SRJC H2 ECONS 9757-1 QP

©SRJC 9757/01/Prelims/2018 [Turn over ECONOMICS 9757/01 Higher 2 Paper 1 10 September 2018 2 hours 15 minutes Additional Materials: Writing paper SERANGOON JUNIOR COLLEGE JC2 Preliminary Examination READ THESE INSTRUCTIONS FIRST Write down your name and civics group 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, graphs or rough working. Do not use staples, paper clips, highlighters, glue or correction fluid. Answer all questions. Start your answers to each case study question on a new sheet of writing paper. At the end of the examination, fasten your answers to questions 1 and 2 separately. The number of marks is given in brackets [ ] at the end of each question or part question. This document consists of 8 printed pages.

©SRJC 9757/01/Prelims/2018 2 Answer all questions. Question 1: The Automobile Industry Extract 1: Scarce, expensive cobalt essential for electric cars Cobalt prices more than doubled in 2017, and rose to a record high early this year, driven by a rising demand for electric cars. Cobalt has been used for thousands of years to add blue colour in ceramics, glass and pottery, but now its main demand is as a key ingredient used in lithium ion batteries that power everything from Apple products to Tesla electric cars. The supply side of the price equation is also boosting cobalt's price. Cobalt is mostly retrieved as a by-product of the copper and nickel mining industry. The prices of copper and nickel have been persistently falling, making production at many locations uneconomic, forcing mines to close. So even though there is strong demand for cobalt, if the rest of the industry is suffering, cobalt production will too. Source: www.theglobeandmail.com, 27 Feb 2018 Extract 2: It’s time to end subsidies for green vehicles Norway reached a remarkable milestone in 2017, when it became the first country where zero- emission and hybrid vehicles accounted for more than half of new car sales in a calendar year. At the same time, however, the government of Norway announced that it wants to cut back lavish subsidies that allow citizens to save thousands of dollars on the price of a Tesla and other models, while sticking to its plan to make every new car sold a zero-emissions vehicle by 2025. The Norwegian experience sums up the debate over how best to move away from fossil-fuel cars and onto the next generation of ground transportation – that is, whether or not subsidies for customers are worth it. But it also raises the question of whether that debate has become a moot point. The switch to electric vehicles appears to be speeding up globally, largely fuelled by innovation and government policy in major markets. In China, the world’s biggest car market, a company called Nio began mass-producing electric cars in 2017 with the help of heavy subsidies from a Chinese government that is eager to see the end of fossil-fuel cars in its polluted cities. More than 200 companies have also announced plans to manufacture electric cars to take advantage of the huge subsidies. However, some fear these subsidies may lead to overcapacity of electric vehicles, just like what happened to steel and solar panels. And questions also remain over how long it will take and how much will have to be spent before the industry is viable. The push to increase sales of electric vehicles in the meantime is expensive, as Norway has learned. A recent study put out by the Montreal Economic Institute pegged the cost to taxpayers of lowering greenhouse-gas emissions in Ontario via vehicle subsidies at a whopping $523 per tonne. It also said that, for Ontario to reach its goal of electric vehicles constituting five per cent of the new-car market, it will have to spend $8.6-billion in subsidies over the next 13 years. That is simply too much money for too little outcome. More critically, governments are subsidising a product that may not need the help. There is every indication that the world has reached a tipping point, and that natural competitive forces will soon start to bring down the co st of electric vehicles. Governments should therefore abandon their electric car subsidies. Adapted from www.ft.com, 12 Oct 2017

3 ©SRJC 9757/01/Prelims/2018 [Turn over Extract 3: China’s automobile industrial policy In terms of manufacturing scale, China has long established a position for itself as the world’s largest automobile factory. On the level of individual manufacturers, however, Chinese manufacturers still lack international competitiveness. China exported less than 5 percent of locally produced automobiles and vehicle exports have been declining for the past two years, suggesting that China is failing to put its excess production capacity to practical use through exports. Chinese automobile manufacturers have also failed to make their presence in other major automobile markets. Chinese manufacturing sector is large but not yet strong. The government should be aware of the limitations of cultivating and supporting domestic enterprises under an automobile industrial policy that is weighted towards scale expansion. Source: Yuichiro Koga, www.mizuhobank.com, 2 May 2017 Extract 4: Beijing lift restrictions on foreign investment in automobile industry Since 1984, foreign carmakers have been allowed to produce cars in China — but only in joint venture with a local partner holding at least 50 per cent of the venture. In practice, the local partner is almost always one of six state companies. The results of the three-decade-old policy have been mixed. Rather than transforming Chinese car companies into technology giants, the joint venture companies have arguably made Chinese carmakers complacent, according to Chinese polic ymakers. Foreign brands still account for a majority of sales in Chinese passenger cars — and the country’s carmakers have failed to export more than a handful of passenger cars under their own brands. Recently, the Chinese government announced it would scrap the 50 per cent foreign investment cap on automobile joint ventures by 2022. This is expected to encourage global electric vehicle makers to set up wholly owned plants in China. Tesla has unveiled a plan to set up a manufacturing plant in Shanghai. Mr Jochem Heizmann, head of Volkswagen’s China operations, said that the liberalisation sent an “important” signal that other industrial policies that limit competition and innovation might be relaxed. Most US business lobbies however, have dismissed a series of recent market liberalisation measures in the auto and financial sectors — touted by China’s president Xi Jinping in a speech on April 11 — as being “too little, too late”. Source: www.ft.com, 1 Sep 2017

©SRJC 9757/01/Prelims/2018 4 Figure 1: Cobalt prices (US$ per tonne) Source: tradingeconomics.com Questions (a) (i) Using Figure 1, describe the trend in price of cobalt over the period shown. [1] (ii) With reference to Extract 1, using supply and demand analysis, explain how falling prices of copper and nickel have contributed to the change in the price of cobalt observed in (a)(i). [3] (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] (b) Discuss whether government subsidies for electric cars would help or hinder the attainment of economic efficiency in resource allocation. [8] (c) With reference to Extract 3, explain the reasoning that underlie the Chinese government’s automobile industrial policy that is focused on ‘scale expansion’ and comment on the exten