SAJC 2024 JC2 H1 Econs CSQ Prelims Suggested Answers

St Andrew’s Junior College JC2 Preliminary Examinations H1 Economics (8843/01) Suggested Answers

2 © SAJC 2024 8843/01/Aug/24 Question 1: E-books - a tale of digital disruption, and the expansion of Integrated Resorts Suggested Answers (a) With reference to Extract 1, Figure 1 and using a supply and demand diagram, account for the change in pricing of e-books in Germany from 2010 – 2019. [5] Changes in tastes and preferences following the rise in popularity of mobile devices and e - readers have led to an increase in demand, from D1 to D2. Tech advancement, fall in COP resulting in an increase in supply, resulting in a rightward shift from S1 to S2. Assuming that the increase in supply outweighs the increase in demand given the leap in technological advancement, At the original equilibrium price, there is a surplus which exerts a downward pressure on the prices of e-books. There was a fall in prices of e-books from P1 to P2. [DDSS Diagram] (b) “According to the German industry association for booksellers, the average price level for e -books increased by 4.9 percent to 6.63 Euros in 2020, attributed to 'gross profiteering' from e -book publishers. These publishers trawled through university reading lists, identified the commonly used textbooks, classified them as essential and raised the price of these e-books.” Explain how the above strategy led to ‘gross profiteering’ and comment on whether the strategy is the only reason for the increase in e-book publishers’ profits. [6] • By classifying commonly used textbooks as essential, this raises its degree of necessity. • Demand for e-textbooks is price inelastic (|PED|<1). A rise in price will result in a less than proportionate decrease in quantity demanded. • Producers will thus adopt the strategy of increasing prices. The increase in TR from increase in price > decrease in TR from less than proportionate decrease in quantity demanded. • Since profits = TR – TC, assuming that total costs remain constant , there will be an increase in profits earned by e-textbook publishers. • Given that there was an increase in demand following consumers’ raised perception of benefits and willingness to pay for e-books, this resulted in an increase in equilibrium price and quantity, and thus an increase in revenue. • Additionally, this is not the impact on all e -books, only those identified as essential textbooks. • The increase in e -book publishers’ profits can also be due to a fall in TC arising from technological improvements. (c) Using the information in Extract 2, explain whether knowledge possesses the characteristics of a public good. [4] • Non-excludability occurs when there is no effective way to restrict the benefits of public goods to only those who pay for them. • It would be difficult to restrict the sharing of knowledge, or gaining of information, among individuals (e.g. peers, teachers) who have access to them. • Non-rivalry in consumption means that the consumption of the good by one party does not reduce the amount available to others. • The knowledge gleamed from e-books does not diminish from one reader to another. One reader’s knowledge of a fact does not diminish another’s. S2

3 © SAJC 2024 8843/01/Aug/24 (d) ‘Though often underappreciated, libraries remain valuable to individuals and the communities they serve ….’ (Extract 3) Identify and briefly explain two sources of market failure with regards to library services. [5] • Imperfect information/ Information failure is present in the consumption of library services. • Individuals often underestimate the true marginal private benefit of going to the libraries to themselves, such as the long-term benefits of acquiring knowledge which can result in higher levels of income and better job opportunities. • Positive externalities in the consumption of library services • By increasing the ir level of knowledge via visiting the libraries, library users generate positive spil lovers to non-users of library services, e.g. third parties such as their employers or families. This can come in the form of higher productivity of library users generating increased output and profits for their employers (third party). • This results in under-consumption of library services (Qp < Qs) and there is deadweight loss to society, i.e. allocative inefficiency as society’s welfare is not maximised. (e) Extract 3 mentions that with a ‘strong commitment to human capital investment – for the broad majority of the population – skills and wages improve, along with living standards.’ Evaluate the impact of government investments in libraries aimed at improving the standard of living of residents. [8] [First Requirement] Government investments in libraries improves material and non - material SOL. Through an increase in AD and AS from government investments in libraries, there will be an improvement in the material SOL of residents. • An increase in government expenditure will result in an increase in AD, from AD1 to AD2. The initial increase in AD (due to the increase in C/I/G/(X -M)) will lead to a rise in output and NY. The rise in output leads to a further rise in factor incomes as more factors of production are employed. This will cause households to increase their consumption. This subsequent rise in induced C will lead to a further rise in AD and hence NY, which leads to further rounds of increases in induced C. Therefore, there is a more than proportionate rise in NY via the multiplier effect. • At the same time, an increase in knowledge acquisition improves the productivity of labour. As labour productivity improves, each worker is assumed to be able to produce a larger quantity of output per hour, thus lowering the unit cost of production. • This is represented by the rightward shift of the LRAS curve. Furthermore, by investing in human capital via the building of libraries, this will increase the skill and thus quality of labour, increasing productive capacity and LRAS. • Assuming population size increases at a lower rate than real GDP, there is an increase in real GDP per capita. This results in an improvement in material SOL since there would be more goods and services available for consumption per person in the country. Furthermore, there will also be an improvement in the non-material SOL of residents. • With greater employment opportunities brought about by the investment in human capital through libraries, this could lower the levels of anxiety associated with high unemployment, reduce crime rates and improve the safety of residents.

4 © SAJC 2024 8843/01/Aug/24 • Greater knowledge acquisition can improve one’s knowledge against scam and crime prevention, improving non -material SOL especially for the growing size of greying population. [Second Requirement] Government investments in libraries may not improve material and non-material SOL. • Financial crowding out effect could limit the extent of increase in RNY. In countries like the United States which has high levels of debt (Extract 3), the government may borrow money to finance the increase in