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 chea