Paper 2 style examination

questions


Merit goods, elasticity,

production possibility curves

This case study on merit goods, price elasticity of supply and production possibility curves
can be completed as a homework or class work exercise and should take around 105
minutes.  It is based on a paper two examination question using the new syllabus.  The
maximum mark for this paper is 40.
Healthcare in the US 
Text A
As the threat posed by Covid19 increased in 2020 so did the price of personal protection
equipment (PPE). The US government spent billions of $US on PPE due to a significant
increase in world demand. Because the price elasticity of supply of PPE was initially
inelastic, producers were unable to keep up with the surge in demand and the price of PPE
increased dramatically. The price of some PPE increased by up to 1300%. [Paragraph 1]
Medical advice to people on how to slow Covid19 infection rates is for all healthy adults and
children to wear a mask. In public policy terms, masks can be considered as a merit good.
Like many healthcare goods, masks do not just benefit those who use them, but also the other
people a mask wearer comes into contact with who are protected from being infected by the
mask wearer. Early in the pandemic some individuals were reluctant to wear masks because
they did not like putting on a face covering and were unsure of the benefits of wearing a
mask. It was also the case that early in the pandemic masks were relatively scarce and quite
expensive. [Paragraph 2]
Text B
The US continues to struggle with poor healthcare coverage despite the introduction of the
Affordable Care Act (ACA) in 2014. The Covid19 pandemic has exposed the unequal nature
of the US healthcare system. If you are rich and have the best health insurance coverage you
will be well looked after in the US, but if you are poor and have inadequate health insurance
or no health insurance at all then you will have very poor healthcare . [Paragraph 3]
The US healthcare system is not only unfair it also has wider economic costs. People who
have poor health are more likely to take time off work and perform less well when they are at
work. It is also the case that people who have sick dependants cannot work if they are full-
time carers for those dependants. The unequal nature of the US healthcare system has
significant implications for the US economy’s production possibilities. [Paragraph 4]
In 2014 the US government introduced the Affordable Care Act (ACA) that aimed to increase
healthcare coverage to the whole of the US population. By 2016, the number of uninsured
Americans had fallen by 50%. One of the important aspects of the ACA was a subsidy paid
to hospitals to reduce the cost of surgical procedures and make them more affordable to
people on low incomes. [Paragraph 5]
The ACA has met with considerable political opposition in the US (former President Donald
Trump wanted to scrap it). Opponents did not like the fact that to pay for the healthcare
coverage of people on low incomes richer people would have to pay more. It was also felt
that people with healthy lifestyles should not have to pay the healthcare costs of people with
unhealthy lifestyles. [Paragraph 6]
Answer the following questions
a. (i) Define the term merit good. (Text A, paragraph 2) [2]
(ii) Using a cost/benefit diagram, explain the positive externalities of individuals wearing
masks. (Test A, paragraph 2) [4]
b. (i) Define term price elasticity of supply. (Text A, paragraph 1) [2]
(ii) Explain two reasons why the supply of personal protection equipment (PPE) might have
been initially inelastic. (Text A, paragraph 1) [4]
c. (i) Define the term subsidy. (Text B, paragraph 5) [2]
(ii) Using a demand and supply diagram, explain the impact of a government subsidy on the
market price and quantity of hospital care in the US. (Text B, paragraph 5) [4]
d. (i) Outline what a production possibility curve (PPC) shows. (Text B, paragraph 4) [2]
(ii) State how efficient an economy operating inside the PPC is. (Text B, paragraph 4) [1]
(iii) Using a PPC diagram explain how an improvement healthcare amongst the US
population might increase the country's potential output. (Text B, paragraph 4) [4]
e. Using information from the text and your knowledge of economics, evaluate the view that
increased government spending on healthcare can only benefit the US population. [15]
All materials on this website are for the exclusive use of teachers and students at subscribing schools for the period of their subscription. Any unauth

Markscheme
Healthcare in the US

Markscheme
This markscheme provides students with guidance for what can be included in their answers
and is not a model answer.

