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2010 H2 Economics (9732)

Year 5 Common Test


Examinations

Question Analysis & Examiners’ Report


Economics Department

Dunman High School (Senior High)


10 Tanjong Rhu Road, Singapore 436895

© DHS 2010 Year 5 H2 Economics (9732) 1


Question 1
Who will Lady Luck Smile on?

Extract 1 – A Bet on the Economy

Singapore is trying to diversify into the service industry such as tourism to reduce her
dependence on manufacturing. Each Integrated Resort (IR) is expected to contribute S$2.7
billion or 0.5 to 1 percent, to Singapore's Gross Domestic Product by 2015. Resorts World
Sentosa owned by Genting Malaysia and Marina Bay Sands owned by Las Vegas Sands,
opened in February and April respectively. Singapore Tourism Board estimated that this will
help to increase the visitor arrivals up to 30 percent with the economic recovery.

Source: Various government websites, 2010

Figure 1: Visitors Arrivals to Singapore („000s), by Month

1000
950
900
850
800
750
700
650
600
Jan-08 Apr-08 Jul-08 Oct-08 Jan-09 Apr-09 Jul-09 Oct-09 Jan-10

Source: www.singstat.gov.sg

Extract 2: Will Feng-shui help?

Both Resorts World Sentosa (RWS) and Marina Bay Sands (MBS) know the importance of
feng-shui in their businesses. Both chose to open at auspicious timings and adopted
strategies after consulting many feng-shui professionals. After all, RWS and MBS were lured
to this region by its growing wealth and passion for gambling.

Both IRs are out to impress with their variety of services. RWS did a soft launch for Universal
Studios by offering limited tickets for visitors to tour the amusement park before the rides
were ready. The consumers were mainly divided into two groups – those who eagerly await
the official launch of the rides and others who are satisfied with exploring the park without

© DHS 2010 Year 5 H2 Economics (9732) 2


the rides in operation. In the partially operating casinos, the long queues irked consumers as
they waited for their turn.

Lady Luck appeared to have abandoned RWS for MBS in April. Many consumers favour
MBS more due to its downtown location and its wider variety of facilities such as convention
centres and luxury shopping malls. The opening of the pedestrian and traffic bridge to MBS
further enhanced its accessibility and appeals to many people. However MBS also faced
problems with its incomplete facilities. Faced with the delay arising from construction woes,
labour shortage and the global financial crunch, it was eager to start operations as soon as
possible to reduce its losses.

MBS President and Chief Executive Officer (CEO) Thomas Arasi has set the daily visitor
target at 70,000 for a fully operational MBS. This is more than double the target of RWS.
However it is unlikely that this will be achieved in the next five years as MBS is partially
completed and is operating with excess capacity. To date, MBS appears to be on a winning
streak given that the convention centres and meeting centres are fully booked over the next
few months.

Adapted from The Straits Times, 2010

Extract 3 – Creating a host of opportunities

SINGAPORE has established her reputation as a dynamic and vibrant business events
destination, and a regional hub for meetings. Meetings, Incentives, Conferences and
Exhibitions (MICE) have become a well-known sector of Singapore‟s tourism industry. This
advantage makes it easier for Singapore to attract top talents and to secure the rights to host
major events here. For the IRs, the world-class infrastructure and service standards have
provided a competitive edge over regional players.

There have been many calls for the IRs to extend their expertise beyond MICE and
hospitality. Some possible fields include providing training for vocation courses on culinary
and hospitality; setting up foundations to support charity events and to collaborate with
government agencies to propel the Singapore brand to greater heights. Many firms operating
in industries like advertising, home furnishing and cleaning appear to have a wider pie to
gnaw at with the opening of the IRs.

The effects of the IRs are debatable in the hotel industry. There are three tiers of hotels to
cater to different consumers as seen from their room rates (Figure 2). Some hotels are

© DHS 2010 Year 5 H2 Economics (9732) 3


feeling the heat of the competition and many of them are adopting measures such as
renovating their hotel facilities and increasing their advertising. Many of these hotels are
classified in the same tier as the IRs, which is the upscale tier. Some hotels feel less intense
competition but are also improving their facilities nevertheless. The recovery of the economy
makes it justifiable to do so. But not all hotels are threatened and some strongly welcome
the opening of IRs instead.
Adapted from The Straits Times, 2010

Figure 2: Standard Average Room Rate (S$) of hotels in Singapore,


January 2008 – February 2010

$350

$300

$250

$200
Upscale Tier
$150
Mid Tier
$100 Economy Tier
$50

$-

Source: Singapore Tourism Board, Monthly Digest February 2010


Data for February 2010 is based on preliminary data

© DHS 2010 Year 5 H2 Economics (9732) 4


Answer all questions

(a) (i) Describe the trend for visitor arrival in Figure 1 from January 2009 to [1]
February 2010.

