New Zealand’s supermarket industry is dominated by two huge firms, Foodstuffs and Woolworths.

Together, their stores control about 85 % of the total market, giving them significant market power.

A report by the New Zealand Commerce Commission has found that these supermarkets are
making huge profits and charging some of the highest prices in the OECD².

A government official said the government would “do whatever it takes to make sure New
Zealanders get a fair deal at the checkout”.

The major retailers appear to avoid competing strongly with each other, particularly on price.
Meanwhile, competitors wanting to enter the market or expand face significant barriers to entry,
including a lack of suitable sites for large scale stores.

The government has strict regulations limiting the sites that can be used for building supermarkets.
The big supermarkets have been buying the limited sites in order to prevent competitors from
entering the market.

It has been reported that the entry of a German retailer into the Australian supermarket industry,
which was also dominated by two firms, has increased competition, cut prices by around 13 % and
saved customers more than NZ$2 billion per year.

-----------------------------------------------------------------------------------------------------------------------------

¹ duopoly: a market dominated by two firms

Figure 2 illustrates a market in which two firms act as a monopolist in the market for cheese by
colluding on the price they charge.

Figure 2
(a.iii)

Calculate the revenue per kilogram (after tax has been paid) to producers when the price is NZ$24
per kg.

[2]

(a.iv)

With reference to Figure 1, explain why the price elasticity of demand for capsicums would change
if the price continued to increase beyond NZ$24 per kg.

[4]
(a.vii)

Using the data provided in Figure 2, calculate the profit earned by these firms if they are operating
at the profit-maximizing level of output in the market for cheese.

[2]
2.

“Best Meals” is one of many small catering companies, each of which prepares a variety of
different meals for airlines in Country X. Table 1 shows the costs of production in US dollars (US$)
on a per hour basis for “Best Meals”.

Table 1

(a.i)

Determine the missing cost figures and insert your answers in Table 1.

[2]
The catering companies buy tomatoes from the domestic market to prepare their meals. Figure 1
illustrates the domestic market for tomatoes, which is perfectly competitive. S is supply and D is
demand.

Figure 1

In order to support the incomes of the tomato farmers, the government of Country X has set a price
floor (Pmin) at US$2.80 per kilogram.
(a.v)

Calculate the indirect tax paid by airlines for the catering meals they bought in 2021 if the domestic
indirect tax rate on food was 6.5 % and their expenditure on meals was US$54 506.70.

[2]

The information that follows refers to the aviation industry, which is considered a significant
contributor to global warming and climate change.

Table 2: Energy used and carbon dioxide (CO2) emissions for rail travel and air travel

______________________________________________________
1
joule: a standard unit of energy
2
passenger kilometre: one passenger travelling one kilometre

Table 3: Estimates of price elasticities of demand (PED) for leisure and business air
travel and estimates of income elasticities of demand (YED) for domestic
and international air travel routes
The Economist Intelligence Unit is predicting that between 2020 and 2030, global incomes will rise
on average by 3 % annually.

(a.vii)

Using relevant information from Table 3, describe the expected impact this rise in global incomes
will have on the demand for domestic routes in relation to the demand for international
routes.

[2]
(b)

Using the text/data provided and your knowledge of economics, recommend a policy that may be
implemented to reduce the contribution of emissions the aviation industry makes to global
warming.

[10]
In New Delhi, India’s capital city, 45 % of workers use cars to travel to work, while 89 % of workers
indicate plans to purchase a car in the next five years. However, 80 % of car users say they would
change their plans if ridesharing businesses such as Uber could meet their requirements on price,
timeliness and availability.

(a.i)

Using a diagram and the information above, explain why traffic congestion in India may be
considered an example of market failure.

[4]
Figure 2

(a.ii)

On Figure 2, draw the market supply curve without the indirect taxes for petrol in New Delhi.

[2]
(a.v)

Using Figure 2 and your answer to part (a)(ii), show that in the absence of indirect taxes the supply
of petrol in New Delhi would be price inelastic.

[2]

(a.vi)

Using Figure 2 and the information in Table 4, calculate the total profit earned by petrol suppliers in
New Delhi per day.

[2]
(a.viii)

With reference to the use of cars in India, explain how one limitation of the assumptions of rational
consumer choice might result in the overuse of cars in New Delhi.

[4]

[Source: © The Times of India, Dash, D.K., 2018. ‘Traffic congestion costs four major Indian cities
Rs 1.5 lakh crore a year’
[online] Available at: https://timesofindia.indiatimes.com/india/traffic-congestion-costs-four-
major-indian-cities-rs-1-5-lakh-crore-a-year/articleshow/63918040.cms [Accessed 20 April 2020].
Source adapted.]

(b)

Using the text/data provided and your knowledge of economics, recommend a policy which could
be introduced by the government of India in order to address the problem of traffic congestion
in New Delhi.

[10]
(a)

Assuming that 25 000 pencils are produced initially, identify the opportunity cost for Country H if
the production of rice is to be increased by 100 %.

[1]

(b)

State one reason why the production possibility curve (frontier) for Country H might shift outwards.

[1]
(e)

Country D is an economically less developed country that specializes in the production of primary
products.

Explain two implications for Country D of a relatively low income elasticity of demand for its
primary products.

[4]

(f)

Good A and Good B are in joint supply.

Using a diagram to support your answer, explain the impact on the market for Good B of an increase
in the price of Good A.

[4]
The government of Islandia wants to reduce the price of rice by 40 % in order to enable low-income
households to buy enough rice to meet their needs. The government decides to achieve this by
imposing a maximum price.

(g)

Calculate the shortage resulting from the imposition of the maximum price.

[1]
(k)

With reference to Figure 2, outline why the imposition of a maximum price might lead to the
creation of a parallel market.

[2]

(l)

Explain one reason, apart from the possible creation of a parallel market, why the imposition of a
maximum price for rice in Islandia might not enable low-income households to buy enough
rice to meet their needs.

[2]
Calculate the social (community) surplus in the market for cotton in San Marcus.

[2]

The Government of San Marcus decides to provide a subsidy equal to $8 per kilogram to its
producers of cotton.

(b.i)

Draw and label the new supply curve following the granting of the subsidy to domestic cotton
producers on Figure 3.

[2]

(b.ii)

Calculate the cost to the government of San Marcus of providing this subsidy to domestic cotton
producers.

[2]

(b.iii)

Calculate the resulting change in producer surplus following the introduction of the subsidy to
cotton producers in San Marcus.
San Marcus now joins the World Trade Organization (WTO) and agrees to slowly liberalize trade,
becoming an open economy.

(d)

State two functions of the WTO.

[2]

The world price for cotton is $2 per kg. The WTO permits the government of San Marcus to maintain
the $8 subsidy.

(e.i)

Plot and label the world cotton supply curve that San Marcus now faces on Figure 3.

[1]

(e.ii)