & Qe ↑, ceteris paribus (DD remains constant)  TR received by farmers would ↓ if DD is price inelastic (as Qe ↑ by less than proportionate compared to the Pe↓) (c) Explain how a weaker New Zealand dollar increases demand for dairy products from New Zealand. [2]  Weaker New Zealand dollar  price of exports in terms of foreign currency is cheaper  increase quantity demanded for dairy products from New Zealand (d) (i) With reference to Extract 4, explain why market failure occurs in the market for fresh agricultural products. [6]  Define market failure: A situation in which the unregulated market is unable to attain social optimal output level where marginal social benefit (MSB) equals marginal social cost (MSC).  In the market for fresh agricultural prod uce, fresh produce require cooling in the refrigerators. When the companies decide to cool their fresh produce using synthetic refrigerants, they make the decision based on their marginal private benefit (MPB) and marginal private cost (MPC). Thus, the number of cooling systems using synthetic refrigerant gases is at quantity, Qe.  However, according to extract 4, synthet ic gases are heavy greenhouse polluters which will result in global warming. The increase in temperatures will affect crop yield and hence farmers who depend on t he weather for their crops may not be able to earn any income due to the reduction in crop yield. Thus, negative externalities are generated as farmers wh o are not involved in consumption of cooling systems using synthetic gases have to bear the cost of reduction in profits.  Due to the presence of negative externalities, there is a divergence between MSC and MPC. As there is no external benef its incurred, MSB = MPB. Hence, at market equilibrium output Qe, MSC is higher than MSB. This implies that the society values the consumption of coo ling systems using synthetic gases less than the cost of consuming them.  The socially efficient output should be where MSC = MSB at output Qs. Since Qe is more than Qs, there is over-co