(ii) Explain a likely reason for your observation. [2]

(b) (i) Compare the price elasticity of demand of consumers who “eagerly await [1]
the official launch of the rides” with those who are “satisfied with exploring
the park without the rides in operation” (Extract 2 Paragraph 2).

(ii) Justify your answer above. [2]

(c) (i) Examine how Marina Bay Sands can achieve a lower unit cost when it [4]
becomes fully operational.

(ii) Using Extract 3, explain the two external economies of scale that the [4]
Integrated Resort can gain with the expansion of the Singapore tourism
industry.

(d) (i) Using Figure 2, compare the average room rate of hotels in Singapore [2]
between the upscale and economy tier.

(ii) Explain possible reasons for the above. [4]

(e) Discuss the threats that the Integrated Resorts have brought to the hotels in [10]
Singapore.

Total: 30 marks

© DHS 2010 Year 5 H2 Economics (9732) 5


Question Analysis (Case Study)

Answer all questions

(a) (i) Describe the trend for visitor arrival in Figure 1 from January 2009 to [1]
February 2010.

This is a type I question. For 1 mark, candidates are to identify that


tourism arrival to Singapore in the given time period shows an overall
increase / upwrd trend. Candidates are not required to give the
refinement due to mark allocation.

(ii) Explain a likely reason for your observation. [2]

This is a Type II question that requires candidates to present 1 set of


reason and reasoning to account for their trend in (ai). The use of the
word „likely‟ implies that candidates should propose a reason that best
answers the question.

Possible answers acceptable could include

1. Increase in income due to economic recovery.


This leads to an increase in demand for travelling to Singapore as
overseas trip are generally a luxury good. With the increase in
income, the expenditure of holiday travel takes more a small
proportion of the income, hence either more households are
willing to travel or households choose to travel more often. This
leads to an more than proportionate increase in demand hence
equilibrium quantity.

The reasoning mark can also be awarded if the candidate


presents the theoretical explanation of the price mechanism in
accounting for the increase in equilibrium quantity for the given
increase in demand.

2. Growing taste and preferences for Singapore


This leads to an increase in demand for travelling to Singapore
given more people are willing and able to travel to the country for
major events held in Singapore during this time period. The
market demand curve, a horizontal summation of all individual
demand curve increases, hence increase the number of visitors to
Singapore. Any other valid reasoning process is acceptable.

(b) (i) Compare the price elasticity of demand of consumers who “eagerly [1]
await the official launch of the rides” with those who are “satisfied with
exploring the park without the rides in operation” (Extract 2 Paragraph
2).

This is a Type 0 question which requires candidates to compare the


value of price elasticity of demand across two groups. Demand of the
first group would be more price inelastic compared to the second.

© DHS 2010 Year 5 H2 Economics (9732) 6


(ii) Justify your answer above. [2]

This is a Type II question which requires candidates to present one


reason and reasoning. The best choice of factor would be the
availability of close substitutes. For the first group, they would view
other forms of entertainment to be close substitutes to Universal
Studio as compared to the second group.

For a candidate who presents other factors, no marks should be


awarded unless there is an attempt to link to the two groups specified
in the question with a correct reason and reasoning.

A candidate who presents an incorrect answer to (bi) but acceptable


reasons and reasoning for (bii) can still obtain a maximum of full credit
as they are answering the question “justify your answers above”.

(c) (i) Examine how Marina Bay Sands can achieve a lower unit cost when it [4]
becomes fully operational.

This is a type II question that requires two sets of reason and


reasoning. Candidates can choose to develop two different internal
economies of scale and apply it to MBS. Candidates can also explain
for the increase in minimum efficient scale upon completion of the
construction of the MBS as this can also lead to the potential
decrease in AC in future as MBS increases its own output.

Candidates who present answers pertaining to external economies of


scale will not be awarded any credit. This occurs as the question has
clearly specified that the cost advantages arise from the increase in
the firm‟s own output.

(ii) Using Extract 3, explain the two external economies of scale that the [4]
Integrated Resort can gain with the expansion of the Singapore
tourism industry.

This is a type II questions that requires two sets of reason and


reasoning on two different external economies of scale. This can
occur in the form of economies of concentration as the strong and
growing reputation of Singapore as the MICE hub. This allows the IR
to achieve cost advantages in their talent search or the amount of
advertising.

The second factor is the economies of disintegration. The growth of


the tourism industry has led to the creations of many supporting firms,
such as advertising, home furnishing and cleaning services. The IR
can engage the services of these supporting firms and concentrate on
its core business, allowing them to achieve a lower unit cost.

