VJC_H2_ECONS_P1_Suggested_Answers

Suggested answers to 2018 VJC H2 Prelims Paper 1 Question 1 a. i) Using Figure 1, compare the change in infant formula milk prices for the periods 2007 to 2014 and 2014 to 2017. Infant formula milk prices increased in both periods. (1) Infant formula milk prices more than doubled from 2007 to 2014; while it rose by only about 10% for 2014 to 2017. (1) [2] ii) Explain whether the data in Figure 2 is able to support the observed change in infant formula milk prices for the period 2007 to 2014. Given the data in Figure 2, there is a positive correlation between rising infant formula milk prices and rising import of infant formula milk in China. (1) This could suggest that China could have been importing from Singapore, leading to an increase in demand creating a shortage there. Hence, the rapid rise in prices of infant formula milk over this period. (1) Figure 2 is insufficient because there is no clear data on the source of the China’s infant formula milk imports. Despite evidence from Extract 1 that Chinese parents were willing to pay double for these products from Singapore, China could have also imported the infant formula milk from other countries like Australia. (2) OR Figure 2 alone is not able to fully support the observed change in infant formula milk prices. In addition, price changes could arise from supply factors and not only from changes in demand. Thus, information on the supply of infant formula milk China and Singapore is needed. The rapid rise in price could have been due to a fall in supply of infant formula milk in Singapore. (2) [4] b. What can you conclude from the evidence in Extract 2 about the price elasticity of demand for infant formula milk powder? From Extract 2, it can be inferred that the demand for infant formula milk powder is likely to be highly price i nelastic given that parents continue to demand infant milk powder due to the perceived lack of close substitutes as they ‘remain loyal’ despite the huge increases in price. (2) Also accept demand for infant formula milk powder is perfectly price inelastic if explained clearly – infant milk powder is the only available substitute for infant milk powder is breast milk. Lack of other close substitute available suggests demand for it is perfectly price inelastic for those who cannot breast feed. [2] c. With reference to the data, justify the market structure for the formula milk market in Singapore. It is an Oligopoly market structure, dominated by a few dominant sellers as seen in Extract 3, where Nestle, Abbott and Mead Johnson constitute 72% of the total market share in Singapore. Such dominance implies strong market power for firms in this industry. (2) [4]

In addition, the high barriers to entry (BTE) is also a characteristic of oligopoly market structure. Extract 3 mentions that such firms aggressively advertise which may result in high brand loyalty for the incumbent firms’ goods. In ad