2022 H2 Economics EOY P1 Suggested Ans

Class Adm No Candidate Name: 2022 Preliminary ExamsPre-university 3 ECONOMICS 9757/01 Paper 1 14 September 20222 hours 15 minutesAdditional Materials: Answer Booklet READ THESE INSTRUCTIONS FIRST Write your name and class on all the work you hand in.Write in dark blue or black pen on both sides of the paper.You may use a soft pencil for any diagrams, graphs or rough working.Do not use staples, highlighters, glue or correction fluid. Answerallquestions. You are reminded of the need for clear presentation in your answers. Ananswer booklet will beprovidedwiththisquestionpaper. Youshouldfollowtheinstructionsonthefront cover of theanswer booklet. If youneedadditional paper, asktheinvigilator for acontinuation booklet. The number of marks is given in brackets [ ] at the end of each question or part question. Answerallquestions. This question paper consists ofXprinted pages andXblank page. [Turn over

2 CSQ1- Suggested answers: (a) (i) Using Figure 1 and 2, compare the trend for theworldwidechocolatemarket salesrevenue with that of India for the period 2016-2021. [2] Similarity:Rising trend for both India and Worldwide chocolate market sales revenue. [1]Difference:However, there is a sharp fall in market sales revenue from 2019 to 2020 forworldwide chocolate market while India continues to increase during the sameperiod. [1] 1m for similarity1m for difference (ii) Using demand and supply analysis andExtract 1, account for thechangesinsalesrevenue from 2019 to 2020 for the worldwide chocolate market. [4] There was a SHARP fall in sales from 2019 to 2020 for the worldwide chocolatemarket. The reasons are :Demand factor :(Any one DD factor)[1m]Theimpact of coronaviruslockdownscurbedimpulsebuyingofchocolate,aspeoplefocused instead on stocking up on essentials leading to a fall in demand.OrEconomicslowdownduetoCOVID19bringsabout lesseconomicactivitiesandlossof jobs and hence a fall in incomeAs a result, there is a fall in demand for chocolate which is a normal (luxury) good DD shifts left.[1m]Since chocolate is a luxury good,YED is positiveand greater than 1.Afall inincomeleadstoamorethanproportionatefall indemand/consumptionof“luxury” items such as chocolate.[1m]DDshiftsbyalarger extent comparedwithaYEDthatispositivebutlessthan1fora good that is a necessity.[1m]Hencethesharpfall insalesrevenuefor theworldwidechocolatemarket iscausedby alarge fallin demand for chocolates. Note: There is no change in SS as mentioned in Extract 1. 1m for DD factor1m for explanation of DD shifting left1m for explanation of YED sign and magnitude1m for explaining the larger extent of shift in DD (b) Define Price Elasticity of Demand (PED) andexplainthedifferenceinvaluesof thePED for cocoa butter presented in Table 1. [4] Price Elasticity of Demand measures the degree of responsiveness of quantitydemanded to a change of the price of the good itself, ceteris paribus.[1m] Price elasticity of demandShort term -0.06Long term -0.34 The sign of PEDisnegativeduetotheinverselawof demand. Aspriceincreases,quantity demanded decreases and vice versa[1m] BothSRandLRPEDof-0.06and-0.34respectivelyhas|PED| <1asthereisahighdegree of necessityfor cocoabutter asaningredient for chocolateORasthereare MI/9757/01/PU3/EOY2022

