MJC H2 ECONS CSQ1 Q A

JC2 H2 Prelim Exam 2018 Case Study Q1 Education Suggested answer scheme: (a) (i) With reference to Table 1, compare the government expenditure per student on primary and university education in Singapore between 2010 and 2016. [2] • Similarity: Government expenditure per student on primary and university education both increased overall during 2010 to 2016. • Difference: - Expenditure per student on primary education has always been lower than that on university education. OR - The increase in expenditure per student on primary education is around 10 times more than that on university education. (ii) Explain one possi ble reason for the difference observed in (a)(i). [2] For 1 st difference - The expenditure on university education on a per student basis has always been higher than that for primary education: The cost of university education has always been higher than that of primary education due to the need for research fa cilities and equipment, payment of salaries to professors (who are mo re highly trained/skilled and command higher wages), etc. However, university class sizes are smaller compared to primary schools, leading to a higher government expenditure per student on university education compared to pr imary education throughout the time period. OR For 2 nd difference above - The increase in expenditure per student on primary education is more than that on university education: This may be because the government has perceived the extent of the market failure in primary education to be larger over the years. This is because the external benefit of pr imary education to the whole population is large compared to its private benefits, whereas the larg e private benefits of university education incentivise individuals to pursue higher education (Ext 2). (b) With reference to Extract 2, expl ain how investment in human capital can ‘raise incomes for the whole economy’. [4] Investment in human capital would mean increased spending on education and training of labour, which increases quality of labour due to productivity gains (Ext 2). This leads to an increase in productive capacity of the economy. As a result, the LRAS increases, leading to potential growth as full employment level of output increases. As the Singapore economy operates close to full capacity, AD is high enough. Moreover, the rise in G on education and training in the short run will cause AD to rise and be high as well. This causes the potential growth to be actualised. The increase in real output leads to firms hiring more labour and hence wages rise in the economy, leading to an increase in real incomes, which ‘raises incomes for the whole economy’.

JC2 H2 Prelim Exam 2018 Case Study Q1 Education (c) Use the concept of opportunity cost to explain one possible effect on each of consumers of education and the US government due to the ‘rising student debt levels’ described in Extract 3. [4] • Interpret rising student debt level: The increase in price of university education in US has led to more students taking loans to fund their education. • Define opportunity cost (or embed definition in answer): Opportunity cost refers to the highest valued alternative that is sacrificed when an option is chosen. • Effect of rising student debt levels on consumers of education: With rising student debt levels, consumers of education (high-school students) have to make a choice between pursuing higher education or going to work, as suggested in Extrac t 3. If they choose to pursue higher education, the opportunity cost would be the income earned from working (next best alternative) that is foregone. OR With rising student debt levels, st udents have to choose to continue education and hence incur the debt or use the money to spend on other goods and services e.g. graduation holiday trip. Therefore, the opportunity cost of choosing to service the risi ng debt is the satisfaction from the graduation holiday trip that is forgone. • Effect of rising student debt levels on US government: Rising student debt levels would mean that the government would need to raise the amount of financial aid to keep higher education affordable, as suggested in Extract 3. Thus, with a limited budget, the government would have less to spend on other sectors such as healthcare (next best alternative) when they choose to spend more on financial aid for university students. The opportunity cost would t hus be the benefit to society from spending more on healthcare that is foregone. (d) Assess whether supply factors, rather than demand factors, are the key cause of rising price of university education in Singapore. [8] Identify supply factors: • Ext 1: Increased labour costs, cost to university of owning and maintaining buildings, covering utilities and buying research equipment. These would lead to a rise in unit COP, lowe ring profit per unit and hence causing producers to reduce qty supp lied at every price. Th is leads to a fall in supply of university education. • Ext 1: subsidies on university education. This leads to a fall in unit COP, thereby causing an increase in SS. • Overall, supply of university educat ion is likely to have fallen since the ‘large’ rise in labour costs along with other costs stated above may outweigh the effect of subsidies on university education, which are most likely increasing marginally by ar ound 6% over the years based on the increase in govt spending per student (Table 1). Identify demand factors: • Ext 1: Singapore's median household income grew 10%.

JC2 H2 Prelim Exam 2018 Case Study Q1 Education Table 2: increase in Singapore’s GDP per capita. These suggest an increase in inco mes and hence purchasing power of consumers, increasing the demand for university education, assuming it is a normal good (YED>0). • Ext 2: A greater desire for personal fulfilment and increased desire to learn specialised skills. These would lead to a further rise in demand due to increased preference for higher education. Thesis: Supply factors are more important than demand factors • [Fall in SS & MAP] With the overall fall in s upply of university education from S1 to S2 (Fig 1), at the initial price P1, there is a shortage of E1A. This leads to an upward pressure on price. As price rises, quantity demanded starts to fall and quantity supplied starts to rise until a new equilibrium is reached at E2 where the shortage is eliminated. At the new equilibrium, price has increased from P1 to P2 and quantity has fallen from Q1 to Q2. Fig. 1 • [Rise in DD] At E2, with the rise in deman d for university education from D1 to D2, the resultant shortage at P2 leads to an upward pressure on price. At the new equilibrium E3, price has risen further from P2 to P3 and quantity increased from Q2 to Q3. • [Overall impact of both shifts on price] Both the fall in supply and rise in demand reinforce each other and lead to a rise in price of university education from P1 to P3. This explains the ‘jump’ in price of university education mentioned in Ext 1. • SS factors are more important in caus ing this increase in price because Ext 1 suggests increase in labour cost is a ‘large’ contributing factor, despite the subsidies. Coupled with t he increases in ot her costs stated above, this would have caused a large fall in SS, leading to a large rise in price. EV: However, the PED< 1 for education as it may be deemed as a necessity. With the fall in supply, the price of uni versity education would rise to a larger extent compared to a situation whereby PED>1. Hence, there is a sharp P3 P2 P1 E3 A Qty of university education E1 E2 Price S2 S1 D2 D1 Q2 Q3 Q1 0

JC2 H2 Prelim Exam 2018 Case Study Q1 E