1993

Section A
93.1. Consider the budget line of an individual with a fixed income. This individual buys two goods,
X and Y, of which Y may be regarded as money income. Suppose this individuals income
rises by 50% and the relative price of X doubles. In a diagram with X on the horizontal axis
and Y on the vertical axis, the new budget line
A.
is the same as the old one.
B.
intersects the old one and is steeper.
C.
lies to the left of the old one and is steeper.
D.
lies to the right of the old one and is flatter.
93.2.

Which of the following statements about cost is true?

A.
Cost changes if and when the highest-valued alternative changes.
B.
When the highest-valued alternative changes, the individuals demand also changes.
C.
The cost of buying a car rises when the road conditions are such as to make driving
unpleasant.
D.
All of the above.

93.3.

Mr A owns $100 000 worth of long-term bonds while Mr B owns $100 000 worth of
short-term bonds. There exists only one interest rate in the market. A rise in the interest rate
will
A.
reduce the wealth of both men by the same amount.
B.
reduce the wealth of both men but Mr A will suffer more.
C.
reduce the wealth of both men but Mr B will suffer more.
D.
increase the wealth of Mr B but reduce the wealth of Mr A.

93.4.

Mr Leung and Miss Tang are equally skilled at their jobs as teachers; their productive
capacities in everything else are also similar except Miss Tang has more entrepreneurial talent.
If both of them have the same salary as teachers, then
A.
their economic rent as teachers is the same.
B.
Miss Tang has a lower economic rent in teaching.
C.
Mr Leung has a lower economic rent in teaching.
D.
None of the above.

93.5

In the following figure, D1 and D2 are two straight line demand curves.

Price
D1

D2
0

Quantity

Which of the following statements is correct?

A.
D1 is more price elastic than D2 at every positive price.
B.
D2 is more price elastic than D1 at every positive price.
C.
D1 and D2 have the same price elasticity at every positive price.
D.
None of the above.

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93.6.

Under which of the following situations will the marginal revenue product of a factor of
production be smaller than the value of its marginal product?
A.
When the quantity of the factor employed decreases, the price of the factor falls.
B.
When the quantity of the factor employed decreases, the price of the factor rises.
C.
When the product demand curve facing the producer is downward sloping.
D.
When the price of the product is rising over time.

93.7.

Suppose good X is measured on the horizontal axis and good Y one the vertical axis. If the
price-consumption curve for X is a vertical straight line, then
A.
Y is an inferior good.
B.
X is an inferior good.
C.
X is a normal good.
D.
X is a Giffen good.

93.8.

In its production process, a chemical factory upstream pollutes a river nearby without
considering the damages inflicted upon a fish farmer downstream. Under zero cost of
transacting,
A.
the chemical factory will pollute more if it has the private property rights to use the
river.
B.
there will be no water pollution if the fish farmer has the private property rights to
use the river.
C.
there will be no water pollution if the fish farmer purchases the ownership of the
chemical factory.
D.
water pollution will be reduced if private property rights over the use of the river are
established, regardless of who owns these rights.

93.9.

The Pareto condition is satisfied if

A.
it is possible to make one individual gain without making another lose.
B.
there is no way to make one individual gain.
C.
there is no way to make all individuals except one gain.
D.
None of the above.

93.10.

Price control
A.
encourages allocation on a non-price basis.
B.
promotes a more equal distribution of income.
C.
generates a condition of disequilibrium.
D.
has no wealth redistribution effect.

93.11.

Mr Lee thinks Coke and Pepsi are perfect substitutes for each other. Suppose Pepsi costs $3
per can and Coke costs $2.5 per can, and that Mr Lee has 10 coupons, each of which can be
used to buy one can of Pepsi for $2. If he has $45 to spend on cans of Coke and Pepsi, Mr Lee
will buy
A.
B.
C.
D.

93.12.

15 cans of Pepsi and 4 cans of Coke.

5 cans of Pepsi and 14 cans of Coke.
10 cans each of Pepsi and Coke.
There is not enough information to tell.

