2010 Yr 5 H2 CT Qn Qn Analysis Examiners Comments

© DHS 2010 Year 5 H2 Economics (9732) 1

Dunman High School (Senior High) 10 Tanjong Rhu Road, Singapore 436895

2010 H2 Economics (9732) Year 5 Common Test Examinations

Question Analysis & Examiners’ Report Economics Department


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

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

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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


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

Source: Singapore Tourism Board, Monthly Digest February 2010

Data for February 2010 is based on preliminary data

$-

$50

$100

$150

$200

$250

$300

$350

Upscale Tier

Mid Tier

Economy Tier


Answer all questions

(a) (i) Describe the trend for visitor arrival in Figure 1 from January 2009 to

February 2010.

[1]

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

(b) (i) Compare the price elasticity of demand of consumers who “eagerly 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).

[1]

(ii) Justify your answer above. [2]

(c) (i) Examine how Marina Bay Sands can achieve a lower unit cost when it

becomes fully operational.

[4]

(ii) Using Extract 3, explain the two external economies of scale that the

Integrated Resort can gain with the expansion of the Singapore tourism

industry.

[4]

(d) (i) Using Figure 2, compare the average room rate of hotels in Singapore

between the upscale and economy tier.

[2]

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

(e) Discuss the threats that the Integrated Resorts have brought to the hotels in

Singapore.

[10]

Total: 30 marks


Question Analysis (Case Study)

Answer all questions

(a) (i) Describe the trend for visitor arrival in Figure 1 from January 2009 to

February 2010.

[1]

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

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).

[1]

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.


(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

becomes fully operational.

[4]

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

Integrated Resort can gain with the expansion of the Singapore

tourism industry.

[4]

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.


(d) (i) Using Figure 2, compare the average room rate of hotels in Singapore

between the upscale and economy tier.

[2]

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.


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

hotels in Singapore.

[10]

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.


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



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


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


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.


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]


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.


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)


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


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)


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.


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.


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.

Documents

2010 Yr 5 H2 CT Qn Qn Analysis Examiners Comments