MI 2008 MI Prelims H2 Econs P1

Class Index No Candidate Name: This question paper consists of 7 printed pages and 1 blank page. Preliminary Examination 2008 Pre-university 3 ECONOMICS 9732 PAPER 1 9732/01 Monday 15 September 2h 15m Additional materials: Answer paper READ THESE INSTRUCTIONS FIRST Write your name, class and index number in the spaces at the top of this page and 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 all the questions. At the end of the examination, fasten your answers to the two questions separately. The number of marks is given in brackets [ ] at the end of each question or part question. You are reminded of the need for clear presentation in your answers. [Turn over]

Answer all questions Question 1 Extract 1: Battle brewing in the drug store business Longs Drug stores with its 520 branches is a key player in the drug retail business in California. Another key player in this region is Walgreens, a national drugstore chain. But the Longs Drug store chain is to be taken over by Walgreens’ main rival, CVS Caremark, later this year. For CVS, which has no stores in California, the proposed $2.9bn deal for Longs is the latest stage in a national battle being waged neighbourhood by neighbourhood with Walgreens to drive nationwide market share. CVS, based in Rhode Island, and Walgreens, from the Midwest, are now running neck and neck in the push to achieve national leadership through local dominance, with about 6,800 drugstores each. Pennsylvania-based Rite Aid, the third largest national chain, has about 5,800 stores. Source: Adapted from The Financial Times, August 15, 2008. Extract 2: Mergers vs. Organic Growth A retail analyst at Citigroup, says the purchase of Longs “is excellent and is one that would take a decade or more for CVS to replicate through organic growth”. CVS is confident about its ability to integrate the Longs stores, pointing to the successful integration of the Savon and Osco stores it acquired two years ago and the 1,800 Eckerd stores in Texas and the south that it bought from JC Penney in 2004. Walgreens, in contrast, continues to focus on expanding organically by opening its own new stores. Rite Aid has been less successful in its efforts to keep pace, struggling to integrate 1,800 Brooks and Eckerd brand stores that it acquired in 2006 in an attempt to build scale. As they have grown, all three chains hav e used their scale to reduce overheads and to market higher-margin private label products such as over-the-counter medications. They have also sought to reinforce their retail business by expanding into new areas, such as “walk-in” in-store clinics, operated by nurse s who dispense basic medical treatment, and developing their specialty pharmacy businesses, which offer enhanced management services for patients with chronic conditions. Source: Adapted from The Financial Times, August 15, 2008. Figure 1 Market Share (No. of Outlets) of Drug Stores in the US CVS 6800 Wa -Martl 4055 Rite Aid 5800 Others 8000 Walgreens 6800 Source: The Financial Times, Reuters. The category “Others” includes over 3000 outlets that are individually owned. The remainder includes chains with 2 or more outlets. 2

Extract 3: Is Wal-Mart the future? Wal-Mart, the largest US retailer, operates more than 4,000 pharmacies at its superstores and warehouse clubs across the US. There is growi ng evidence that its two-year-old drive to reduce the costs of generic drugs has lured busi ness away from the traditional stores and its pharmacy division is already the most profitable among the drug store chains. More significantly, Wal-Mart has also indicated that it is interested in exploring the creation of smaller format stores focused on health, potentially joining the drugstores in their battle for market share. Wal-Mart is also encouraged by its successful foray into cyberspace and sees online retailing as its biggest growth area. Source: Adapted from Reuters, June 30, 2008. Extract 4: Online shopping 'defies slowdown' Online retailing is continuing to boom in the UK despite pessimism about the economy, according to a survey. The amount of money spent by consumers shopping online increased by 35% to £14.7bn last year, retail analysts Verdict Research said. The growth rate - the fastest in six years - is about 10 times that of the UK's retail market as a whole. The growth in internet access and users making more regular and expensive purchases online meant the growth would continue. It is forecast that online retail sales would reach £44.9bn by 2012, about 13.8% of total spending. The development of faster broadband in the internet had made the process of shopping quicker and easier for many people while many saw it as a way of finding lower prices and bargains in most sectors. Source: Adapted from the BBC News. Figure 2 3

Questions a) Describe and account for the trend in UK total online spending from 2002 to 2007. [ 2 ] b) Using demand and supply analysis, explai n why Wal-Mart is becoming more successful compared to its rivals. [4] c) Using data from the extracts, i) Identify and explain the type of market structure in which drug stores in the US are likely to fit in. [4] ii) Using economic analysis, show how the drug retail industry achieves its equilibrium within the identified market structure. [4] d) Suggest reasons why some firms in the drug retail industry are unable to remain competitive even though others enjoy the scale economies. [6] e) Discuss the likely impacts of the CVS takeover of Longs Drug on itself, its competitors and consumers. [10] Total [30 marks] 4

Question 2 A Study of Vietnam Extract 5: Asia's other miracle Not so long ago, the word “Vietnamese” was almost inevitably accompanied by the phrase “boat people”. For two decades after the fall of Saigon in 1975, the defining image of Vietnam was the waves of refugees washing up on its neighbours' shores, fleeing oppression and poverty back home. How things have changed. Today, many former refugees are returning to seek new careers and start businesses in a transformed Vietnam. It is now one of Asia's fastest-developing countr ies, with annual growth averaging 7.5% over the past decade. Although this is less stellar than China's growth, Vietnam has made more impressive progress in cutting poverty than its vast northern neighbour. Although the government's initial hopes for 9% growth this year may be dashed, as the country struggles with double-digit inflation and a yawning trade gap, the long-term outlook remains promising. Source: Adapted from The Economist, April 24, 2008 Extract 6: World trade body admits Vietnam World Trade Organisation (WTO) member states have voted in favour of Vietnam's entry, which would make it the 150th member of the trade body in 2007. The move will give it more access to overseas markets but force it to cut high import tariffs. It will have to reduce import duties from the current average rate of 17.6% to 13.8% within five to seven years of joining the WTO. The lowering of import tariffs is expected to cut the state budget by some 21%. After Vietnam joins the WTO, its textile, rice and coffee exporters will no longer be subject to other countries' import quotas. But banking, insurance and telecommunications industries have expressed some reservations over the pr ospect of increased international competition. Restrictions on foreign ownership of firms inside the country will be also be lifted. Foreign