AJC H1 ECONS P1 Answer

2018 JC2 H1 Economics Preliminary Examination – Sample Answers Anderson Junior College Economics Department Page 1 Anderson Junior College JC2 2018 H1 Economics Preliminary Examination Case Study Question 1 – Aging population: Burden or opportunity? a (i) Describe the trend for the health spending in Japan from 2000 – 2017. Trend: increasing from 2000 – 2017 1 (ii) Discuss how far the concept of price elasticity of demand may account for the above trend in health spending. P1: The concept of PED may account for the above trend Shrinking workforce  fall in SS  price increase. As 0 < |PED| < 1 (lack of substitutes)  increase in price will lead to a less than proportionate decrease in quantity demanded  increased in total expenditure  account for the increase in health spending P2: However, the concept of PED may not account for the above trend  Limitation of ceteris paribus assumption or PED could actually be more than one (|PED| > 1 due to substitutes available such as robotics)  price increases  increase in price will lead to a more than proportionate decrease in quantity demanded  total expenditure will actually decrease  cannot account for the increase in health spending In addition, other factors may account for the above trend Increase in demand due to aging population (Ext 1)  increase demand  equilibrium price and quantity increase  total expenditure increases EV: Make a stand and justify E.g., demand factor more significant as population “rapidly greys” (Ext 2) E.g., more information needed, for instance on the PED value Mark scheme: Level Knowledge, Application, Understanding and Analysis Marks L2 An answer that clearly explains with economic framework on how PED may account for the trend 4-6 L1 An descriptive answer with multiple basic conceptual errors on how PED may account for the trend 1-3 Evaluative comment Up to 3 further marks for an evaluative appraisal of possibly which factor is the main factor 9 b With reference to data, discuss the likely effects of a shrinking workforce in Japan and technological advancement on the robotics market. 8

2018 JC2 H1 Economics Preliminary Examination – Sample Answers Anderson Junior College Economics Department Page 2 Shrinking workforce (Ext 1)  fall in supply of labour  wages increase Thus demand for robotics which are substitute for labour will increase (Ext 4: funding development of elder care robots to help fill a projected shortfall of specialised workers)  shift DD curve to the right Tech advancement  fall in unit COP  more profitable  increase in SS  shift SS curve to the right P1: increase in DD > increase in SS  equilibrium P and Q increase It takes time to develop and create robotics suitable for different types of healthcare services, coupled with the aging population. It is likely that increase in demand will outweigh the increase in supply in the SR. Hence, equilibrium price and quantity will increase (Fig 1). P2: increase in DD < increase in SS  equilibrium P falls, Q increases Once the technology is fully developed, they may be able to produce more robotics. Hence it is likely that increase in supply will outweigh the increase in demand in the LR. Hence, equilibrium price will decrease while equilibrium quantity will increase (Fig 2). Evaluation Ext 2: With the rapidly aging population and, as the robotics are seen as a close substitute to the workers, demand for the robotics will increase significantly. However, given the existing technology, supply of robotics is

2018 JC2 H1 Economics Preliminary Examination – Sample Answers Anderson Junior College Economics Department Page 3 unlikely to increase significantly. Hence the increase in demand is still likely to persist and outweigh the increase in supply. Hence, equilibrium price and quantity will increase. Level Knowledge, Application, Understanding and Analysis Marks L2 An answer that clearly discusses the different impact on the robotics market 4-6 L1 An answer that is descriptive without much economic framework linking the factors to the robotics market 1-3 Evaluative comment Up to 2 further marks for an evaluative appraisal of possibly which factor is the most significant and hence eventual impact on the market c Explain two possible changes that may occur to the demand curve of healthcare workers given the introduction of robots. Robots are deemed as substitutes for healthcare workers (Ext 4: development of elder care robots to help fill a projected shortfall of 380,000 specialised workers)  increase in supply of robots causes fall in price of robots  increase in quantity demanded of the robots  fall in demand for the healthcare workers  leftward shift of the demand curve. With the introduction of robots, there are now more substitutes available, therefore demand for healthcare workers also becomes more price elastic/less price inelastic  demand curve becomes gentler / less steep. 4 d What is the main characteristic of a normative economic statement? Identify one example of such a statement from Extract 3. A normative economic statement expresses value judgements (opinions) about economic fairness or what the outcome of the economy and policy measure(s) ought to be. One example is “So, Japan’s demography, paradoxically, is not an onus, but a bonus”. Other accepted statements: - “Prime Minister Shinzo Abe said Japan’s aging, shrinking population was not a burden, but an incentive to boost productivity through innovations.” - “ I have absolutely no worries about Japan’s demography.” 2 e Is a publicly funded nursing facility an example of a public good? Provide reasons for your answer. Public goods exhibit both characterist ics of non-excludability (NE) and non-rivalry (NR) in consumption. Excludability  an elderly’s consumption of the nursing facility is made contingent on payment, while other individuals who do not pay for the 4

2018 JC2 H1 Economics Preliminary Examination – Sample Answers Anderson Junior College Economics Department Page 4 nursing facility can be effectively excluded from enjoying the benefits  can exclude non-payer from staying in the public nursing home AND Rivalry in consumption  the consumption of the nursing facility by one elderly reduces the amount of benefit that is available to others. Conclusion  since publicly funded nursing facilities do not fulfil characteristics of NE and NR, they are not an example of a public good. f (i) Explain why the operation of a free market may lead to the under- provision of nursing facilities and how a subsidy can help to address the problem. In deciding how much nursing facilities to consume, rational consumers will only weigh their marginal private benefit (MPB) against marginal private cost (MPC) of consuming nursing facilities in order to maximise their utility . The private benefits include the utility gained/ care given, while the private costs include the cost of nursing facilities. Taking these private benefits and private costs into consideration, consumers will then decide to consume nursing facilities up till Q e where their MPB = MPC in order to maximise their utility (Fig 1). In addition, when consuming nursing facilities, positive externalities are incurred. Positive externalities are the benefits to third parties that are not taken into account by those who undertake the activity such as lessening the burden on the families who are the third party, higher productivity for the family members as they do not have to take time off to take care of elderly (Ext 5: “shift the responsibility of supporting the elderly away from the families”). Presence of externality leads to a divergence between marginal social benefits (MSB) and MPB. Due to the divergence, MS