MI H2 ECONS EQs Answer

1. Smartphone usage is predicted to overtake computer usage in the near future. This is due to advances in smartphone technology and greater affluence. Discuss how the combination of smartphone technology and greater affluence might affect the expenditure by consumers on different models of smartphones. [25]  Normal-Luxury Models Normal-Necessity Models Inferior Models (e.g. 2nd hand lower-end smart phones) in technology COP falls  Increase in SS  P falls, Q increases. PED>1, with a given fall in price, more than proportionate increase in Q TE increases. COP falls  Increase in SS  P falls, Q increases. PED<1, with a given fall in price, less than proportionate increase in Q TE falls. COP falls  Increase in SS  P falls, Q increases. Since there are close substitutes to inferior models, PED>1. With a given fall in price, more than proportionate increase in Q TE increases. [Also accept if student justifies why PED<1 and explains that TE falls]. In income YED>1. Income increases DD increases by more than proportionate amount  T E increases (by a large amount). 1>YED>0. Income increase DD increases by less than proportionate amount  TE increases. YED<0. Income increases, dd falls  TE falls. Combined effects SS & DD TE increases. SS & DD TE indeterminate SS & DD TE indeterminate. Evaluation As YED>0, large shift in dd curve when income increases. This large increase in dd combined with PED>1  large increase in TE. If increase in dd > increase in ss  TE increases. Singapore is a rich developed countries with one of the highest smartphone penetration rates in the world. Fall in dd > increase in ss  TE likely to fall.

L1 Answer merely identifies the different models of smartphones that are available in Singapore and recognizes how advances in smartphone technology and greater affluence affect the market for smartphones. No reference to elasticities of demand. 1-9 L2 Undeveloped answer on how the advances in smartphone technology and greater affluence affect the smartphone markets for the different models of smartphones. There is some reference to PED & YED. 10-14 L3 Answer provides a thorough analysis of the impact of the expenditure on at least two different models of smartphones. There is good reference to PED & YED in the analysis. 15-21 E1 Answer provides an unsubstantiated opinion on the extent of the impact of greater smartphone technology and greater affluence on the different models of smartphones in the Singapore context. 1-2 E2 Answer provides a substantiated opinion on the extent of the impact of greater smartphone technology and greater affluence on the different models of smartphones in the Singapore context. 3-4 2. (a) Explain the various forms of barriers to entry. [8] (b) Should the government act to reduce barriers to entry whenever possible? [17]  Define barriers to entry.  Explain at least three different forms of barriers to entry.  Ownership of essential resources     If  one  firm  owns  the  resources  needed  to  produce  a  particular  good,  it  is  possible  for  the  firm  to  keep  other  firms  from  entering  the  industry.  For  example,  Aluminium  Company  of  America  (ALCOA)  controls  almost  every  source  of  bauxite,  therefore  it  monopolises  the  production  of  aluminium  in  America  till  World  War  II;  Debeers  either  owns  most  of  the  world’s diamond mines or has effective control of  them.      Internal Economies of scale     (i) Natural Monopoly:    A  natural  monopoly  enjoys  substantial  economies  of  scale  ‐‐‐   the  LRAC  goes  on  falling  significantly such that minimum efficient scale is at an output which is higher than the total  demand  in  the  market/industry,  the  industry  may  not  be  able  to  support  more  than  one  producer.   When this is the case, a single firm can satisfy the market demand at a lower cost  per unit than two or more firms operating at smaller levels of output could.     In  figure  1,  D1  represents  the  industry  curve,  and  hence  the  demand  curve  for  the  firm  under monopoly. The monopolist can gain supernormal profit at any output between points  a and b. If  there were two firms, however, each charging the same price and supplying half  the industry output, they would each face the demand curve D2 and higher AC. There is no  price that would allow them to cover costs.

Examples of  natural  monopoly arising from internal economies  of scale are  public  utilities,  such  as  the  distribution  of  electricity  and  water  where  tremendous  amount  of  capital  is  required  to  produce  the  product  (and  market  is  relatively  small).  As  monopoly  increase  production, AFC falls and this  fall will likely outweigh any increase in AVC. Hence, AC falls as  output increases.    For example, to generate electricity, capital in the form of a power station etc. is required; to  distribute the final product, even more capital in the form of cables, poles, transformers etc.  are needed. For telephone network, cable television etc., the cost per household is lowest  when a single company “wires” throughout the community for signal reception. Because of  the nature of a natural monopoly and the fact that the product is usually one that society  feels is essential, it is necessary for the government to regulate the firm so as to ensure that  the consumers benefit from the low per‐unit costs of production. The question is: what price  should the monopolist be allowed to charge?      (ii) Even if an industry could support more than one firm, a new entrant is unlikely to be able  to start up on a very large scale. For example, an established monopoly is likely to have  access to cheaper finance and can charge a price below the cost of the new entrant and  drive it out of business.     High set‐up costs for new firms    If a new firm can enter fully grown into the market, it might be able to compete effectively  with  the  existing  monopolist.    However,  the  cost  to  the  new  firm  of  entering  the  market,  developing its products, and establishing its reputation and its distribution network may be  so  large  that  its  entry  will  be  unprofitable.   The  high  fixed  capital  costs  involved  in  some  industries  (e.g.  silicon  wafer  fabrication,  shipbuilding,  petrochemicals,  oil  refinery,  iron  &  steel) may also discourage the less financially able from entering the market as producers.     Legal Restrictions  LRAC  Output D1 b a  D2 $  O  Fig.1 Natural Monopoly

Patents and Copyrights : These are exclusive rights to production given by the authorities to  the developer of a new product for a  number of years. During  that  time,  no  other firm or  individual  can  produce  or  duplicate  the  good  unless  authorized  by  the  holder  of  the  patent/copyright,  so  that  inventors  are  given  a  temporary  monopoly  over  the  use  of  their  inventions.   Moreover,  these  laws  give  firms  the  stimulus  to  turn  an  invention  into  a  marketable product, a process called innovation.  If other firms could simply copy successful  products, many firms would be less willing to incur the high initial costs of researching and  developing new products and bringing them into the market.    Licenses  and  other  Entry  Requirements  :  Governments  often  promote  a  monopoly  by  awarding a single firm the exclusive right to provide particular goods and services.   Licenses  give certain firms the right to broadcast radio and TV signals.    The government itself  may  claim  the  right  to  provide  certain  productions  by  outlawing  competitors.    For  example,  SingTel in Singapore has the exclusive right to provide telephone services to consumers until  2000, when other firms will be permitted to enter the market.