HCI_H2_ECONS_CSQ1_ans

HWA CHONG INSTITUTION C2 Preliminary Examination 2016 Higher 2 Economics Case Study Question 1: The Coal Industry and Housing Market in the United Kingdom (UK) Suggested Answers (a) With reference to Extract 3, explain why the value of the price elasticity of supply of new housing in UK might change over time. [3] Define PES [1m] If there is no definition given, the idea of how responsive quantity supplied will be to a change in price must be captured in the student's explanation to get 1m. State + Explain that in SR: PES<1 [1m] Need time to build houses and in the short term, there is a "lack of materials and labour… bricks running out… construction workers left the industry"  lack of spare capacity State + Explain that in LR: PES likely >1 [1m] Availability of materials and spare capacity as "brick makers reope n plants" and skilled workers as former military personnel join the construction industry and training schemes help to train them to become skilled workers. (b) With reference to Table 1, explain whether the pricing policy by the electricity company could be considered an example of price discrimination. [4] Explain that the different prices charged for the usage of electricity could be due to 3 rd degree price discrimination: [2m] - Define PD  charging different prices (day vs night) to different groups of consumers (day vs night) for the same product (electricity) due to reasons not associated with cost differences. - The different prices charged could be due to di fferences in price elasticity of demand. Day prices are higher as demand for electricity is more price inelastic due to higher degree of necessities in the day time where electricity is required for the functioning of the economy when most people are awake, e.g. business and production activities, school, households etc. Night prices are lower as demand is more price elasti c due to lower degree of necessities. Most activities are not essential to be conducted in the night when most people will be resting. Explain that the different prices charged could be due to differences in costs: [2m] - During the day (peak), demand for electricity is higher, leading to higher marginal cost incurred and hence higher prices are charged. - During the night (off-peak period), nuclear and coal-fired stations, with lower operating costs, will be used. However, during peak period, power stations with higher operating costs (e.g. oil- fired stations) will have to be activated. (c) Using the information in Table 1, account for the difference in average house prices in London and Yorkshire. [3] Price difference likely due to differences in demand and supply: London has a higher average house price because: Higher demand due to higher annual income earned (£79,000) leading to higher purchasing power and higher population (8.5m) + Lower supply due to lack of land in the capital (1,572km 2) available for buildin