RVHS_H2_ECONS_CSQ1

© RVHS 2014 9732/01 RVHS 2014 Y6 H2 Prelim 2 Case Study 1 Answers: (a) With reference to the data in Table 1, (i) state how the own price elasticities of energy sources help to determine the nature of the good. [1]  PED< 1, necessity (ii) explain what determines the effectiveness of an increase in the price of oil in reducing total energy consumption in the UK. [4]  Effectiveness of an increase in the price of oil in reducing total energy consumption depends on the price elasiticities of demand. Since demand for oil in the UK is price inelastic (PED=0.04), an increase in price will cause a less than proportionate fall in quantity demanded.  Effectiveness also depends on the value of cross elasticities of demand (XED) between oil and other sources of energy (e.g. gas, coal). E.g. if value of XED between oil and gas is high, an increase in the price of oil will lead to an increase in the demand for gas by a large extent which may offset the fall in qty demanded of oil to some extent. Hence the effect of an increase in the price of oil on the overall fall in the total consumption of energy in the UK may be small and ineffective. (b) Explain how advances in technologies affect the level of subsidies given to encourage green energy projects. [3]  Govt subsidies to producers of green energy projects lower COP, SS curve shift right, price falls and Qty dd increases  Advances in technologies have the same effect on COP which makes production of green energy cheaper. This will further increase SS and shift the SS curve to the right  Hence, with cost savings derived from advances in technologies, the level of government subsidy can be reduced to m eet the current renewable energy output targets (c) Explain how investing in renewable sources of energy can help to mitigate the rise in home energy bills. [2]  Renewable sources of energy e.g. wind, solar, marine and fossil fuels are factor inputs in the generation of power supply to households  Increase in the number of sources of factor inputs allows for more diversified and less volatile energy supply which can mitigate the rise in home energy bills (assuming demand constant) (d) Using the concept of opportunity cost, explain whether there is justification for consumption subsidies to be high in nations that export a lot of fossil fuels. [2]  Opportunity cost refers to the benefits of the next best alternative forgone  In nations that export a lot of fossil fuel s, if they choose to provide consumption subsidies on fossil fuel, opportunit