For candidates who accounted for economies of information, this


might not be the most appropriate choice of factor unless they are
able to provide a good linkage to the case material.

© DHS 2010 Year 5 H2 Economics (9732) 7


(d) (i) Using Figure 2, compare the average room rate of hotels in Singapore [2]
between the upscale and economy tier.

This is a Type I question which requires candidates to compare the


average room rate of two different tiers of hotels. For the first credit,
candidates should identify that the average room rate for the upscale
tier are higher than economy tier. To obtain the 2nd credit, candidates
can either comment on the volatility, rate of change or the magnitude
of increase. It can be observed that the average room rate for
upscale tier is more volatile, decreasing at a faster rate or is at least 1
times more than the average room rate for an economy tier hotel.

Any other valid point on comparison on the average room rate of the
two hotel tiers should be awarded credit. However candidates who
merely describe trend without using any comparative word should not
be awarded any credit as they are not answering the question.

(ii) Explain possible reasons for the above. [4]

This is a Type II question which requires candidates to present 2 sets


of reason and reasoning, one for each observation in (di). A maximum
of two marks will be awarded if both reasons are specific to one
observation in (di) only.

Below is a list of possible answers to account for the higher average


room rate of upscale tier hotels.

1. Higher cost of production for upscale tiers


This leads to a higher minimum price that management of upscale
tier hotels must receive before they are willing and able to supply
the hotel services. This leads to a higher market price than
economy tier hotels, assuming demand is the same across the
two markets.

2. Fewer upscale tier hotels


This leads to a lower quantity supplied at each given price in the
upscale tier hotel market, or lower supply. Assuming that demand
is the same across the two markets, it leads to a higher market
equilibrium price.

In terms of content, candidates should not be accounting for shifts of


the curve as this observation focuses on the absolute price level
across two hotels.

Below is a list of possible answers to greater volatility / greater rate of


decrease for average room rate of upscale tier hotels.

1. Nature of the good – Luxurious Vs Necessities


Upscale tier hotel services are more luxurious than economy tier
class. With the economic recession, the fall in income leads to a
more than proportionate fall in demand for upscale tier hotels
hence a greater fall in prices.

© DHS 2010 Year 5 H2 Economics (9732) 8


2. Greater capacity to vary production level
As upscale tier hotels are larger, they have greater ability to vary
the number of rooms in operation, hence affecting supply. During
poor economic conditions, they have greater ability to reduce
supply, hence putting more downward pressure on prices of their
goods. This leads to a greater fall or volatility in prices.

3. Market power of firms and /or financial ability / strategies


undertaken by the firm
Both hotels are generally imperfect firms who have ability to set
their own prices. With the given decrease in demand, larger firms
(upscale hotels) have greater ability to reduce prices or have
greater financial ability to sustain the fall in revenue (or losses) for
the temporary strategies to cushion the fall in revenue.

If the candidate presents the second observation in (di) as the extent


of magnitude, they need to state in their own opinion whether this is a
large or small difference. A list of possible answers that can be
presented includes

1. Extent of shifts in demand and /or supply with the use of YED
2. Price elasticity of demand and / or supply to accompany the extent
of shifts in the curve

(e Discuss the threats that the Integrated Resorts have brought to the [10]
hotels in Singapore.

This is the only Type IV question in the Examination. In view of the current skills
level of candidates for evaluation, the Examiners‟ Board have reduced the
evaluation marks to two instead of the usual four. Hence a maximum of 8 marks
can be awarded for level of response instead of the usual six. However a
candidate who presents an answer deserving of 6 marks for level of response
marking and 4 marks for evaluation should also be awarded full credit.

Candidates are to present a discussion on the issue – whether and to what extent
the Integrated Resorts have brought threats to the other hotels in Singapore.

In presenting the thesis, candidates can focus on the increase in competition


presented by the IRs since they are substitutes to other hotels. The other hotels
would face a decrease in demand for their services, leading to a fall in revenue. It
is also possible that other firms would be forced to incur a higher cost of
production given that they are adopting strategies to better position themselves
across their competitors. This could include renovating their hotel facilities and
increase in advertising. The overall impact on their profit would then depend on the
extent of change in revenue as compared to cost. The greater competition for
factor inputs due to the growth of the industry could also lead to external
diseconomies of scale, thereby driving up average cost of production. Candidates
could also provide a more in depth analysis by commenting on the extent of
change in variables using economic analysis such as elasticity concepts.

