CJC H1 ECONS Answers

1 2018 CJC H1 Prelim CSQ 1 Answers Suggested Answers: (a) (i) With reference to Table 1, describe the trend in the price of sugar between January 2015 and December 2016. General Trend: Increasing trend of the price of sugar from January 2015 to December 2016. [1] Refinement: Sharp fall in the price of sugar from Jan to Mar 2015 OR Sharp rise in the price of sugar from Mar to Jun 2016 OR Sep to Dec 2016. [1] [2] (ii) With reference to Extract 1 and using a demand and supply diagram, explain the price changes of sugar in 2016. 2 Possible Approaches: Approach 1: Price increased from Jan to Sep 2016, price fell from Sep to Dec 2016 (explain using DD/SS shifts) Approach 2: Price increased from Jan to Sep 2016 (explain using DD/SS shifts), Sharp increase from Mar to Jun 2016 (explain using PED/PES analysis) Increase in Price from Jan – Sep 2016 [3m] Increase in DD due to rise in income of middle class from emerging economies, assuming sugar is a normal good. [1] Fall in SS due to adverse weather conditions in Brazil (El Nino) [1] Simultaneous shift = shortage at P e, leading to rise in Equilibrium Price + Diagram [1] Other accepted answers: Increase in current DD due to consumers’ expectations of higher future sugar prices. Approach 1: Fall in Price from Sep – Dec 2016 [2m] Increase in SS due to producers’ expectations of more sustainable profit [1], ceteris paribus, the sugar price will fall in certain periods when there is a surplus at the P e. [1] Approach 2: Sharp Rise in Price from Mar – June 2016 [2m] Given a fall in SS, PED is inelastic due to lack of close substitutes for sugar [1], it will lead a sharp increase in price. [1] OR Given an increase in DD, PES is inelas tic due to lack of spare capacity [5] Fig 1: Increase in Price of Sugar [1]

2 / lengthy period of harvest [1], thus, price of sugar will increase sharply. [1] (b) To what extent is the global deficit in sugar likely to lead to an improvement in standard of living of sugar growers in Brazil. Standard of living measures the welfare of the average citizen in an economy and it consists of both the material and non-material aspects. Material SOL considers the quantity of goods and services consumed by an average citizen while non-material SOL reflects the qualitative aspect of life such as the life expectancy and level of education. Thesis: The deficit in sugar will improve the SOL of growers in Brazil PED of Sugar likely to be less than 1, given the lack of close substitutes. Thus, a global deficit in sugar market will increase price, leading to a less than proportionate fall in quantity demanded of sugar, increasing the TR of sugar growers. Profits = TR – TC, assuming TC stays constant, profits will increase for sugar growers. The increase in profits will thus increase the disposable income of the growers and this will increase their purchasing power and ability in the consumption of more goods and services. The material SOL of growers will increase. Anti-thesis: The deficit in sugar will not improve the SOL of growers in Brazil Also, there is a lack of data on the non-material SOL of growers. Growers might be incentivized to work longer hours to reap greater profits from sugar production, thus this will increase the stress level and reduce amount of leisure hours to be enjoyed. Thus, the non-material SOL of growers might worsen due to the deficit in sugar. Given the PED value of sugar, the price of the commodity is subjected to large fluctuations in the free market. This is due to supply shocks such as the adverse weather conditions / government interventions via the use of indirect subsidy. When the price of sugar falls given an increase in supply in the medium/long term, the TR and profits for growers will fall and this will reduce the material SOL of growers. Other possible considerations: Negative externalities in production, If PED > 1 due to availability of close substitute (natural or artificial sweeteners), thus TR will fall. Synthesis Stand and Substantiation: The extent of effect on SOL depends on the net effect between material and non-material aspects, as well as whether the profits of sugar growers can be sustained in the long run, as changes in total costs is uncertain. It may actually increase with bad weather conditions making farming more difficult and time consuming. [7]

3 Level Descriptors Marks L1 Considered superficially the impact on SOL. Answer is one-sided - considers positive OR negative impact on SOL. Answer contained inaccuracies and/or lack economic analysis. 1-3 L2 Provided a balanced argument by considering both the positive and negative impact on SOL. Max 4m – 2-sided analysis of mSOL / nmSOL is being considered. Max 5m – For a balanced argument that lacks case evidence as support. High L2 should consider both material and non- material SOL. 4-6 EV Provided a well reasons stand by considering possible perspectives of: (1) Weighing of mSOL and nmSOL (2) Sustainability of profits in the LR Up to further 1m (c) (i) With reference to Extract 2, explain the relationship between sugar and ethanol. Sugar and ethanol are competitive in supply as seen in extract 2, when production of sugar rises, that of ethanol falls [1] as they both require the same factor inputs / resources (land, labour etc) in production. [1] [2] (ii) Using the marginalist principle, explain why a grower decides to switch from ethanol to sugar production. Step 1: Explain Marginalist Principle [1m]: Assume growers are rational profit maximisers - Weigh the Marginal Benefit (MB) against the Marginal Cost (MC) in making rational decisions, maximise profit when MC = MB. [1] If MB>MC, farmers will continue to grow the additional unit of crops. If MB<MC, farmers will cut back on their production of an additional unit of crops. They will stop only when MB=MC of growing crops. Step 2: Give examples of MB and MC (1m each): Ethanol or Sugar POV: MB of ethanol/sugar production : price of ethanol/sugar and thus additional revenue farmers can earn from the sale of an additional unit of ethanol/sugar. [1m] MC of ethanol/sugar production : additional cost of growing an additional unit ethanol/sugar, for example additional rent on land [1m] Step 3: Explain the decision to switch (1m): Ethanol POV: Price of sugar is rising due to the deficit  thus opportunity cost of producing ethanol, and not producing sugar, is rising This means for ethanol producers MC > MB  they stop ethanol production and switch to sugar production until new MC = new MB OR Sugar POV: [4]

4 Price of each additional unit of sugar is rising due to deficit  additional revenue is rising As MB > MC for sugar production  more farmers will switch to producing more sugar until new MB = new MC. (d) Using Extract 3, discuss if the benefits of implementing the price ceiling on sugar outweigh the costs. Intro: An effective price ceiling is a legally established maximum price below the market equilibrium price. The price ceiling aim to keep the price of sugar low to benefit consumers in Thailand. To determine whether the decision to implement the price ceiling is justified, a weighing of the costs and benefits will be taken. Thesis: Benefit of Price Ceiling – Lower Price for certain consumers When the price ceiling (Pc) is imposed, this will lead to a lower price than the original price P0, and benefit certain consumers (lower income group) as it will make sugar more affordable than before. This might improve equity in terms of resource allocation. But this is based on the assumption that the consumers will be able to have access to the lower-priced sugar as there is a shortage, since at price P c, quantity demand (Qd) exceeds quantity supply (Qs). Wh