Suggested Answers Outline to A Levels 9757 H2 2018 CSQ Question 1 by Mr Toh
Ai. PED = %change in qdd / %change in price
PED = 0.024 / 0.02
PED = 1.2
Aii. Can use proportion of income (in low income consumers & younger people) OR availability of substitutes (non-sweetened drinks / water) OR degree of necessity (low)
Bi. Cross elasticity of demand
Bii. XED = %change in dd of A / % change in price of B
XED = 4% / 6%
XED = 0.04 / 0.06
XED = 0.67
Figures not necessary as they are just an approximation, given the values for purchases of water and non-taxed beverages were on average, it’s good enough to use as an estimation.
The value is likely to be positiveas these 2 goods are substitutes for one another (which means when price of SSBs increase, demand for bottled water increases. However since a 6% increase in price of SSB only results in a 4%, the value is likely to be smaller than1 (not very close substitutes).
c. Influence taste and preferences àincrease demand àincrease TR àincrease profitability
Differentiationàless substitutable àReduces PED value àgreater ability to do pricing changes àcan influence TR àincrease profitability
Differentiationàless substitutable àreduce XED value àrivals’ pricing will affect them less
d. In a consumer’s rational decision making, he/she would seek to maximise utility.
Such determinants would be related to what allows the consumer to maximise utility.
Consumer would consume based on where his/her marginal costs = marginal benefits
- Cost of drink
- Enjoyment of good (utility)
- Possible impacts on health
- Consideration of alternatives
Elaborate on the above points
In a world where there were no information failure and consumers all behaved rationally, they could make rational decisions.
However, information failure means that consumers may not have immediate information on the possible impacts on their health to make a rational decision at point of purchase.
Arguably, that can also be considered a rational decision because the consumer was making a decision that takes into account the information that he/she has at that point.
Solve by Fiscal Intervention
- Addresses negative externalities but not imperfect information
- Hard to estimate MEC
- Explain how subsidies would encourage lower prices & increased consumption of healthy dietary choices
- Explain relationship between healthy dietary choices vs sugary drinks
- Lower price of healthy dietary choices will reduce demand for sugary drinks
Show diagram of how a fall in demand for sugary drinks will lead to consumption to fall closer to Qs, reducing market failure
- Blunt tool, hard to control how much demand for sugary drinks will fall by
- Does the government suffer from information failure?
For example, is the government really keenly aware of what are considered to be ‘healthy dietary choices’ and those are the alternatives that the government would want to encourage?
Consider wider impacts on the economy as trade-offs (for example if the country has large manufacturing industry in soft drinks?) & any other unintended consequences.
Solve by Non-Fiscal Intervention
- Addresses imperfect information but not negative externalities
- Hard to reach target crowd
Mindsets hard to change (if people are already addicted and used to drinking)
· Fiscal intervention deals mainly with negative externalities + may have impacts on macro (unemployment)
· Non fiscal intervention can better address imperfect information