When the price of good X rises, a consumer responds by reducing her quantity demanded of
the good. The substitution effect, being part of this change, is measured by
A.
holding all other things constant.
B.
holding the substitution of other goods constant.
C.
holding her money income constant.
D.
holding her real income constant.

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93.13

Assume the interest rate is 10% per annum and will remain so forever. Suppose you don not
drink wine but are storing wine as an investment. Assume that there are no storage costs and
that the market value of a bottle of wine purchased today at $500 will increase by $50 every
year. To maximize wealth, you should sell the wine you store
A.
after any number of years.
B.
after two years.
C.
after one year.
D.
There is not enough information to tell.

93.14.

Suppose the airport tax per passenger leaving Hong Kong is increased from $150 to $1 000.
Which of the following will be true?
A.
The average length of the airplane journeys will tend to rise.
B.
The variance of travellers ages will fall.
C.
The ticket prices of shorter flights will fall.
D.
All of the above.

93.15.

Which of the following statements about price discrimination is true?

A.
Price discrimination is less efficient than simple monopoly pricing.
B.
Price discrimination tends to result in an average price similar to that of monopoly
pricing.
C.
Price discrimination will not occur in one single market, even if consumers have
different information costs.
D.
None of the above.

93.16.

If a consumer sets aside $100 per month for going to movies and never spends a dollar more
or a dollar less on movies, then his demand for movies is
A.
elastic.
B.
inelastic.
C.
unitarily elastic.
D.
None of the above.

93.17.

Under monopoly pricing or price searching

A.
output will be higher if perfect price discrimination is adopted.
B.
average cost is at a minimum.
C.
the marginal value of the good to consumers always exceeds its marginal cost of
production.
D.
the monopolist earns a return on his capital at a rate higher than the rate of interest.

93.18.

The price of a natural resource will tend to rise if

A.
a new substitute for the resource is discovered.
B.
unexpected new supplies of the resource are discovered.
C.
the cost of extracting the resource falls.
D.
the government subsidizes the users of the resource.

93.19.

Which of the following statements about an economic theory is correct?

A.
A useful theory must contain hypotheses that are refutable by facts.
B.
A testable implication may contain variables that re not observable.
C.
If a theory is to be useful, its assumptions must be realistic and its predictions must
be correct.
D.
The implications of a theory must always be true.

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93.20.

If Mr Hau spends all the money in his pocket, he can buy 5 bowls of red bean soup and 2
bowls of noodles (combination X) or 3 bowls of red bean soup and 6 bowls of noodles
.
(combination Y). If follows that both combinations are points on the same
A.
indifference curve
B.
income-consumption curve
C.
budget line
D.
price-consumption curve

93.21.

Scarcity
A.
B.
C.
D.

is implied by the existence of price.

implies competition in society.
does not exist for a free good.
All of the above.

93.22.

Most people in Hong Kong travel on the Mass Transit Railway (M.T.R.) or buses. Suppose
the fares of the M.T.R. decrease by 20% while the bus fares remain unchanged. The total fare
revenue will
A.
remain unchanged for buses but increase for the M.T.R.
B.
increase for buses but decrease for the M.T.R.
C.
decrease for buses but may increase or decrease for the M.T.R.
D.
increase for the M.T.R. but may increase or decrease for buses.

93.23.

If the average variable costs are constant, the firms short run supply curve
A.
a horizontal line.
B.
the rising portion of the marginal cost curve.
C.
The rising portion of the average cost curve.
D.
the rising portion of the marginal cost curve above the minimum point of the average
cost curve.

93.24.

Consumer surplus is extracted by a seller when

A.
consumers are prohibited by the seller from buying less than a stipulated quantity.
B.
an entrance fee is required to enter an amusement park, and inside the park the
customer will have to pay an extra fee for each game he plays.
C.
members of a club are required to pay membership fees before they are allowed to
dine in the club.
D.
All of the above.

93.25.

The law of demand

A.
is derived from the indifference curves.
B.
states that quantity demanded and income are positively related.
C.
states that price elasticity is always lower for a necessity.
D.
None of the above.

93.26.