© DHS 2010 Year 5 H2 Economics (9732) 9


For the anti-thesis, candidates can choose to present it as there is no threat to the
other hotels or the threat is very small. This can occur as other hotels are not close
substitutes to the IRs given the different tier they belong to. As a result, there is no
change to their demand and hence no impact on their revenue. It is also possible
for candidates to present an argument that the launch of IR would attract more
tourists and bring along an increase in demand hence revenue for them instead.

In terms of the cost arguments, candidates can also choose to present the
increase in non price strategies could bring along internal economies of scale if
output increases more than the increase in cost. This is with the assumption that
the minimum efficient scale has yet to be achieved. The launch of IRs could further
enhance the external economies of concentration / disintegration thereby allowing
them to achieve lower unit cost.

For the discussion, candidates can present any other valid points on the effects on
hotels in Singapore.

For evaluation purpose, candidates are to present their stand on whether and to
what extent is there really a threat (or large threat) that the IRs have brought to
other hotels in Singapore. However to obtain credit, they must provide a correct
reason specific to their discussion for the 1st mark and a correct and developed
economic reasoning for the 2nd mark.

Level Marks Level Descriptor


Level 3 7 -8 A well developed and well applied discussion with scope

Minimal conceptual errors


Level 2 4–6 An underdeveloped discussion

OR

A largely theoretical discussion without any application or


scope

OR

A well developed one sided discussion

With some minimal conceptual errors


Level 1 1–3 An undeveloped discussion that is largely listing / outline

A well developed answer that is irrelevant to the question

A developed one sided discussion

E1 1st mark Evaluative stand based on discussion with correct


reason
E2 2nd mark Evaluative stand based on discussion with correct
reason & reasoning

© DHS 2010 Year 5 H2 Economics (9732) 10


© DHS 2010 Year 5 H2 Economics (9732) 11
Examiners’ Comments For Case Study

General Comments

The performance on this case study appears to be weaker than expected. Some candidates
displayed excellent comprehension in applying economics concepts learnt in all 5 questions,
but such performance was not observed widely.

Candidates performed weakly in both lower-order and higher-order thinking skills questions.
The two main reason identified is the demonstration of conceptual confusion and candidates
inability to understand the questions requirements.

Observed conceptual confusion occurred primarily are candidate inabilities to distinguish:


price-elasticity of demand and income-elasticity of demand and internal economies of scale
(IEOS) and external economies of scale (EEOS) and their impact on average cost.

Candidate‟s inability to understand the question requirements has affected their ability to
score the highest possible mark, it will further elaborated below.

Question A(i)
Most candidates were awarded the full credit of 1m. Few candidates understood the
question requirements and wrote additional refinement data was unnecessary such as
volatile trend.

Question A(ii)
This question requires the candidate to describe for the trend observed in A(i). Candidates
understood the question and answered using the “reason” and “reasoning” method. Many
candidates were awarded the 1st credit for the giving of a economic reason describing the
trend observed. However, many candidates misunderstood statements as reasonings. Thus,
they were not awarded the 2nd credit.

Question B(i)
Most students were able to correctly identify the demand of consumers who “eagerly awaited
the official launch of the rides” as being more price inelastic than those who were “satisfied
with exploring the park without the rides in operation”. Good answers employed the use of
comparative words like “more”, ie, more inelastic. Weaker answers that did not use
comparative terms were not penalised this time round.

Question B(ii)
A reasonable number of candidates could correctly identify one reason as to why the
demand for those consumers who waited for the official opening of the theme park was more
price inelastic. Commonly cited reasons included “addiction”, “degree of necessity” and
“availability of substitutes”. However, only a few students were able to substantiate their
reason with an acceptable reasoning. For example, many did not explain what these terms
meant. Some answers also failed to compare across both groups of consumers, which, in
turn, resulted in the answer going off-point. Some candidates explained, at length, the

© DHS 2010 Year 5 H2 Economics (9732) 12


definition of price elasticity of demand. However, this was not a requirement and hence no
marks could credited.

Question C: When attempting C(i) and C(ii), many candidates were not only conceptually
confused over IEOS and EEOS, but also confused over revenue and cost. Many candidates
were either conceptually confused or had misread the requirements for each question,
writing concepts of EEOS for C(i) and IEOS for C(ii). Many candidates are under the
impression that increased in revenue can decrease the IR average cost.

Question C(i)
Most Candidates understood the question requirements and gave 2 set of answers
answered using the “reason” and “reasoning” method to score full credit. Most candidates
were awarded the 1st reason credit. Candidates who merely repeated concepts of IEOS
without application to the context were not awarded the next credit.

A note to candidates: Helix Bridge and traffic bridge linking MBS to Raffles Boulevard isn‟t
build by MBS. Thus the fixed cost spent in constructing these isn‟t incurred by MBS.
Students should not repeat this again.