3 no close substitutes for cocoa butter. FromExtract 2, palmand cotton oil arepoorsubstitutes and there are no alternatives of cocoa butter sofar that couldmeet theexact demand of cocoa butter.[1m] The LR |PED| is more than the SR |PED| because in the long run, firms thatpurchase cocoa butter might be able to find closer alternatives for cocoa butter ordiscover closer substitutesfor cocoabutter inresponsetochangeinpricesofcocoabutter, while in the short run, firms may not have sufficient time to do so. [1m] 1m for definition1m for explanation of sign1m for explanation of magnitude using a PED factor1m for explaining why long run |PED| is larger than short run |PED| (c) With reference to Extract 2, explain the relationship between cocoa butter andchocolate. [2] Cocoa butter is a factor of production in the production of chocolate.[1m]ThisisbecauseaccordingtoExtract2,50%ofcocoabuttermadefromcrushingandgrinding cocoa beans is used inmakingchocolate.[1m] 1m for correct identification of relationship between the two goods1m for correct explanation using the Extract (d) Establishing“apricefloor wouldgivecocoafarmersalivingincome–andtoensurefarmersget afair shareof thewealthaswell astoprotect farmersfromdirepovertyand fluctuations in the cocoa market.” Withtheaidof adiagram,discussthefactorstoconsiderwhethertheminimumpriceshould be implemented for cocoa farmers. [8] Question Analysis Command word: “Discuss the factors”explain factorsand evaluate which ismost importantContent: “factors to consider whether the minimumprice should beimplemented for cocoa farmers.”● Factors affecting decision making: Benefits, costs and constraintsContext: Cocoa farmers MI/9757/01/PU3/PRELIM2022 [Turn over

4 Requirement Suggested Answer Introduction:Definition andoverview A price floor is defined as a legally established minimumpricethat buyersarerequiredtopayfor agoodorservice.Farmers are prohibited from selling below the stipulatedprice, but prices can rise above it. For price floor to beeffective, it must be set at a price above the marketequilibrium price. Government may want to use a pricefloor to protect the income of the farmers from falling,especially inperiodsof verylowpriceslikewhenthepriceof cocoa abruptly fell by 30 percent three years ago,leaving many farmers struggling desperatelymentionedinExtract 3. Factor 1:Benefits ofminimumprice. Factor to consider in deciding whether minimum priceshould be implemented include: Benefits of minimumprice in alleviatingpovertyfor cocoafarmersinAfricaand Decision to implement minimum price would depend onwhether price floor would benefit and help to alleviatepoverty for the cocoa farmers in Africa. Africa is the largest global producers of cocoa supplying70%of theworld’scocoabeans. Manycocoafarmersandworkers having to get by on less than 1.25 US dollars aday and a study also showed that 58 percent of cocoafarming households had incomes below the extremepoverty line inExtract 3. According to Extract 3 and 4, despite forecasts that thedemand for cocoa will rise by nearly 20 %in the comingyears and the increasing revenues for chocolatecompaniesbut manyfarmersarenot abletocovertheirlivingcosts. Incomeof cocoafarmersislowcomparedtothe profit made by the chocolate industry and a study inApril 2018 also showed that 58 percent of cocoa farminghouseholds had incomes belowthe extreme poverty line.Many cocoa farmers and workers have to get with lessthan 1.25 US dollars a day. Farmer’s incomeinsecurityisaffected by volatile cocoa prices stems from changingsupply volumes and are forced to sell their beans at lowprices immediately due to poor living conditions, theimmediate need for money and a lack of storage facilities. A price floor would give cocoa farmers a living income –andtoensurefarmersgetafairshareofthewealthaswellas to protect farmers fromdire povertyandfluctuationsinthe cocoa market, and better standard of living. Benefits of minimum price for farmers:Minimum price hence helps to stabilising price of cocoa/minimise fluctuationsin prices of cocoa MI/9757/01/PU3/EOY2022

5 With the government guaranteeing the price paid to thefarmers, and buying up the surplus stocks, this results in by increasing the total revenue(PminxQs) forfarmers as shown in Figure 1 This can help to reverse the situation where farmers stopinvesting in their farms, cutting salaries, not providingworkers with proper working conditions, and in the worstcases are prone to use child labour. Factor 2:Costs ofminimumprice. Factor to consider in deciding whether theminimumpriceshould be implemented include: Worsening of resourcemisallocation of cocoa farming. Decision to implement minimum price would depend onwhether pricefloor wouldworsenresourcemisallocationofcocoa farming in Africa. Minimump