EJC H2 ECONS P1 Suggested ans and mark scheme

1 2018 JC2 H2 Preliminary Examination Economics Paper 1 Suggested Answers, Mark Schemes Case Study 1 (a) Compare the fertiliser demand growth rates for nitrogen and phosphate between Africa and the Americas. Similarity: The growth rate for both commodities was positive for both regions. [1] Difference: However, the growth rate for nitrogen exceeded phosphate for Africa while the growth rate for nitrogen was less than phosphate for the Americas [1] Or Americas had a larger demand growth in phosphate while Africa had a lager demand growth nitrogen. [2] (b) State how the following goods are related: (i) phosphorous and meat The demand for phosphorous is a derived demand of meat. [1] [no mark for mere stating of derived demand as the cause and effect will be vague] or Phosphorous is a factor input for meat. [1] [1] (ii) meat and biofuels Both meat and biofuels are in competitive supply [1m] or Both meat and biofuels require the same factor input. [1m] Evidence: “In developed regions, on the other hand, the shift towards a diet of meat and cheese has also increased phosphorus demand, since meat and dairy contain a significant proportion of phosphorus. As a result, countries everywhere face rising demands for phosphorus, which has led to precarious markets.” In 2008, the price of phosphate fertilis er almost doubled because of increased demand for fertiliser (due to more meat consumption) and biofuels, and a short-term lack of availability of phosphate rock. [1]

2 (c) Explain two possible conditions that will encourage the successful formation of “an OPEC for phosphorous”. Any 2 reasons with justification 1. They must sell homogenous good For the countries in cartel to not deviate from the agreed price, they must be selling the same good. If the good is question is different, retaliation by other countries in the cartel such as aggressively lowering the price would have no impact on the countries. 2. All the countries must abide by the quota Countries in the cartel need to abide by the quota. If any of the country decides to increase the quantity, it would lead to a higher Q and lower P compared to profit-maximisation outcome, hence rendering the cartel ineffective. 3. There must be a country that has a large market share In the event where the country deviates, the country that controls most of the market share can punish the deviator. 4. The good that is under the cartel must not have close substitutes If there are substitutes, consumers can turn to the substitutes. In doing so, the cartel would not be able to set a high price because the consumers will switch to other substitutes and disrupt the pricing and output decision by the cartel. 5. The countries must have similar cost structure. If the countries do not have similar cost structure, the country with the lowest cost of production will have a higher tendency to cheat, hence breaking down the cartel. [4] (d) Using a diagram, explain how a price floor on agricultural crops could theoretically improve the living standards of Indian farmers, if implemented as part of the farmer-oriented initiative. 1m [correct diagram] – Price floor diagram [3]

3 1m [Explain the diagram] – Price floor would raise the price of agricultural crops from P0 to PF. This will increase the revenue received (P0Qo to PfQf) by the farmers and assuming cost remains constant and the government buys up the surplus, this would cause an increase in profits. Or 1m [Using PED] – The demand for agricultural crops is price inelastic because of the lack of substitutes. With the rise in price as a result of the price floor, this would lead to a less than proportionate fall in quantity demanded. This results in an increase in total revenue, even without the government buying up the surplus. 1m [link to SOL] - Hence, leading to a rise in purchasing power that will allow them to consume more goods and services. (e) Identify a normative statement in Extract 4. Note: A normative statement must be a statement of opinion that cannot be objectively tested or proven. “One area that should be prioritised in reducing phosphorus is the smarter use of fertiliser.” “Therefore, it is increasingly necessa ry to promote a plant-based diet to reduce the amount of phosphorus consumption.” [1]

4 (f) Discuss whether the Indian government had sufficient information to make a rational decision to develop its phosphorous industry. Content Decision-making determinants Context Indian government in its decision to develop the phosphorous industry Command Discuss + Evaluation Rational decision making by the government is premised on its aim to maximise social welfare. In this case , to make a rational decision, we will analyse whether the India government had sufficient information pertaining to the benefits, costs, constraints faced and unintended consequences of developing its phosphorous industry. The information is sufficient for the India government to ascertain the benefits resulting from the development of the phosphorus industry. According to Extract 3 para 2, the fertiliser sector is one of 25 sectors identified as exhibiting high potential for profitable growth in India. One significant reason could be due to the huge demand for phosphorus, given that it is an essential nutrients in fertilizers for food production. Additionally, its demand is extremely price inelastic since phosphorus has no substitutes (Extract 1, para 2). An increase in price of phosphorus can lead to a less than proportionate decrease in its quantity demanded, hence increasing total revenue. Assuming total revenue is greater than total cost, there is huge potential for supernormal profits to be reaped from the development of this industry. Also, “Indian Prime Minister Narendra Modi has been encouraging the “Made in India” movement, pushing for new employment opportunities in the manufacturing sector, since he came to power in 2014”. By developing the phosphorus industry, it will be able to create domestic employment through foreign direct investment. The increase in I will lead to an increase in AD, represented by a rightward shift of AD 1 to AD2, hence resulting in RNY from Y0 to Y1. The rise in RNY [8]

5 will lead to an increase in employ ment, since demand for labour is a derived demand for the increase in production of phosphorus. With the rise in employment, this would improve the standard of living of India’s citizens. Furthermore, with the rise in FDI comi ng into India, this will lead to an improvement in her balance of payment position. By developing the phosphorus industry, this will attract more FDI into the country and ensuring the country will attain a healthy balance of payment position. The information is insufficient for the India government to ascertain the costs resulting from development of the phosphorus industry. While there is sufficient information on the benefits of developing the phosphorus industry, there is insufficient information on the total cost to the India government. In part, it is important to consider the unintended consequences of negative externalities that could arise from the production of phosphorus. Ext 1ract para 3 highlighted that inefficient use of phosphorus could pollute rivers and cause toxic algal blooms. This could possibly result in a loss of income for fishermen who are not directly involved in the production and consumption of phosphorus. Such negative externalities could lead to an overproduction of phosphorus and allocative inefficiency in the use of resources. As the government may not be able to accurately estimate the marginal external cost that arises given that the damage from pollution is extremely difficult to assess, the cost of developing th