Question C(ii)
Most Candidates understood the question requirements and gave 2 set of answers
answered using the “reason” and “reasoning” method to score full credit. Most candidates
were awarded the 1st credit for reason, except for candidates who misunderstood the
concepts of “economies of concentration”. Many candidates had confused marketing EEOS
with economies of concentration. Thus, these candidates were awarded reasoning credit.

Most candidates were able to explain and apply concepts of EEOS to the IR. However,
many candidates were not awarded full credit for their reasoning as they had not explained
how the IR has benefitted from the expansion of the tourism industry. These candidates
merely explained the benefits of the expansion of Singapore's tourism industry without
relating the possible cost savings arising from it to the IR.

Question D(i)
Most students could correctly identify the general trend for the first mark, and give one
refined observation for the second mark. A common mistake made was to describe change,
ie, positive/negative change, which was not required. Some candidates described “spikes” in
the data, which was not accepted because a “spike” is a sudden, temporary surge in the
same direction as the general trend. In this case, both average room-rates decreased overall
but the rates between July and October 2008 conversely increased. Hence, “reversal” would
have been a more appropriate description. Students who did not use comparative words
were deemed to have misinterpreted the question and were not awarded any marks.

Question D(ii)
Few candidates could correctly state two sets of reason and reasoning to score the
maximum number of marks for this question. Most students made the mistake of explaining
how consumers, instead of their demand, were price elastic. Answers of this nature were not
penalised this time round but it is hoped that such mistakes would be avoided, going
forward. Some students were unaware that answers to this question had to be directly

© DHS 2010 Year 5 H2 Economics (9732) 13


related to answers given in d(i). For those who were aware of this requirement, few could
give possible explanations. A common mistake was to cite the opening of the integrated
resorts (IRs) as the reason for the decline in room rates over the period due to an increase in
the supply of hotel rooms, when in fact, the IRs opened only in 2010, thus failing to explain
the decline that began in late 2008. Another common mistake was to confuse price with
income elasticity of demand, which led to answers that were not creditable due to the
presence of severe conceptual errors.

Question E
This question carried the highest mark allocation and a sufficiently thorough response was
required for a good mark. In order to score well for this question, candidates needed to
present two sides of the discussion with scope, as well as a judgment with economically
sound reason and reasoning. Some good answers provided explained how Integrated
Resorts threatened the interests of local hotels in terms of lower revenue and higher costs
through competition for consumers and factor inputs respectively; as well as how Integrated
Resorts could benefit local hotels due to their complementary nature of services provided, or
how certain hotels are unaffected by Integrated Resorts due to their low substitutability. L3
marks were awarded to candidates who provided a wide scope of well developed points.
Sadly, such examples were few to be seen.

Most candidates were able to explain how the hotels are threatened, as a result, scoring the
Thesis marks. Many candidates, however, failed to recognise the directive word and the
need to provide an Anti-thesis that explains how Integrated Resorts have brought no or little
threat or benefits to the hotels in Singapore Candidates who presented a one-sided
discussion are limited to maximum of 4 marks, low L2. Majority of such candidates either
falls under this category or high L1 of 3 marks, depending on quality of development in
answers.

Many candidates assumed that by explaining the strengths or advantages of Integrated


Resorts, they are discussing the threats brought by them. This was not correct. The correct
focus of the question is on the effects on the hotel, both positive and negative. Inevitably,
those candidates who limited their analysis on Integrated Resorts without providing a clear
link to effects onto hotels generally scored poorly under irrelevance of answers.

© DHS 2010 Year 5 H2 Economics (9732) 14


Essay

1) Prices of Certificate of Entitlement (COE) has jumped between seven to nine


times in the first bidding tender since the government reduced supply of
COE. Raymond Tang, from the Singapore Vehicle Traders Association
suggests that anyone who wishes to buy a car should do it now or else the
prices of COEs will be higher in the next round.

