SRJC_H2_ECONS_P1_CSQ1_Suggested_Answers

1 ©SRJC 9757/01/Prelims/2018 SRJC H2 CSQ 1 Suggested Answers (a) (i) Using Figure 1, describe the trend in price of cobalt from 2013 to 2017. [1] The price has generally increased over the period. (ii) With reference to Extract 1, using a supply and demand analysis, explain how falling prices of copper and nickel have contributed to the change in price of cobalt observed in (a) (i). [3] Cobalt is produced as a “by-product” from nickel meaning it is produced in joint supply with nickel and copper. This means when there is an increase in copper and nickel production, there will be a simultaneous increase in supply of cobalt. When prices of nickel and copper fall, there is a fall in quantity supplied of these metals as profits fall. Hence, mines shut down. This leads to a fall in supply of cobalt, causing a shortage that leads to an increase in cobalt prices as observed in a(i). (iii) Explain with the aid of a relevant diagram, how the level of profit of a producer of electric cars is likely to be affected by the change in price of cobalt. [3] Cobalt is a raw material used in producing rechargeable batteries which are used in electric cars (extract 1). As such, when cobalt price increases, the price of the batteries increases which in turn increases the cost of electric cars. This cost is a variable cost since the number of batteries and thus cobalt needed varies with the number of electric cars produced. This means both the marginal cost (MC) and average cost (AC) increase. MC and AC curves will shift from MC 0 to MC1 and AC0 to AC1 respectively. Assuming the electric car firm is a profit- maximising firm, its output level falls from Q 0 to Q 1 and price increases from P 0 to P 1. As demand is price elastic, the rise in price leads to a more than proportionate fall in quantity demanded. Hence the firm’s total revenue falls. As profit is the difference between total revenue and total costs, the rise in cobalt prices will result in a fall in total profit of the car firm from area P 0C0AB to area P1C1DE. (b) Discuss whether government subsidies in the market for electric cars would help or hinder the attainment of economic efficiency in resource allocation. [8] Q0 Q1 0 Quantity of electric cars Revenue, cost AC0 AC1 MC0 MC1 MR AR P1 P0 C1 C0 B A E D

2 ©SRJC 9757/01/Prelims/2018 Answer Introduction Efficiency in resource allocation refers to a situation in which it is impossible to make someone better off without making someone else worse off. In the market, economic efficiency is attained when marginal social benefit (MSB) equals to its marginal social cost (MSC). Body Some governments like in Norway and China subs idises electric cars in order to encourage its consumption through lowering price. This is aimed at reducing the level of pollution in the country and hence achieving a more efficient a