2012 J2 H1 Prelim Exam Answers

1 © Jurong Junior College 2012 (H1) JJC H1 PRELIMINARY EXAMINATIONS 2012 - ANSWERS Case Study Question 1 (a) (i) Describe the trend in Base Metal prices between March 2009 and December 2011. [2]  Overall there is a rising trend. (1m)  Prices peaked in around March 2011, after which it fell continuously till Dec 2011.(1m) (ii) Explain possible reasons for the trend above. [4] [An explanation to support why there is an overall increase in price] Rising consumerism and income/affluence has increased the demand for final end products such as consumer goods. Metals is an important factor input in the production of these consumer goods, thus the increase in demand for consumer goods will increase the demand and need for metals as a resource. Production of metals generally lags beh ind the demand for metals. It takes more time for producers of metals to gather their various factors of production to ready the mines for extraction when demand rises. (2m) [Another explanation why prices fell] The effects of the global recession might ha ve reduced income and consumption of consumer goods significantly. This might have caused a fall in demand for consumer goods and the corresponding demand for metals and thus its price. (2m) (b) Using the concept of price elasticity of demand, analyse ho w a cut in export sales of rare earth metals by China affects the total revenue of consumer -based and precision weaponry firms in US. [6] Cut in export sales of rare earth metals will cause a shortage of this metal mineral. This reduc tion in supply will cause prices of rare earth metals to increase. Such an increase in price will lead to an increase in cost of production for many industries in US producing various consumer goods, such as desktops and smartphones as rare earth metal is an important factor input in these industries. This will shift the supply curve of these industries to the left causing a rise in prices of these products. (2m) The demand for consumer -based goods such as vehicles, computers, and smart phones is price elastic as there are many substitutes available from foreign producers. For such industries, an increase in price due to higher cost of rare earth metals will lead to a more than proportionate fall in quantity demanded causing total revenue to fall. This is because the rise in revenue from the price increase is less than the fall in revenue from the loss of revenue due to a fall in quantity. Total revenue for producers in consumer based products will fall. (2m) On the other hand, the demand for weapons is pr ice inelastic due to the lack of substitutes available for the US governments. In these industries the rise in price will lead to a less than proportionate fall in quantity demanded for the products. Total revenue for precision weapon producers will rise. (2m)

2 © Jurong Junior College 2012 (H1) 2m for explaining how the export restric