Adapted from The Straits Times, 7 April 2010

(a) Explain the factors leading to the surge in COE prices in recent months. [10]

2) In January 2010, Kraft Food successfully took over Cadbury in a US$19.7


billion deal and became the world‟s largest confectioner. Kraft said the
purchase will result in at least US$675 million in annual cost savings and
give the company leading positions in emerging markets including India,
Brazil and Mexico.
Adapted from Bloomberg Businessweek, 19 January 2010

(a) Explain Kraft‟s decision for taking over Cadbury. [10]

© DHS 2010 Year 5 H2 Economics (9732) 15


Question Analysis (Essay)

Question 1:

Certificate of Entitlement (COE) prices hit fresh highs in the first bidding tender since the
government reduced supply of COE to curb the rising traffic congestion problem in
Singapore. Compared to a year ago, COE prices have jumped between seven to nine times.
Raymond Tang, from the Singapore Vehicle Traders Association suggests that anyone who
wishes to buy a car should do it now or else the prices of COEs will be higher in the next
round.
Adapted from The Straits Times, 7 April 2010

Explain the factors leading to surging COE prices in recent months. [10m]

This is a type I part (a) essay (many causes to one effect). Candidates are required to look
at the market for COE and explain the factors leading to surging COE prices in recent
months. Candidates must present the reasoning processes on changes of the demand and
supply for COEs and the adjustment process (price mechanism) for an increase, or more
specifically large increase in price. For scope purpose, candidates should present both
demand and supply factors.

For demand side factors, candidates should also be able to understand that demand for
COE is a derived demand, consumers do not demand COE for its own sake; demand for
COEs comes from demand for cars. This link must be made clearly at the start and with this
understanding. Candidates can link the factors resulting in an increase in demand for cars
(e.g. through increase in income due to economic recovery or higher expected prices in the
future) to an increase in demand for COE, leading to an increase in COE prices. The only
supply factor to account for the leftward shift of the supply curve for COEs occurs through
the reduction in COE quota by the Singapore government. For correct application to the
context, the supply of COEs should be drawn as a vertical line. Candidates are required to
have knowledge of specific markets with the COE market as one of the markets. To score a
high Level 3, candidates must present their analysis with a vertical supply curve.

To score Level 3, candidates must address the surge in prices of COE. This can be
achieved through two possible ways: firstly by explaining the combined magnitude of shift for
the demand and/or supply curves. Secondly, by using demand and supply price elasticities.
Candidates are reminded of the need to use economic reasoning to develop their answer in
full.

In using the first method, candidates can choose to elaborate on the degree of closeness of
cars and COEs (i.e. perfect complements) to explain a large increase in demand of COEs for
any given increase in demand for cars. Depending on the reason for increase in demand for
cars, candidates could choose to use income elasticity of demand (for reason – increase in
income) or cross price elasticity of demand for cars (for reason – decrease in price of cars)
to further substantiate their development. The above explanation however does not hold if
candidates use increase in expected prices of COEs. The best answer should be a
combination of increase in demand, decrease in supply and a perfectly price inelastic supply
curve with a well developed elaboration of the price mechanism.

© DHS 2010 Year 5 H2 Economics (9732) 16


In using the second method of price elasticity, candidates must exhibit caution in their use of
price elasticity of supply. Answers that provided two supply curves with different elasticities
with the increase in demand would not be awarded any credit due to the inappropriateness
of the answer. This is due to the nature of the supply of COEs. Given that it has always been
controlled by the government, an analysis on a decrease in price elasticity of supply in
recent months to account for surge in price with the increase in demand does not answer the
question. The only answer that could be accepted based on PES should be combined with
the large increase in demand as explained above.

In contrast, candidates who presented a well developed answer using a shift in supply
combined with a decrease in price elasticity of demand in recent months are still able to
obtain a Level 3, regardless of the nature of the supply curve. However to score full credit,
candidates must use the correct vertical supply curve and develop a developed price
mechanism process taking into account PED.

Level Marks Range Descriptor


1 1-4 Largely irrelevant answer
OR
An answer that comprises of multiple major conceptual errors.
OR
An undeveloped answer that is largely outline / statements

2 5-7 A relevant but underdeveloped answer


OR
A well developed answer that does not demonstrate enough
scope i.e. only demand or supply factors (MAX 6m)
OR
An answer that demonstrates scope but fail to explain for the
surging price of COEs

2 8-10 A well-developed answer that looks at both demand and supply


side factors and uses the appropriate economic reasoning to
explain for surging COE prices.
OR
A well-developed answer with correct economic analysis but
fails to acknowledge that supply curve for COEs should be a
vertical line (MAX 9m)

© DHS 2010 Year 5 H2 Economics (9732) 17


Question 2:

In January 2010, Kraft Food successfully took over Cadbury in a US$19.7 billion takeover
deal and became the world‟s largest confectioner. Kraft said the purchase will result in at
least US$675 million in annual cost savings and give the company leading positions in
emerging markets including India, Brazil and Mexico.

Adapted from Bloomberg Businessweek, 19 January 2010

Explain Kraft‟s decision for taking over Cadbury in the above context. [10m]

Similar to the previous question, this is also a type I „cause-effect‟ part (a) essay which
require candidates to explain many causes leading to one effect. To be more specific,
candidates need to explain why Kraft chose to take over Cadbury. From the pre-amble, the
reason for Kraft‟s acquisition of Cadbury is due to the cost and revenue advantages it can
reap from doing so.

