Section A (40 marks, including 2 marks for effective communication)
1. ‘Tom loves candies at lot. He will spend 30% of his pocket money in buying candies every month.’
State the price elasticity of demand and explain whether the law of demand is implied in this case. (4)
2. Ho is a full-time student. During summer holiday, he gives tutor classes to his friends, earning $50 for each chapter. Assuming Mr. Ho is a Hong Kong resident, explain whether:
a. Ho helps reduce the unemployment rate of Hong Kong; (2)
b. Ho’s earning should be included in GDP of Hong Kong; (2)
c. The notes prepared by Ho are regarded as production. (2)
d. Suppose the government imposes a tax on all earnings received by private tutors. Explain whether it will lead to a change in opportunity cost of Ho for being a private tutor. (3)
3. Recently, tax imposed on tobacco has increased by 50%, in order to improve the health condition of Hong Kong citizens. Explain under what circumstance the tobacco tax revenue increase will after the increase in tax. (3)
4. Mr. Chan remits $10000 from mainland to Hong Kong, in which all of them are in his pocket. Later, 10% of it is given to a beggar and 50% of it was used to purchase a NCD issued by a commercial bank, the remaining was deposited into his saving account. Later, he purchased a digital camera costing $2000, which is paid by a transfer from the Mr. Chan’s saving account to the shop’s current account.
Explain the effect of these transactions in money supply M1 and M2 of Hong Kong. (4)
5. ‘Due to the depreciation of Hong Kong dollar, we have to spend more on buying imported oil and new buses,’ said the CEO of Kowloon Motor Bus (KMB) Company Ltd.
a. Suppose the new buses are imported from Britain. Illustrate how the above situation affects the price of these buses in Hong Kong market. (2)
b. With the aid of diagram, explain how KMB can increase the total revenue due to the above change. (7)
c. The following is the comparison of different transport service provided by different companies, they all provide transport service from City One Shatin to Central:
Service | Fare | Time of journey | Features |
KMB Route 182 | $16 | 80 minutes | A franchised bus company. |
MTR | $12.5 | 40 minutes | Partially owned by the government. |
CTB Route 88R | $18.5 | 30 minutes | A non-franchised bus company. |
Based on the information above, explain what market structure KMB belongs to. (2)
6. Mr. Wong owns a firm. Suppose there are only two factors in the firm: Machine and labor, while machine is a fixed factor and labor is a variable factor. He has bought a new machine and he finds that the total output increases by 50%. Explain whether the law of diminishing marginal return is illustrated in this case. (3)
7. Study the diagram below:
a. Explain whether the nominal GDP in this economy must increase. (2)
b. Based on the change in real GDP, explain which business cycle this economy in Year X belongs to. Give one characteristic of the business cycle of this economy. (2)
Section B (50 marks, including 2 marks effective communication for Question 10 and 11 respectively)
8 Study the table below, showing the man hour required to produce one unit of the good.
Good X Good Y | |
Country A Country B | 5 AND 20 18 AND 25 |
Suppose worker is the only factor for producing both goods in both countries and the following table is some information on worker:
Country A | Country B | |
Number of workers employed | 100 | 80 |
Average working hours per worker per day | 8 | 11 |
Average working days per week | 6 | 5.5 |
The allocation on worker is shown below:
Resources on Good X : Resources on Good Y | |
Country A | 3 : 7 |
Country B | 2 : 8 |
Based on the data above,
a. Calculate the labor supply for producing Good X and Y in Country A and B respectively (2)
b. Convert the first table into the table below, showing the output per unit of resources used of each country when resources (man hour) are all utilized to produce one good: (4)
Good X Good Y | |
Country A | OR |
Country B | OR |
c. i. Which country has a comparative advantage in producing Good Y? (3)
ii. Which country has an absolute advantage in producing Good X? (3)
(Note: For accuracy purpose, please express your answer in fraction.)
d. Calculate the minimum transportation cost to make that trade will not be mutually beneficial. (2)
9 Sanlu, Mengniu and Nestle are three famous milk powder producers in China.
a. It was discovered that some babies got kidney stone after drinking the milk made by Sanlu. Many people do not buy Sanlu milk powder anymore. At the same time, the government ordered Sanlu to stop producing milk powder for three months. Explain with the aid of diagram, under what condition will the price of Sanlu milk powder decreases. (7)
b. Melamine is found in Mengniu milk powder as well. In order not to waste the milk, Mengniu sent the milk powder with problem to be recycled as fertilizers. Explain whether the milk powder is regarded as capital for the fertilizer plant. (2)
c. Allowing citizens to buy milk powder in a cheaper price. Government intervention X was imposed.
i. Suppose there is no change in demand and supply because of the intervention. Name X.
ii. ‘Due to government intervention X, more and more people failed to buy our milk powder,’ said the CEO of Nestle Co. Suppose intervention X is effective, and melamine is not found in Nestle Milk powder, explain the phenomenon above, and explain if there is any change in total revenue of Nestle milk powder. (1+8)
10 The economic tsunami has lead to a recession of economy of the whole world.
a. In Yuen Long, price of a lunchbox drops drastically from $15 each to $10.
i. Explain whether the drop in price of lunchbox is regarded as deflation. (5)
ii. It is discovered that all shops in Yuen Long sell their lunchbox at $10 each. At the same time, their lunchboxes are all purchased from KK Supermarket, the biggest supermarket in Yuen Long. Give two reasons to explain why lunchbox market in Yuen Long is not perfect market competition. (2)
b. The Hong Kong government decides to reduce the stamp duty in buying shares.
i. Explain how the GDP of Hong Kong will increase because of this measure. (3)
ii. Mr. Macdonald, an American citizen, has purchased shares in Hong Kong. Explain how the following transactions will affect the balance of payments account of Hong Kong:
I) Buying $500000 ordinary shares of HSBC in Hong Kong. (2)
II) The HSBC pays $1000 as final dividend to Mr. Macdonald. (2)
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