JJC H2 ECONS Answer Booklet

JURONG JUNIOR COLLEGE 2018 JC2 ECONOMICS 9757 (H2) PRELIMINARY EXAMINATION ANSWER BOOKLET

2 Prelim Answers for Paper 1 CSQ1 (a) Using Table 1, identify the year that Russia has the lowest growth in nominal GDP and state the growth rate. [2] Russia has the lowest growth in nominal GDP in 2017 (1m) with the growth rate of 5.2% (1m). (b) Explain why the ticket pricing strategy for the 2018 World Cup Final as shown in Table 2 can be considered an example of third-degree price discrimination. [4] The ticket prices for category 1 seats of the 2018 World Cup Final are higher than that of category 2 and 3 seats (Table 2). This can be considered an example of third-degree price discrimination as the following conditions are satisfied. Firstly, FIFA has market power as there is no alternative supplier selling the World Cup tickets (Extract 1). Secondly, markets are effectively separated/segregated to prevent resale, that is, resale is not possible between seat categories. Category 3 lower-priced ticket holders cannot resell their tickets to those holding higher-priced tickets as ticket holders need to have a FAN ID with their photographs in order to gain entry into hosting stadiums (Extract 1). Thirdly, there is different price elasticity of demand (PED) in the separate markets. On one hand, category 1 seats are closest to the centre of the field and the demand for these seats would be relatively more price inelastic (PED<1) as supporters can have better view and they do not deem other category of seats as close substitutes (Extract 1). On the other hand, demand for category 2 and 3 seats are relatively more price elastic (PED>1) as ther e is availability of other category seats as substitutes. [3m] Hence this ticket pricing strategy is an example of third-degree price discrimination as it is the practice of charging different groups of people different prices for the same product (same final match between 2 teams) for reasons not associated with differences in costs of production (no different in costs to produce the seats in the different categories). [1m] (c) Explain how Russia’s hosting of the 2018 World Cup would create ‘indirect jobs’. [2] Russia’s hosting of the 2018 World Cup would create direct jobs in the building of important infrastructure projects (Extract 4), which will lead to higher employment. These workers would then be able to able to purchase consumer goods, ranging from food and beverages such as Domino’s (Extract 2) and sportswear such as Nike (Extract 3). Producers of these consumer goods will expand production and hence hire more workers resulting in the creation of indirect jobs (Extract 4). These workers will in turn lead to further increase in consumption and production of other consumer goods leading to a multiple increase in indirect jobs. [2m as a whole] (d) Explain how Domino’s can make use of cross elasticity of demand and income elasticity of demand concepts to increase its revenue during the World Cup season. [4] CED (2m) Domino’s can make use of cross elasticity of demand (CED) concept to increase its revenue. There are other pizza companies such as Pizza Hut and Papa John’s that are close substitutes to Domino’s. As such, Domino’s will have a highly positive CED with them. To make its products less substitutable and decrease the CED value, Domino’s can make use of non- pricing strategies, that include product development such as coming up with the new “The Meatfielder” pizza to create real differences and product promotion such as advertising prominent retired English footballer Jimmy Bullard to create imaginary differences (Extract 2). These non-pricing strategies will increase demand for Domino’s pizza, hence increasing its quantity and revenue during the World Cup season.

3 OR Pizza and beverage are complements that have negative CED value. Since Coca-cola is a strong complement to Domino’s, Domino’s will have a highly negative CED with Coca-cola. Hence Domino’s is able collaborate with Coca-cola to offer bundled packages at discounted price during the World Cup season (Extract 2). Such collaboration will increase demand for Domino’s pizza, hence increasing its quantity and revenue during the World Cup season. YED (2m) Domino’s can make use of income elasticity of demand (YED) concept to increase its revenue. Domino’s pizza is considered a normal good with positive YED. Since Russia has recovered from negative growth to positive growth (Table 1 and Extract 2), there is an increase in income and purchasing power of consumers. Hence this increases the demand for Domino’s pizza. Domino’s can cater to the needs of the more affluent people by developing more premium pizzas and offer more personalised services such as personal cashier. Domino’s can also increase the number of workers employed (Extract 2), extend the operating hours and delivery services of its stores. Demand for Domino’s pizza will increase, hence increasing its quantity and revenue during the World Cup season. (e) Assess how far price and output decisions of Nike are dependent on the actions of its competitors. [8] The sportswear industry is a competitive olig opoly, with few large dominant firms, Nike, Adidas, Puma and Reebok, taking up ~70% of market share (Extract 3). Although the firms are all price setters that can influence either price or output, there is mutual interdependence between the firms. The action of one firm will hav e a significant effect on its competitors so much so that these competitors will have strong reactions to any changes in decision made by the firm (Extract 3). Nike’s price and output decisions can clearly be seen to depend on the actions of its competitors. The assumption here is that Nike is a profit-maximising firm that produces at an output where marginal cost (MC) = marginal revenue (MR), and it maximise profits through maximising total revenue and minimising total cost. Price and output decisions of Nike are dependent on the actions of its competitors Due to mutual interdependence among the sportswear companies, Nike faces a kinked demand curve, which is explained as follows. In this model, rival firms will match each other’s price reduction but not price increase. On one hand, if Nike raises its price above equilibrium price, it will experience a fall in its revenue as quantity demanded falls more than proportionately. This results in a more price elastic demand curve above the equilibrium price. On the other hand, if Nike lowers its price below the equilibrium price, it will experience a fall in its revenue as quantity demanded rises less than proportionately. This results in a more price inelastic demand below the equilibrium price. In this case, Nike maximises profits when MC=MR, giving rise to price rigidity as any increase or decrease in price results in fall in total revenue. Nike’s price and output decisions remain unchanged over a wide range of costs. A small change in the marginal cost of production does not cause equilibrium price to change so long MC still cuts MR at the region of indeterminacy. Price and output decisions of Nike are dependent on other factors Change in cost of production The change in cost of production also influences the price and output decision of Nike. With the substantial rise in cost of raw materials such as cotton and nylon (Extract 3), cost of production increases. This increases the MC of production of sportswear for Nike significantly. At original profit-maximising output, MC is greater than MR implying that the last unit of good sold adds more to Nike’s cost than it does to revenue. It is not worth producing the last unit of output as it depletes the firm’s profits (incurs losses) and this induces the profit-maximising Nike to cut output to increase profits. Nike will reduce output up t