For cost advantage, candidates need to highlight the potential internal economies of scale
that Kraft can enjoy from the buying over of Cadbury e.g. specialisation. More importantly,
candidates need to explain how the expansion of Kraft by taking over Cadbury will allow
them to achieve cost advantage. This is essential for them to get high credits. One possible
explanation is that with acquisition of Cadbury, Kraft will now have a larger pool of labour
resource and this allows greater room for specialisation. Through specialisation, workers will
become more efficient as they engage in a particular production process repeatedly i.e. they
benefit from „learning-by-doing‟. This will allow them to become more productive, thus
leading to a fall in average costs. Besides specialisation, candidates can also explain other
sources of internal EOS such as financial EOS, marketing EOS etc. To obtain good credits
for this question, candidates need to apply the cost advantage identified to the context of
Kraft.

For revenue advantage, candidates need to explain how an increase in market power will
allow Kraft to be able to charge a higher price and thus increasing their total revenue. This
can be explained by how acquisition of Cadbury increases the market share of Kraft. This
reduces the price elasticity of demand for Kraft‟s products as there are now less substitutes
available. As a result, Kraft can now increase the price of its products and face a less than
proportionate decrease in quantity demanded, thus increasing their total revenue.
Alternatively, candidates can also explain how an increase in Kraft‟s size from the acquisition
allows Kraft to establish barrier to entry and helps it protect its market share. However, if
candidates were to use this point, then they should explain what is the source of barrier to
entry, e.g. having more financial ability to engage in predatory pricing etc.

To get the highest credit, candidates should address the part of pre-amble which states that
the acquisition of Cadbury gave Kraft the ability to have a leading position in emerging
markets. Candidates will need to explain how Kraft‟s expansion will give it a dominant
position in these markets. This could be due to Kraft‟s ability to engage in advertising as the
acquisition allows Kraft to have greater financial rsources or it could be that with a wider
product range from the expansion, Kraft is able to cater to more taste and preferences, thus

© DHS 2010 Year 5 H2 Economics (9732) 18


allowing it to capture a greater market share in these new economies. Candidates who failed
to address this part of the pre-amble will be limited to a maximum of 8 marks.

Level Marks Range Descriptor


1 1-4 Largely irrelevant answer that shows no application to the
context
OR
An answer that comprises of multiple major conceptual errors.

2 5-7 A relevant but underdeveloped answer


OR
An answer that explains only cost or revenue advantages (MAX
6 m)
OR
An answer that is well explained but no application to the
context of the pre-amble (MAX 6m)

2 8-10 A well-developed answer that looks at both cost and revenue


advantages. Able to explain well using sound economic analysis
in the context of the pre-amble.

A well-developed answer that does not address how Kraft’s


expansion helps it to gain leading position in the emerging
markets. (MAX 8m)

© DHS 2010 Year 5 H2 Economics (9732) 19


Examiners’ Comments For Essay

General Comments

Most candidates showed a certain level of content mastery that is needed to do well.
However, majority of candidates were only able to secure a level 2 score for both essays
with only a small minority scoring level 3 marks. There were 2 main reasons for this. Firstly,
many candidates were not able to display the economic rigour that is required for a level 3
score. There were far too many undeveloped or underdeveloped responses. Secondly,
many candidates also chose to answer the question with no regards to the context stated.
These types of answers were usually an indicator that the candidates had engaged in rote-
learning rather than learning for application. These responses too were unable to get the
highest credit.

Comments for Question 1a:

Majority of the candidates only managed to obtain a Level 2 for their essay. Candidates are
reminded of the need to interpret the question correctly and economic rigor is expected for a
well developed answer.

Many candidates only accounted for an increase in price of COEs using demand-supply
analysis (based on factors that occurred recently) and did not go on to address the surge in
price. Majority of those who attempted to address the surge were not able to develop their
answer in economic reasoning thereby limiting the maximum credit to a low Level 3. There
were also a few candidates who did not even elaborate the effect on price of COEs after
presenting the demand-supply analysis.

There were also a handful of candidates who misinterpret the question and present their
demand-supply and PED/PES analysis for cars and merely state the effects on price of
COE. Candidates are reminded that it is important to develop their essay on the correct
context. Extensive elaboration on a related good would still render the essay irrelevant to a
large extent despite the same economic reasoning.

Most of the candidates also did not demonstrate complete understanding on the COE and
presented an underdeveloped reasoning. The relationship between COEs and cars (perfect
complements or derived demand) was not explicitly stated and only a minority of the
candidates is able to explain why supply of COE is perfectly price inelastic.

