MI H2 ECONS P2 QP Answer

[Turn over 2015 Preliminary Examination 2 Pre-University 3 ECONOMICS 9732/02 Paper 2: Essay Questions 18 September 2015 2 hours 15 minutes Additional Materials: Answer Paper 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 or graphs. Do not use staples, paper clips, highlighters, glue or correction fluid. Answer three questions in total, of which one must be from Section A, one from Section B and one from either Section A or Section B. At the end of the examination, hand in your answers to the 2 sections together. The number of marks is given in brackets [ ] at the end of each question or part question. This question paper consists of 3 printed pages and 1 blank page.

2 9732/02/P2/MI/2015 Answer three questions in total. Section A One or two of your three chosen questions must be from this section. 1 The government has raised the tax on alcohol and liquor in Indonesia. This spells bad news for both sellers and buyers of alcohol and liquor. At the same time, the economy is experiencing a downturn. The impact on different buyers – social drinkers and heavy drinkers - is different. a) Using elasticity concepts, explai n which party bears the greater burden of the tax increase. [10] b) Discuss the effects of the tax rise and the economic downturn on the market of alcohol and liquor for both social and heavy drinkers. [15] 2 In theory, firms are assumed to be motivated by the profit maximising objective in its decision making process. However, in reality, this assumption about the behaviour of firms may not be totally true. Discuss. [25] 3 Under Singapore’s Bus Service Enhancement Programme (BSEP), over 248 new buses were added to beef up 111 existing services. With more buses, more bus routes and greater frequency, bus travel in Singapore is going to be a more comfortable and convenient way to get around. a) Explain why there is a need for governments to invest more in managing road usage. [10] b) Assess whether the development of a more comprehensive public transport network is the best approach towards managing road usage in Singapore. [15]

3 9732/02/P2/MI/2015 Section B One or two of your three chosen questions must be from this section. 4 Economic slowdown and rising unemplo yment has caused many governments to implement protectionist measures such as tariffs to help shield struggling sectors from growing competition from foreign firms. Explain the types of unemployment in an economy and discuss whether protectionism can help governments solve these different types of unemployment. [25] 5 Prices in an economy can be affected by external factors as well as by domestic factors. Similarly, prices w ill affect the domestic and external sectors of the economy. a) Explain how changes in the external value of a currency can affect the domestic price level. [10] b) Discuss whether an increase in the general price level will affect the domestic sector more than the external sector. [15] 6 The trend in business and trade in recent years is towards globalisation. a) Explain the trend towards globalisation. [10] b) Globalisation and openness to the outside world have brought many benefits to the Singapore economy. Discuss. [15] End of paper

4 9732/02/P2/MI/2015 BLANK

5 9732/02/P2/MI/2015 2015 PU3 H2 Econs PE 2 1 The government has raised the tax on alcohol and liquor in Indonesia. This spells bad news for both sellers and buyers of alcohol and liquor. At the same time, the economy is experiencing a downturn. The impact on different buyers – social drinkers and heavy drinkers - is different. c) Using elasticity concepts, explain which party bears the greater burden of the tax increase. [10] d) Discuss the effects of the tax rise and the economic downturn on the market of alcohol and liquor for both social and heavy drinkers. [15] Part (a) answer scheme Tax is usually imposed on seller which will increase COP → SS ↓ ie SS curve will shift leftwards → Pe↑ & Qe↓ The extent of Pe ↑ & Q e↓ will dp on PED. With inelastic demand, the price increase is greater than elastic demand, thus the burden of the tax is absorbed more by the buyer if demand is more inelastic. In the figure 1 below, the unit tax is shown by the arrows, when PED >1, unit tax is PePse, price increase is PoPe (tax born by buyers), so sellers bear the remaining tax which is PoPse When PED <1, unit tax is PiPsi (same as PePse), price increase is PoPi(tax born by buyers),sellers bear the remaining tax which is PoPsi. It can be seen that the price increase is greater for the inelastic demand ie buyers bear the greater burden of the tax. Heavy drinkers or those addicted to alcohol will bear the greater burden because they are dependent on the need to drink and thus, they will pay the price increase due to the tax. Social drinkers are those with little need to dr ink and thus, a slight price increase is likely to make them reduce their consumption by a gr eater amount, thus the price increase cannot be very high. Figure 1: effect on tax raise Price Quantity Delastic Dinelastic Pi Pe P0 Psi Pse Qe Qi Q0 S1 So

6 9732/02/P2/MI/2015 Knowledge, Application, Understanding, Analysis L1 Basic understanding of concept but intent of question not understood. 1 – 3 L2 Addresses the question, concepts applied correctly, but answer lacks depth such as failure to look at different sub markets, fail to include diagrams. 4 - 7 L3 Good analysis and sound judgment of whether the demand is price elastic or not. Shows ability to analyze the different submarkets and examine the implications on elasticity. 8 - 10 Part (b) answer With the economic downturn, people’s income would fall. This will reduce people’s demand on goods and services including alcohol consumption. When dd falls, Pe & Qe will ↓. In figure 2, dd shifts leftwards from Do to D1 and price falls from 0Po to 0P1 and equilibrium output falls from 0Q0 to 0Q1 Figure 2: effect of economic downturn 0 Combined effect Tax is imposed on seller → SS ↓ → Pe↑ & Qe↓ Income falls → DD ↓ → Pe ↓ & Qe ↓ So combined effect : Qe will fall but Pe depends on whether SS↓ is greater than DD↓ ie whether the tax effect on ss is greater than the fall in income due to the economic downturn. If SS↓ is greater than DD↓, then the Pe will ↑ and vice versa. For heavy drinkers, YED is likely to be <1 ie the fall in demand is likely to be slight. So in this market, SS↓ is greater than DD↓, then the Pe will ↑ but for the social drinkers’ market, YED is likely to be >1 ie the dd fall is likely to be great since social drinkers are not dependent on alcohol and can cut back on demand with the fall in income. As seen in part (a), PED <1 for heavy drinkers will lead them to be willing to pay for the high price and the slight fall in Qe when tax is imposed. Thus for this market of heavy drinkers, the impact of both tax and fall in income will have lesser effect on Qe and P is likely to increase. Knowledge, Application, Understanding, Analysis L3 A balanced, in depth analysis showing clear understanding of how demand & supply analysis affects the markets for both types of drinkers. 9 - 11 Price Quantity Po P1 Q1 Q0 So Do D1

7 9732/02/P2/MI/2015 L2 Shows under