a. (i) Define the term merit good. (Text A, paragraph 2) [2]

A merit good is a good that governments believe people should consume because of their
social benefits.
(ii) Using a cost/benefit diagram, explain the positive externalities of individuals
wearing masks. (Text A, paragraph 2) [4]

If an individual wears a mask they are less likely to pass on the Covid19 to third parties who
benefit from the use of masks. This is shown by MSB being greater than MPB in the
diagram.

b. (i) Define price elasticity of supply. (Text A, paragraph 1) [2]

Price elasticity of supply is the responsiveness of quantity supplied of a good to a change in
its price.
(ii) Explain two reasons why the supply of personal protection equipment (PPE) might
have been initially inelastic. (Text A, paragraph 1) [4]
Explanation that PPE may be inelastic because:

 Supply is inelastic in the short run and it takes time for producers to increase their
output of PPE
 They might have limited stock of PPE
 There could be limits to the availability of factors of production to produce PPE.

c. (i) Define the term subsidy. (Text B, paragraph 5) [2]

A subsidy is the money paid to the producers of a good by the government to reduce price
and increase market output.
(ii) Using a demand and supply diagram, explain the impact of a government subsidy on
the market price and quantity of hospital care in the US. (Text B, paragraph 5) [4]

The subsidy on hospital care paid by the government causes the supply of hospital care to
shift from S to S1 which reduces price from P to P1 and quantity increases from Q to Q1.

d. (i) Outline what a production possibility curve (PPC) shows. (Text B, paragraph 4)
[2]
A PPC is a model of an economy that shows the different relative amounts of two goods that
can be produced with scarce resources.
(ii) State how efficient an economy operating inside the PPC is. (Text B, paragraph 4)
[1]
Inefficient
(iii) Using a PPC diagram explain how an improvement in the health of the US
population might increase the country's potential output. (Text B, paragraph 4) [4]
 As health
improves in the US potential output increases and PPC shifts to PPC1. This is because a
healthier labour force that results from better healthcare can become more productive.

e. Using information from the text and your knowledge of economics, evaluate the view
that increased government spending on healthcare can only benefit the US population.
[15]
Answers should include:

 Definition of government spending.

 Explanation that increased government spending on healthcare might lead to positive
externalities that increase welfare in the population (‘protects people a mask wearer
comes into contact with’).
 Explanation that increased government spending on healthcare might improve labour
productivity and increases potential output (‘more likely to take time off work and
 perform less well when they are at work’).

 Explanation that increased government spending on healthcare reduces income

inequality if healthcare spending is aimed at households on low incomes (‘Affordable
Care Act (ACA) that aimed to increase healthcare coverage to the whole of the US
population’). This is show by the shift from LC to LC1 in the diagram towards the blue
line perfect income equality.

 Explanation that increased government spending on healthcare improves household

health and this increases their welfare and life expectancy.
 Evaluation/synthesis might include discussion of the opportunity cost of increased
government expenditure on healthcare. Government spending on healthcare also
means people on higher incomes have to pay for the healthcare of people on lower
incomes or people with healthy lifestyles have to pay for those with unhealthy
lifestyles (‘coverage of people on low incomes means richer people would have to pay
more’). This might be seen as unfair. Government spending on healthcare is sometimes
seen as inefficient and affected by political factors.

Applying the levels of response criteria.

Marks Level descriptor

0-3 The response indicates little understanding of the demands of the

 question, uses little relevant theory and no use of the text/data.

The response indicates some understanding of the demands of the

4-6 question, limited use of  relevant theory, limited evaluation and
limited use of the text/data.

The response indicates an understanding of the demands of the

7-9 question, uses some relevant theory, some evaluation and some
use of the text/data.

The response indicates an understanding of the demands of the

10-12 question, uses relevant theory appropriately, evaluation is used
appropriately and the use of the text/data is applied appropriately.

The response indicates an understanding of the demands of the

13-15 question, uses relevant theory effectively, evaluation is used
effectively and use of the text/data is applied effectively.