IJC H2 ECONS P1 Suggested Answers

PRELIMINARY EXAMIANTION SUGGESTED ANSWERS ECONOMICS UNIT @ INNOVA JUNIOR COLLEHE 1 IJC Preliminary Examination 2018 Paper 1 Question 1 Suggested Answers 2018 H2 Prelim Case Study Q1 (a) Explain why all the price elasticities of demand values in Table 1 are negative. Price elasticity of demand measur es the responsiveness of quantity demanded of a good to a change in the price of the good itself. The negative values of the price elastici ties of demand reflects the law of demand, which states that the price and quant ity demanded of a good are inversely related. For example, as the price of a good like fruit and vegetable changes, the quantity demand ed of fruit and vegetable will change in the opposite direction. Mark allocation Stating law of demand – 1 mark Explanation of inverse relationshi p between price and quantity demanded of a good – 1 mark Markers’ comments A large number of candidates accounted for the magnitude of PED instead of sign. Hence, many explained factors for PED < 1 instead of focusing on the law of demand as the reason gaining no credit for their explanation. [2] (b) With reference to Table 1, explain the impact on UK consumers’ spending on meat when there is (i) an increase in the price of meat, As the PED value of meat is less than 1, a given increase the price of meat will lead to a less than pr oportionate fall in quantity demanded of meat. Consumers spending on m eat, given by Price x Quantity, will increase as the increase in s pending due to increase in price will offset the fall in spending due to a fall in quantity demanded of meat. Mark allocation Explanation of meaning of PED value – 1 mark Explanation of link between incr ease in price and consumers’ spending – 1 mark Markers’ comments Quite a number wrongly argued that since an increase in the price of meat causes the quantity of meat consumed to fall, there will therefore be less spending on meat without the us e of the PED concept to consider which effe ct will be greater. Some others [2]

PRELIMINARY EXAMIANTION SUGGESTED ANSWERS ECONOMICS UNIT @ INNOVA JUNIOR COLLEHE 2 incorrectly apply the YED concept instead. There is also tendency to confuse a change in demand with a change in quantity demanded. (ii) a recession. As YED value of meat is positive, a recession, which results in a fall in income, will lead to a fall in t he demand of meat as well. Hence, the overall effect will be a fall in the consumer spending of meat as the price and quantity of meat consumed falls. Mark allocation Explanation of meaning of YED value – 1 mark Explanation of link between recessi on and consumers’ spending – 1 mark Markers’ comments Quite a number used the magnitude of YED instead of the sign. The link between fall in income and fall in demand for food was not made too. Therefore, th e impact on total expenditure is incorrectly explained. [2] (c) With reference to Figure 1 and the us e of the concept of opportunity cost, compare the effect of a rise in price of food on lower income UK households and other UK households. Opportunity cost of a decision refers to the next best alternative forgone. A households’ income is either s pent on food and drinks or other goods and services. With a rise in price of food, the household’s expenditure on food increases, as demand for food is price inelastic. There will then be a reallocation of more of household’s budget for food and drinks, which means opportunity cost incurred in te rms of other goods and services that can be consumed. As food takes up larger proportion of income of lower income households compared to other households, with t he increase in expenditure on food, they will have lesser income left. Hence, lower income households more likely to have to forgo non-essentia l goods compared to other households incurring greater opportunity cost. Mark allocation Explanation of concept of opportunity cost – 1 mark Explanation of effect of rise in price of food on lower income and other households with the use of Figure 1 – 3 marks Note: [4]

PRELIMINARY EXAMIANTION SUGGESTED ANSWERS ECONOMICS UNIT @ INNOVA JUNIOR COLLEHE 3 If explanation did not use Figure 1 – max 2 marks If explanation shows application of the concept of opportunity cost but did not make comparison between lower income and other households – max 3 marks Markers’ comments There were some excellent res ponses for this question which demonstrated a clear understand ing of the requirements of the question. While most were able to interpret Figure 1, many lost marks as they did not apply the concept of opportunity cost to explain the e ffect on household spending and make valid comparison. (d) Explain the likely impact of Brexit on the UK consumers’ welfare. With Brexit UK is no longer part of t he EU and tariff barriers on goods from the countries in the EU will be applicable, raising the prices of imports from the EU, leading to lower consumer surp lus. There could also be reduction in choice of goods available to the UK consumers if producers cut down on some types of imports due to greater trade restrictions. Hence, UK consumers’ welfare will be lowered as a result. Mark allocation For a clear explanation of one impact of Brexit on consumers’ welfare. Markers’ comments Many students applied the c oncept of standard of liv ing which resulted in imprecise responses. Quite a number merely lifted phrases from the extracts instead of explaining the imp lications of Brexit on UK before linking it to the impact on consumers’ welfare. [2] (e) Discuss the extent to which the surviv al of firms in the UK food and drinks manufacturing sector will be adversely affected “as the UK leaves the EU”. As the UK leaves the EU (Brexit), the firms in the UK food and drinks manufacturing sector could be facing greater cost and revenue pressures which can adversely affect their profits. As mentioned in Extract 2 and 3, Brexit is likely to lead to rise in cost of production due to rise in wages in the se ctor as UK faces lower supply of workers with the loss of EU work ers and higher cost of imported raw materials with the resulting tariff barriers imposed on imports into UK. At the same time, greater uncertainty about the prospects of UK economy after Brexit has weakened consumers’ confidence, possibly resulting in lower demand for food and drinks. [8]

PRELIMINARY EXAMIANTION SUGGESTED ANSWERS ECONOMICS UNIT @ INNOVA JUNIOR COLLEHE 4 . Figure 1 illustrates the effect of the above changes on a firm in the industry. Assuming the firm’s objecti ve is to maximize profits, the equilibrium price and output of the firm is given as OQ 1 and OP 1 where MR1 = MC 1. The initial profits earned by the firm is FP 1DE. With the increase in cost of production, the cost curves will shift to MC2 and AC2 while the fall in demand will shift t he demand and MR curves to D2 and MR2 respectively. As such, the new equilibrium output and price is now OQ2 and OP 2 where MR 2 = MC 2. The new profits earned by the firm is lowered as given by JP2LK. Hence, Brexit might affect the survival of firms adversely. However, the extent of the effect might vary for different firms in the sector. It depends on how much the firms are impacted by the rise in the cost of production. This in turn depends on how heavily reliant the firms are on imported raw materials for ingredients, labour from the EU and the nature of their production. Firms that are more reliant on imported raw materials, labour from EU are more labour-intens ive in their production method are likely to be more adversely affected as their cost of production might rise by a larger extent. As the sector consists of sm