RI 2022 Economics Prelim Markers' Report

ECONOMICS Higher 2 Syllabus 9757 Examiner’s Report Year 6 Preliminary Examination 2022 Raffles Institution Nurturing the Thinker, Leader & Pioneer TEL: 65 6419 9888 ● FAX: 65 6419 9898 http://www.ri.edu.sg ● One Raffles Institution Lane, SINGAPORE 575954

Y6/9757/Prelims/2022 2 © RI 2022 [Turn Over ECONOMICS Y6 H2 Preliminary Examination 2022 Paper 9757/01 Paper 1 Case Study Question 1 a) i) Identify and explain a fixed cost and a variable cost for a pharmaceutical company. [2] Variable cost – cost of variable factors like biobags or filters or sterilisation gear which increases as the output of pharmaceutical products increases. [1] Fixed cost – Rental of manufacturing facilities which does not increase with the output level in the short run. [1] Examiners’ comments Most were able to score full marks, however a significant number of scripts identified vague and weak examples of fixed cost - “maintenance cost of machines” or “maintenance cost of operation”. Maintenance costs could arise from wear and tear directly related to the production of drugs, or it could be regular maintenance costs not correlated to the level of production. Students are advised to use very explicit and clear examples and explain how they are variable or fixed costs. Another common mistake was to give examples which were not related to a pharmaceutical company. Please note that a pharma firm (e.g. Pfizer and Moderna) produce drugs and medicines, they do not operate hospitals and clinics (e.g. Parkway Medical, Raffles Medical). ii) Explain how fixed costs may have an impact on the size of firms in the pharmaceutical industry. [2] If th ere are high fixed costs involved, e.g. purpose -built factories with specialised equipment to manufacture drugs, then the size of the firm is likely large. This is because high fixed costs will require a firm to have a large output level before its average cost of production start to fall significantly, i.e., the firm reaps iEOS over a large output level. OR High fixed costs is a large start -up cost which is a high barrier to entry and this allows incumbent firms to have large output and market share and therefore size of firm is likely large.[1] Examiners’ comments This question was poorly done. Most misunderstood the question and explained how size of a firm could affect BTE, which is the opposite of what the question is asking for. Some candidates had the correct idea about iEOS but failed to explicitly bring in t he concept of falling average COP as output increases. b i) With reference to Figure 1, describe the changes in the level and composition of national healthcare expenditure in USA. [2] The level of National Health Expenditure (NHE) has increased. [1]

Y6/9757/Prelims/2022 3 © RI 2022 [Turn Over In terms of composition, out-of-pocket expenses has significantly fallen whereas health insurance’s share of National Health Expenditure (NHE) has increased significantly. [1] ii) Discuss whether demand or supply factors are more significant to account for the change in the level of national healthcare expenditure in USA. [8] Suggested Answer: Total Expenditure = PxQ. There are many factors that caused supply of healthcare services to fall and demand to rise which in turn causes equilibrium P and Q to change, causing the level of National Healthcare Expenditure to change. Note: Students need not explain every factor. A total of 2 distinct demand and supply factors with PED discussed suffice and the link must be made to total expenditure (TE). Supply Factors (1) Ext 1 P2: The move to digitalisation in healthcare services has led to an increase in cost of production. E.g., in providing professional consultations, testing and monitoring using the internet, firms need to instal the relevant hardware, technology and services to ensure effective and efficient level of services, and these require additional costs leading to an increase in average cost of production (COP). (2) Ext 1 P3: The use of newer procedures to treat illnesses which involve use of new advanced technology will increase the COP of healthcare institutions too. Use of new drugs which are highly expensive because of patents contributed to this rise in COP too. (3) Ext 1 P7: “continued staff shortages with more healthcare workers choosing to leave the profession”  with increasing net number of healthcare workers leaving the profession, possibly due to the long hours and tedious nature of work  results in fall in labour supply in the market and that is likely to drive up wage rate. This increases cost of production of healthcare goods and services. (4) Ext 1 P1: “ Increased provider consolidation has decreased market competition…”  because of mergers and acquisitions, fall in number of producers  fall in supply in the market. (5) Ext 1 P7: “Inflation affects the costs of operations, supplies, administration, and facilities”  this directly raises the cost of input factors and hence raises cost of production  producers will cut back output to maintain profitability  reduces effective supply. As a result, firms are less willing and less able to supply at each and every price level. Hence, Supply curve shifts leftwards from S0 to S1. Market for healthcare P0 Q0 D0 S1 Price Quantity 0 S0 P1 Q1 A B Shortage

Y6/9757/Prelims/2022 4 © RI 2022 [Turn Over At the prevailing price, with a shift in supply curve upwards, quantity demanded is greater than quantity supplied and that leads to a shortage in the market. Consumers will bid up price and firms will start to increase output and a new equilibrium will be reached at a higher price P1 and lower output Q1 The demand for healthcare is price inelastic since there are few substitutes to improve health outcomes when one is ill, apart from consuming healthcare products and services. Hence the fall in supply is met with a more than proportionate increase in price from P0 to P1 as compared to a smaller fall in quantity demanded from Q0 to Q1. Hence, total healthcare expenditure increases from 0Q 0 AP0 to 0Q1 BP1. Demand Factors (1) Ext 1 P4: “Medical advances can improve our health and extend our life, but they can also lead to an increase in spending and the overutilization of expensive technology and drugs.” The longer lifespan of Americans increases the need for more medical care because seniors and elderly are more prone to illnesses and have a higher risk of medical complications when ill  contribute to higher demand for healthcare. (2) Ext 1 P6: “Another prominent concern is that an increasing proportion of the U.S. population has at least one chronic disease”  there is an increase in the proportion of overweight Americans and this is likely due to the diet and sedentary lifestyle  result in high rate of chronic illnesses like diabetes, heart diseases, high blood pressure which require long term treatment  greater demand for healthcare (3) Ext 1 P5: “Moral hazard issues… encourage a high volume of redundant testing and overtreatment.”  Consumers whose medical expenses are covered by health insurance may demand additional but unnecessary treatment, procedures or consultation visits to the doctor because they need not bear these additional charges. These costs are borne by the insurance companies and that led to an increase in demand. The above factors led to an increase in demand for healthcare services  caused a shift in the demand curve to the right. At the prevailing price of P 0, a shortage arise and through the price adjustment mechanism, there is upward pressure on price to P1 while quantity increases to Q1. Total expenditure increases from 0Q0A P0 to 0Q1B P1. Q0 Market for healthcare