HCI 2023 Econs Suggested Case Study Answers updated (students)

Suggested Answers to A Level 2023 H2 Economics (CASE STUDIES) by Hwa Chong Institution Economics Unit 2023 A-Level Case Study Question 1 (a) With reference to Figure 1, compare the potential benefits for a graduate in the US with a Bachelor’s degree to a school leaver who has a High School Diploma. [2] The average weekly earnings for a graduate in the US with a Bachelor’s degree is higher than a school leaver with a High School Diploma. [1] The rate of unemployment for the former is lower than the latter. [1] Note: Two differences are provided since there is no similarity. (b) With reference to Extract 1 and using a supply and demand diagram, explain one possible reason for the higher average earnings of graduates with a Professional degree compared to those with a Bachelor’s degree. [3] Assume that the supply of graduates with Professional degree is the same as supply of labour with a Bachelor’s degree. Since rate of unemployment for graduates with a Professional degree (3.1%) is lower than graduates with a Bachelor’s degree(5.5%), this suggests that the demand (DD2) for graduates with a Professional degree is higher than graduates with a Bachelor’s degree (DD1). [1] The higher demand for graduates with a Professional degree compared to graduates with a Bachelor’s degree could be due to the higher level of productivity of the former compared to the latter. [1] As shown in the diagram below, the average earnings of graduates with a Professional degree is higher (W2) than graduates with a Bachelor’s degree (W1). Wage(average earnings) SS W2 W1 0 L1 L2 Labour DD1 DD2

Suggested Answers to A Level 2023 H2 Economics (CASE STUDIES) by Hwa Chong Institution Economics Unit Explanation of diagram [1] Note: The question stated ‘a supply and demand diagram’ hence only one diagram is used (although 2 DD- SS diagrams should be shown). Alternative answer: The marginal private cost for higher education is higher as suggested in Extract 1 where in para 2, these cost includes explicit costs like tuition fees and also implicit cost of wages forgone. The higher private cost will cause supply of workers with a Professional degree to be lower than the supply of workers with a Bachelor’s degree. Hence, wages for workers with Professional degree will be higher compared to that of a Bachelor’s degree, assuming same demand. (c) ‘Opportunity costs may make even free schooling unaffordable for some families.’ (Extract 4) Explain one example of an opportunity cost that might make free schooling unaffordable. [3] Opportunity costs measure the cost of making a choice, in terms of the next best alternative foregone. [1] For children from poor families, they have the choice of either attending school or work. If they choose to attend school, they would forgo the next best alternative, which is the number of work hours forgone. [1] Although schooling could be free, these poor families would forgo the earnings from work. This implies that free schooling is unaffordable for poor families. [1] (d) Explain how asymmetric information may lead to wrong choices in the market for education. [4] Asymmetric information arises when the economic agents (e.g. consumers and producers) involved in the transaction do not have the same amount of knowledge, resulting in a distortion of incentives and inefficient market outcomes. Adverse selection occurs when a good is mainly bought or sold by a certain segment of the more informed party that would harm the uninformed party. [1] Education providers have more information regarding the quality of education than parents. In order to profit from the provision of education, the providers might hide some of the information they have about the quality of education from potential parents/children. [1] Potential parents/children take this into consideration in the decision-making process, and tend to lower the price that they are willing to pay for education in view of the possibility that they would be getting poor quality education (inferred from Extract 4, para 4). At this lower price, good education providers are unwilling to provide their services, resulting in an education market where only lower quality education is provided. [1]

Suggested Answers to A Level 2023 H2 Economics (CASE STUDIES) by Hwa Chong Institution Economics Unit Asymmetric information thus results in the market for education adversely selecting against higher quality education in favour of lower quality education. [1] (e) The government of a low-income country wishes to increase spending on education. With reference to Table 1, discuss whether the government should concentrate this increase in spending on primary education. [8] The increase in government spending on education is assumed to be the increase in government subsidies on education. The discussion is based on the concepts of positive externalities, where the free market equilibrium price of primary education is deemed to be high while quantity of primary education consumed is low. R1: The government of a low-income country should concentrate this increase in spending on primary education. The private return of primary education for low-income countries is 25.4% while the social return of primary education is 22.1%, which is the highest compared to secondary and higher education. Primary education has the highest MEB compared to secondary and higher education, this implies that there is a highest level of divergence between marginal private benefit (MPB) and marginal social benefit (MSB), since MSB=MPB+MEB, resulting in the largest DWL amongst the three. Hence, the government should concentrate the spending on primary education in terms of subsidy to eliminate the DWL. As shown in the diagram below, the government of a low-income country might give a subsidy to producers corresponding to the external marginal benefit i.e. subsidy = MEB at Qs on each unit of primary education produced. This shifts the MPC downwards so that the new MPC, which equals MPC – subsidy, coincides with the MPB at Qs. Hence, the new market equilibrium quantity where MPB = MPC – subsidy, now coincides with the socially efficient quantity Qs, where MSB = MSC. If the subsidy accurately reflects the external marginal benefit, the price consumers are paying for primary education is now lower at Pm’, compared to Pm before the subsidy. To encourage more families to send their children for primary education, the government of a low-income country should concentrate this increase in spending by increasing subsidies on primary education.

Suggested Answers to A Level 2023 H2 Economics (CASE STUDIES) by Hwa Chong Institution Economics Unit R2: The government of a low-income country should not focus increase spending on primary education. Since the private return for primary education is high (25.4%), the low income group has the incentive to consume primary education even without government subsidy. In addition, the private cost of primary education is low hence without government subsidy, primary education should be affordable among the low income group. Therefore, the government of a low-income country should not focus increase subsidies on primary education. Summative Conclusion While primary education can be argued to be affordable to the low income group, the marginal external benefits are likely to be higher than estimated. The marginal external benefits for education could be 50% higher than estimated (Extract 2) thus this imply that the MEB at Qs is likely to be underestimated. If the government of a low-income country aims to achieve the socially efficient level of consumption (Qs), the amount of subsidy ought to be higher than estimated. Since there are large external benefits to society and MEB at Qs is likely to be larger than estimated, the g