H2 Prelims Paper 2 Q3_Suggested Answers

3. Over the last two years, the food and beverage (F&B) industry in Singapore was among the hardest hit sectors amidst the poor business climate and manpower shortages. (a) Explain the determinants of a rational F&B owner’s decision on whether to increase the number of outlets in Singapore. [10] (b) Discuss the extent to which firms in highly competitive industries are more vulnerable to closure than firms in less competitive industries during a recession. [15] Question analysis Command Word “Explain” – requires student to explain the different factors that guide decision making for a firm i.e benefits, costs, constraints, other information about market Context F and B Concept Decision-making framework, firms and decisions Introduction: A rational F&B owner will consider his/her self-interest in the decision, which will be based on the consideration of only the private cost and private benefit. The objective of the owner is to maximize and increase profits. The factors that need to be considered are the additional benefit and additional costs of each additional outlet opened. An assumption in this answer is that the F&B owner has the financial resources to open additional outlets in Singapore. Body Paragraph/Requirement 1: Explain the marginal benefits in increasing the number of outlets in Singapore The additional benefits that an F&B owner would need to consider is the additional revenue can be earned from opening a new outlet in a new location. This additional revenue would be from the number of dishes that are sold in the new outlet. Some factors that would influence how much the additional revenue is are the nu mber of potential patrons in the area. In areas which are densely populated, the potential to earn revenue is also higher. One thing to consider is also the economic climate. Due to the pandemic, incomes of citizens have fallen and may result in a fall in demand for F&B dining in general. Nonetheless, this depends on how income elastic the F&B outlet is. If the F&B outlet is income inelastic or negatively income elastic, the potential revenue earned could still increase. Body Paragraph/Requirement 2: Exp lain the costs (explicit and implicit costs) in increasing the number of outlets in Singapore

The costs that the F&B owner needs to consider are the explicit and implicit costs. Explicit costs in the F&B market are such as the costs of ingredients, labour costs and infrastructure of the F&B outlet. Due to the supply disruptions and manpower constraints due to the pandemic and other economic challenges, the explicit costs would have been considered to increase. Implicit costs refer to the opportunity costs, which is the benefit of the next alternative forgone. As an F&B business owner, these funds to open an additional outlet could have been used for marketing its current outlet more aggressively to attract more customers to the current outlet. The opportuni ty c