answer question 2

Extract 3 Chinese government to give $4.9bn to domestic formula milk producers Chinese formula milk producers, including Inner Mongolia Yili Industrial Group and China Mengniu Dairy, are set to get 30-billion yuan ($4.9 billion) in official funds to support mergers. The plan is to reduce the number of domestic formula milk producers in the highly fragmented market over the next five years from 200 to 50. This will create stronger sector leaders to increase the ability of companies to compete with international rivals who dominate the premium end of China's $12.4bn formula milk market. Chinese formula milk firms would gain the support in the form of government subsidies, funds from China Development Bank and favourable tax policies, the China Business Journal said. The total amount would be about 30-billion yuan, it said. 10 (Source: http://www.bdlive.co.za/world/asia/2013/09/23/ state-to-give-chinese-milk-powder-makers-4.9bn, September 23 2013, 09:05) Page 4 of 6 QUESTIONS (a) With reference to Extract 3, explain the type of integration involved between domestic formula milk producers in China. [2 MARKS] (b) With reference to Extract 3 and your own knowledge, examine the likely impact of government subsidies on the profits of Chinese formula milk producers. Use a cost and revenue diagram in your answer. [6 MARKS] "(c) Discuss why'price-fixing and anti-competitive behaviour' by foreign formula milk producers in China may have been possible (Extract 1, line 7). [9 MARKS] (d) Evaluate the likely impact of the 'E71 million' fines (Extract 2, line 2) on the price and availability of high quality formula milk. [9 MARKS] (e) What type of market structure characterises the Chinese formula milk production? On what grounds would you justify your answer? [7 MARKS] (f) Use economic theory to explain the fact that a tin of formula milk sold for f10 in Britain was selling for as much as f30 in China. [7 MARKS] TOTAL MARKS: 40