RI Y5 H2 Promotion Examination - Examiner's Report 2019

1 ECONOMICS Higher 2 Syllabus 9757 Examiner’s Report Year 5 Promotional Examination 2019 R a f f l e sI n s t i t u t i o n N u r t u r i n g t h e T h i n k e r , L e a d e r & P i o n e e r TEL: 65 6419 9888 ● FAX: 65 6419 9898 http://www.ri.edu.sg ● One Raffles Institution Lane , SINGAPORE 575954

2 ECONOMICS Y5 H2 Promotional Examination 2019 Question 1 Case Study Note: Good sample scripts have been included in the examiner’s report. These good sample scripts are not model answers – there may still be room for improvement. What you can learn from them is that these students explained, not just stated, their points. They also made good reference to case material to link to their theoretical knowledge, choosing the most appropriate framework. (a) Using Table 1, compare the changes in general price and healthcare price levels in Singapore between 2011 and 2017. [2]  Similarity (1m): o Both healthcare costs and consumer prices increased between 2011 and 2017.  Difference (1m): o However, healthcare costs rose by a greater extent than consumer prices. Examiner’s comments:  No need to quote numerical values for the percentage changes. If quoted numerical values and the values are incorrect, full credit will not be given.  Many students quoted the absolute change instead of percentage change.  Some students erroneously compared across price indices to wrongly conclude that general prices were higher or lower than healthcare prices.  Some students gave a lengthy description without any explicit comparison. Brevity is the soul of wit, be more succinct.  Some students broke up the time range and provided similari ty and difference based on different periods, but at least one full time range comparison is required.  Some students described the relationships between the two price trends (e.g. positive relationship), but describing the relationship does not directly compare the direction of change.  Students who made explicit comparisons using comparative terminologies , e.g. Both / similarly/ however /in contrast, tend to score better than those who did not. Note the question requirement to ‘compare’. (b) Assess whether making patients pay for different prices for Class A and Class B2 wards (Table 2) is an example of price discrimination. [6]  Definition:  Price discrimination occurs when firms charge different consumers different prices for the same good, for reasons not associated with cost differences.  Thesis:  It is a case of price discrimination because SGH provides two different ward classes for consumers to make their choice based on their different PED. Demand for Class A wards is relatively less price elastic than demand for Class B2 because high-income who self-select into Class A wards spend a smaller proportion of their income on hospital bills. Demand for Class B2 wards, on the other hand, is relatively more price elastic than demand for Class A because lower-income who self-select into Class B2 wards spend a larger proportion of their income on hospital bills. Thus, the price for Class A wards is higher than Class B wards

3 because price discrimination allows the hospital to capture consumer surplus which will add on to its TR, and in turn its total profits.  Assuming that the marginal costs (MC) of providing services to both Ward A and Ward B are the same, by equating the MC with the marginal revenue (MR) in both markets, at the profit- maximising output level in both wards, the profit -maximising price will be higher in the submarket with the relatively less price elastic demand. Hence, a higher price will be charged for Ward A than for Ward B.  Anti-thesis:  However, t here are significant cost differences e.g. providing air -conditioning to Class A wards and choice of meals will incur more costs than a non -aircon ward with no meals through higher electricity bills and/or resource and labour costs in meal preparation.  OR The different wards are not the same good because the experience is different, for e.g. Class A ward offers more personalised services than Class B2 ward.  Synthesis:  In conclusion, whether it is an example of price discrimination is difficult to ascertain because it depends on whether the cost difference justifies the price difference.  If the cost difference is much less than the price difference, then there is an element of price discrimination. Suggested mark scheme:  Listing throughout or glaring conceptual errors throughout or lacking in application to context, max 2m  Journalistic throughout, that is, lacking in rigour in economic analysis 1-3m  One-sided answer that provides rigour in economic analysis, max 4m  No synthesis, max 5m  To secure max 6 marks, a balanced response that provide rigour in economic analysis and a synthesis 4-6m Examiner’s comments:  Weaker answers for this question did not manage to provide a two -sided argument with a final synthesis for “assess whether” command word.  Students who scored well for this question typically considered PED/segmenting the market, cost differences and explained why on balance, this was or was not price discrimination. This was done by briefly accounting for whether the price indeed is justified by the cost difference.  No need to identify which degree of PD to secure full credit.  Diagram is not required.  Monopoly power and no resale point to ability to PD, but not whether the different prices is an example of PD. Listing conditions for price discrimination is not enough to score for this question. Conditions are necessary for price discrimination but is insufficient to show that it is actually price discrimination. To put it in another way, there are many firms who possess these conditions but do not price discriminate.  On that note, dismissing conditions for price discrimination, however, is sufficient to show that this is NOT price discrimination. Good sample script: Price discrimination refers to charging different prices for the same good, whereby the price differences are not reflected by the cost differences. Precise definition

4 Making patients pay for different prices for Class A and Class B2 wards may be an example of price discrimination because of the difference in price elasticity of demand (PED) for different groups of consumers. PED is the measure of responsiveness of quantity demanded of a good to a change in its price, ceteris paribus. Those who choose ‘more luxurious care’ (extract 2) in Class A wards are usually the higher income groups whose demand for such wards is price inelastic. This is because the price of healthcare takes up a smaller proportion of their income than those from the lower income group. Thus the price of Class A wards is higher. On the other hand, lower-income groups have to spend a larger proportion of their income on healthcare, hence their demand is relatively more price elastic so they are charged a lower price for Class B2 ward s. Thus difference in price for Class B2 and Class A is due to difference in PED. Clear reference to PED determinant and hence price charged However, there are differences in cost of providing services of Class A and Class B2 wards. In Table 2, Class A wards have single rooms, air-condition, attached bathroom and a choice of meals while Class B2 has 5 or 6-bedded rooms with natural ventilation. Thus, the re is an obvious difference in cost of providing these wards as more resources such as electricity in air -conditioning and labour costs to provide a higher variety of food for those in Class A, whereas Class B2 requires less as their resources are shared b etween more patients. Hence it would cost more to provide Class A services than Class B2 services, thus