SAJC_H2_ECONS_P2_Essay_Questions_and_Answers

1 ST. ANDREW’S JUNIOR COLLEGE PRELIMINARY EXAMINATIONS – 2018 (JC2) General Certificate of Education Advanced Level Higher 2 ECONOMICS Paper 2 Additional Materials: Answer Paper 9757/02 11 September 2018 2 hours 15 minutes READ THESE INSTRUCTIONS FIRST Write your name and class 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 three questions in total, of which one must be from Section A, one from Section B and one from either Section A or Section B. Start each question on a fresh sheet of paper. At the end of the examination, fasten all your work securely together. The number of marks is given in brackets [ ] at the end of each question or part question. This document consists of 3 printed pages. © SAJC 2018 [Turn Over]

2 1. Besides possessing dominant positions in many of the world’s most important markets, budget airlines are stealing passengers from full- service carriers. Fierce cost-cutting, unbundling of services as well as booming economies of the developing world are but some contributin g factors to the roaring su ccess of budget airlines. Last year, for the first time, they carried mo re than one billion fliers – nearly 30% of the 3.7 billion who took to the air. Adapted from The Wall Street Journal, Aug 2017 (a) Explain the factors that determine the price elasticity of demand, income elasticity of demand and cross elasticity of demand of a good. [10] (b) Discuss the relative importance of the above demand elasticity concepts in explaining the rise in popularity of budget airlines among air travelers in the past decade. [15] (a) Introduction The various elasticity of demand concepts allow economists to determine the responsiveness of consumers to the change in the causal factor. Each of the elasticity concepts is in turn affected by its own sets of factors. Body - PED measures the responsiveness of quantity demanded of a good with respect to a change in price of the good itself c.p. (provide formula). - The PED value is always negative – a ssumes Law of Demand applies to the good - Size of PED value informs of the res ponsiveness of consumers to the change in price of the good itself, c.p. The larger the (absolute) value, the more responsive consumers are. Suggested Factor – E.g. Degree of necessity - PED value of a necessity is expected to be low and less than 1 (i.e. PED<1). - Given a rise in price, a consumer will only reduce the quantity demanded of the goods less than proportionately due to the continued need to consume the good. - For example, even if the price of sa lt rises by 10%, a consumer will unlikely re