The more human capital an individual worker brings to the labour market,
A.
the higher will be his marginal product.
B.
the easier it will be for him to find work.
C.
the more difficult it will be for him to find work.
D.
the more hours of labour he will be willing to supply.

93.27.

Which of the following about a price-searcher is correct?

A.
He chooses the price and quantity independently.
B.
The demand curve facing him is downward sloping.
C.
He always causes efficiency loss.
D.
He sets the price as high as the market will bear.

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93.28

Interest exists even without money. This statement is

A.
true because we pay interest when we borrow.
B.
true because interest is the premium one pays for the earlier availability of goods.
C.
false because interest is a compensation for inflation.
D.
false because money is used in all societies.

93.29.

Utility
A.
B.
C.
D.

93.30.

is a measure of individual satisfaction.

is a measure of social welfare.
is an arbitrary assignment of numbers to rank options.
All of the above.

An employer observes that when one employee is sick (and does not come to work), the value
of output falls by $500 per day. If two workers are sick, the value of output falls by $1 200
and when three workers are sick the value of output falls by $2 100. Suppose the wage rate is
$750 per man-day. The employer should
A.
keep the same number of workers.
B.
fire one workers.
C.
fire two workers.
D.
fire three workers.

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Section B
93.1.
Explain the relationship between income and interest.

(8 marks)

93.2.

What is profit? What is the difference between profit and rent?

(8 marks)

93.3.

A firm is often regarded as an organization which supersedes or replaces the market. What
does this mean? (Note: You are not asked to explain here why the firm emerges, but to
explain the nature of the supersession.)
(8 marks)

93.4.

In the diagram dA is the demand schedule of individual A and dB is the demand schedule of
individual B.
Price

dA

dB
(i)
(ii)

Quantity
0
Add up the two demand schedules in the above diagram horizontally.
Explain under what situation the demand schedules should be added up horizontally
instead of vertically.
(8 marks)

93.5.
In the diagram the market demand for a good intersects the market supply of the good at E,
Price

P*

E
Market Demand

Quantity

and all the individuals in the market buy or sell that good at price P*. Explain why the
situation described satisfies the Pareto condition.
(8 marks)
Section C
93.6
Many retail stores offer quantity discounts. For example, large boxes of laundry detergent
are frequently offered at lower prices per ounce than smaller boxes. It is sometimes argued
that this pricing arrangement is a form of price discrimination.

93.7.

(i)

What is price discrimination?

(3 marks)

(ii)

Give an explanation of the above discount practice other than price discrimination.
(10 marks)

In many shopping centres in Hong Kong, shops selling similar products are found operating
side by side as if they are trying to increase competition. Examples are fashion boutiques,
computer shops and fast food stalls.
Explain why the shopowners choose to flock together even though the increase in competition
would tend to result in a lower profit.
(10 marks)

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93.8.

In Hong Kong, during the week before the Chinese New Year, many flower bazaars are
organized by the government to let vendors sell their New Year commodities to the public.
The government allocates the right to operate each stall by tender or bids and the right to
operate a stall goes to the vendor who bids the highest price for it. The bidding is usually held
a month in advance. Therefore, events that happen after the bidding which would affect the
income from operating a stall would not be reflected in the bid. The right to operate a stall is
not transferable.
If the right to operate a stall was transferable, would the government received higher bids for
the stalls? Explain.
(10 marks)

93.9

Consider a country which seeks to impose a significant tax on the import of automobiles. This
country may (a) impose a uniform unit tax for each and every automobile imported, or (b)
impose an ad valorem tax as a percentage of the market value of the automobile.
Suppose with either (a) or (b) the government would receive the same total tax revenue.
Which of the two schemes would have a higher average quality of the automobiles imported?
Explain.
(10 marks)

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Solution
SECTION A
1B

16 C

2A

17 A
18 D

3B
4B
5B
6C
7B
8D
9D
10 A
11 C
12 D
13 C
14 D
15 D

19 A
20 C
21 D
22 C
23 A
24 D
25 D
26 A
27 B
28 B
29 C
30 C

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