EJC Econs 2023 A-Level H2 P1 Q1 - students

Suggested Answers for 2023 A-Level H2 P1 Qn 1: Costs and benefits of education (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] An average graduate in the US with a Bachelor’s degree has higher weekly earnings compared to an average school leaver who has a High School Diploma. An average graduate in the US with a Bachelor’s degree should also expect to experience a lower probability of unemployment compared to an average school leaver who has a High School Diploma (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] According to Extract 1, the marginal private cost of higher education, comprising tuition fees, other costs like travel and wages foregone, are substantial. As a result, due to the higher costs involved in attaining a Professional degree compared to a Bachelor’s degree, individuals are less willing and able to undertake a Professional degree and supply their labour at each wage level. Figure 1 The supply of graduates with a Professional degree is thus lower than that with a Bachelor’s degree as shown below. Assuming that demand for labour remains the same at DD0, equilibrium wage of graduates with a Professional degree, W P, is higher than that of graduates with a Bachelor’s degree, WB. (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 cost is defined as the value of the next best alternative that is foregone. According to Extract 4, “Parents may need their children to work to supplement the household income”. The opportunity cost of free schooling are the wages foregone by t he student if he attends school rather than going for work assuming that the next best alternative is going to school. The wages foregone could have been essential for the survival of the family in the short run, making free schooling unaffordable.

(d) Explain how asymmetric information may lead to wrong choices in the market for education. [4] Asymmetric information refers to a situation where one party in the economic transaction has more information than the other party. In other words, 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. As suggested by Extract 4, parents may have lower levels of information regarding the quality of education at a school compared to the teachers or the principal there. Parents thus perceive the benefits of education, an example being the possible higher wages their children may enjoy, to be lower than it actually is. This makes parents underestimate actual marginal private benefit MPB(actual) of education for their children, causing MPB( actual) to be higher than MPB(perceived). Figure 2 In Figure 2, assuming no externalities, MPB(actual) equals to marginal social benefit (MSB), and marginal private costs equals to marginal social costs (MPC=MSC). MPC is the cost of education, an example being school fees. Parents will thus have their children consume up to Q P where MPB(perceived)=MPC. However, the socially optimal output is QS where MSB=MSC. This causes an under-consumption of QPQS. Between QP and QS, Area QPGFQS which is the total social benefit is greater than area QPEFQS which is the total social cost. This means that societal welfare could have been gained by increasing quantity consumed up to the socially optimal output of QS. This forgone societal welfare is the deadweight loss (area EFG) due to under-consumption of and under -allocation of resources to education, leading to allocative inefficiency and hence market failure. (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] Command Discuss whether Start Point Concentrate increased spending on primary education End Point R1: Benefits of concentrating increased spending on primary education (should) R2: Costs of concentrating increased spending on primary education (should

not) Content Marginal External Benefit, Marginal Social Benefit, Marginal Private Benefit Context Government of low-income country; Market for education As shown in Table 1, spending on education at all levels (from primary to higher) results in not only strong private returns but also results in social returns (positive externalities in consumption as defined in E xtract 2). Private returns could refer to greater employment opportunities, higher future income and social standing. On the other hand, social returns refer to benefits to external parties such as employers, in terms of higher labour productivity and lower costs of production and higher profits. R1: Should concentrate increased spending on primary education (Benefits) As shown in Table 1, t he extent of external benefits of spending on primary education (PE) (22.1%) is higher than spending on higher education (HE) (13.2%). As shown in Figure 3 below, the marginal external benefit (MEB) of primary education consumption, shown by vertical distance EF, is higher than the MEB of higher education, shown by vertical distance (AC). Figure 3 Rational consumers of primary education will consume up to Q P(PE), where MPB(PE) = MPC so as to maximise utility. However, at QP(PE), MSB(PE) > MSC i.e. society values each additional unit of PE more than the cost of consuming that unit and will be better off if consumption of PE is increased to QS(PE) where MSB(PE) = MSC i.e. a DWL of area EFG exists. Using similar analysis, QP(HE) is at where MPB (HE) = MPC and QS(HE) occurs where MSB(HE) = MSC. Society will be better off if consumption of HE is increased to QS(HE) where MSB(HE) = MSC i.e. a DWL of area ABC exists. Since there is higher DWL related to the consumption of PE, it can be argued that the government of a low-income country should concentrate an increase on spending on education on primary education. This can possibility be done by subsidising education consumption, which will reduce the MPC and increase consumption to Q S(PE). Cost/Benefit Quantity of primary and higher education 0 MPB(HE) Q P (PE) Q S (HE) MPC=MSC MPB(PE) A B C MSB(HE) MSB(PE) Q P (HE) E F G Q s (PE) MEB(PE) MEB(HE)

R2: Should not concentrate increased spending on primary education (Costs) On the other hand, the private returns of higher education (26.8%) is more than private returns of primary education (25.4%), as show in the diagram above, where MPB (HE) > MPB (PE). Thus, even though the MEB (PE) > MEB (HE), the MSB(PE) is only greater than the MSB (HE) to a smaller extent (since MSB = MPB + MEB) i.e. the deadweight loss is not as large as it could have been. Thus, even though more resources should be allocated to PE, there should still be some resources that is allocated to the provision and consumption of HE, since there is still the presence of DWL in the market for HE. Similarly, governments could provide subsidies (reducing MPC) to HE students to increase the consumption of HE to Q S(HE). Note: the precise explanation (requiring the contrast of the different deadweight with higher vs lower MPB) would be technical, and not required for the exams, as it would require too much time for a proper analysis. However, interested students can still try to do their own analysis. SEV In conclusion, governments in low-income cou