The following factors are generally underdeveloped by the majority of the candidates –
expectations of future price increase, decrease in supply by the government and nature of
PED / PES. The lack of economic rigor is the dominant reason in the level 2 marks obtained
by many candidates. The price elasticity of demand was also very poorly applied by many
candidates. Candidates often merely state the inelastic nature of demand without any reason
and did not attempt to combine it with shifts in supply or wrongly combine it with shifts in
demand to account for surge in price. Some candidates even twisted the definition of PED to
obtain the final outcome on a surge in price. For candidates who identify the correct use of
PED and shifts in supply, many of them merely state the graphical illustration rather than use
economic reasoning to account for the surge.

© DHS 2010 Year 5 H2 Economics (9732) 20


Lastly there were a handful of candidates who compared the increase in demand to be more
than the decrease in supply. This is an inappropriate presentation given that both factors
lead to increase in price. It is more important to elaborate how the combined shifts lead to a
larger increase rather than comparing the magnitude of the shift to obtain the final outcome.
However majority of candidates who combined the increase in demand and decrease in
supply merely presented a graphical illustration and the lack of economic rigor limited their
credit to maximum low Level 3.

Comments for Question 2a:

Although this is a relatively straight forward question, it was generally not well done. Most
candidates had a level of content mastery to get half the maximum credits but a common
issue that surfaced was their inability to apply their content in the context of the question.

Many candidates treated this question as a chance to „write all you know‟ about internal
economies of scale (EOS) and revenue advantages without explicitly linking it to Kraft‟s
expansion. The examiner was impressed by some candidates‟ strong content mastery but
was disappointed to see that the content was not well applied. As a result, the examiner was
left wondering if candidates had merely engaged in „rote-learning‟ rather than „learning for
application to the real world‟. Given that the second scenario is what economics learning is
about, the examiner will like to emphasize the importance of application to score well in
assessment.

Most candidates were able to provide sufficient scope by explaining both cost and revenue
advantages for Kraft‟s expansion. For the cost advantages, candidates were aware of the
need to use internal EOS and most were able to provide various sources of IEOS. However,
many also failed to link how Kraft‟s expansion was able to help it reap cost advantages. For
example, candidates who explained that as Kraft expanded, it was able to secure more
loans as financial institutions find the firm more credit-worthy and less likely to default on its
loan. There was no attempt to link this observation to lowering of average cost. Thus,
candidates should link Kraft‟s credit-worthiness to its ability to get loan at a lower interest
rate or at least link to how its higher ability to secure more loans allow Kraft to purchase
more new technology. This will then lead to a lower average cost incurred by Kraft. Similarly,
candidates who tried to explain how Kraft‟s expansion resulted in a fall in average cost
through „spreading of overheads‟ often left out the explanation of how a greater output level
led to a „spreading of overheads‟. They should explain that with the expansion, some
indivisible fixed capital such as machinery is utilised more efficiently. This lead to a fall in
average cost as output increases.

For revenue advantages, there were three main problems. The first is that many candidates
explained how increased market power of Kraft from the expansion allows it to have more
ability to set prices and thus increase revenue. However, there was no explanation of why
this was the case. The reason for this is due to the lack of substitutes available for
consumers as Kraft becomes the dominant player in the market. This will make the demand
for Kraft‟s products more price inelastic and thus it can increase price to increase total
revenue.

© DHS 2010 Year 5 H2 Economics (9732) 21


Secondly, many candidates were able to identify that the increased market share of Kraft
creates barrier to entry for new firms, thus eliminating competition. But this was usually done
without any justifications. They should present examples of what some of these barriers to
entry may be e.g. with the stronger financial resources from a larger firm, Kraft‟s ability to
adopt predatory pricing increases. This will result in new entrants not being able to survive in
the market. They should then link this to how it benefits Kraft i.e. by protecting their dominant
position.

Lastly, a large proportion of candidates totally ignored the pre-amble „give the company
leading positions in emerging markets‟ even though the question requires candidates to
explain Kraft‟s decision in context of the pre-amble. Good answers explained that with Kraft‟s
expansion, it is now more able and willing to engage in market research and develop new
products that cater to the taste and preference of the consumers in these markets. Also, they
are better able to engage in more aggressive advertising campaigns to gain a foothold in the
new markets. All this will help to entrench Kraft‟s market position and benefits its revenue.

In all, many candidates limited themselves to a level 2 score when all they had to do was to
make a more deliberate attempt to expand their answers and link it explicitly to the context of
Kraft‟s expansion.

© DHS 2010 Year 5 H2 Economics (9732) 22