Download Economics Mock Exam Paper 2 (Set 14) Suggested Answers The

Economics Mock Exam Paper 2 (Set 14)
Suggested Answers
The following answers are for reference only. Alternative answers are also acceptable so long as they
are well reasoned.
Section A
1.
Marks
(a) Non-rival in consumption / concurrent consumption
(1)
Admitting more people to the exhibition will not reduce the number of services
to other people. / Different people can enjoy the exhibition at the same time.
(2)
(b) It is not a free good. / It is an economic good.
(1)
–More ‘free admission’ is preferred to less.
Either one,
–There is a cost of providing the services, because the resources used for providing
(1)
the services are scarce and have alternative uses.
–Any other relevant point
2.
(a) The profit-maximizing output is 4 units as MC = P.
Output (units)
1
2
3
Total cost ($)
220
460
720
–
240
260
Marginal cost ($)
4
(1)
5
6
7
1,000 1,300 1,620 1,960
280
300
320
340
(2)
(b) The output will remain unchanged as a fixed cost does not affect the marginal
(or the variable) cost.
3.
(2)
(a) Average labour productivity = Total output / Total input of labour
(1)
(b) Increased
(1)
Reasons:
–Better production methods
–Better production technology / equipment
–Better / more training
@1
–Improved public health
max: 2
–Any other relevant point
[Mark the FIRST TWO points only.]
Economics Mock Exam Paper 2 (Set 14)
Suggested Answers
Marks
(c) Verbal elaboration:
The LRAS will increase.
(1)
The price level will decrease and the long-run real GDP will increase.
(2)
Indicate on the diagram:
–A rightward shift of the LRAS curve
(1)
–P↓ + Y↑
(1)
Price level
LRAS0
LRAS1
P0
P1
AD
0
4.
Aggregate output
YF1
YF0
(a) Verbal elaboration:
The price elasticity of supply is smaller than the price elasticity of demand.
(1)
Indicate on the diagram:
–Able to show the producers’ subsidy benefit
(1)
–Able to show the consumers’ subsidy benefit
(1)
–The producers’ subsidy benefit > consumers’ subsidy benefit
(1)
Price ($)
Producers’ subsidy benefit
S1
b
P3
P1
S2
a
P2
c
D
Consumers’ subsidy benefit
0
Q1
Q2
Quantity
Economics Mock Exam Paper 2 (Set 14)
Suggested Answers
Marks
(b) Verbal elaboration:
The quantity transacted increases. / There is overproduction.
(1)
The marginal cost of production is greater than the marginal benefit of the good.
(1)
Indicate on the diagram:
–Deadweight loss = Area abc
5.
(a) The banking multiplier is equal to 4.
(1)
Change in total deposits = –$10 million × 4 = –$40 million
(1)
Given that there is no change in cash holding,
(1)
the money supply will also decrease by $40 million.
(1)
(1)
V and Y are constant in the long run.
(1)
A reduction in M will reduce the price level by the same percentage.
(1)
(a) (i)
(ii)
7.
(1)
Bank reserves will decrease by $10 million.
(b) MV = PY
6.
(1)
Standard of deferred payment / unit of account
(1)
No. Oranges are not homogeneous / not divisible.
(2)
(b) The cost of the earlier availability of resources
(2)
(a) Regressive tax
(1)
People pay the same amount of tax for an identical bottle of wine.
(1)
The higher the income, the lower the proportion of the tax in income.
(1)
Economics Mock Exam Paper 2 (Set 14)
Suggested Answers
Marks
(b) The prices of red wine in Category A falls relative to that in Category B.
8.
(1)
The quantity demanded of red wine in Category A rises relative to that in Category B.
(1)
The market share of red wine in Category A increases.
(1)
(a) Absolute advantage: A country can produce more units of a good using the same
amount of resources.
(1)
There is not sufficient information to tell if Country A has absolute advantage because
we do not know the resources they have.
(1)
(b) Country A exports Good Y.
(1)
Cost of exporting 2Y = 4X
(1)
Country A gains 2X from exporting 2Y.
(1)
OR
Country A imports Good X.
(1)
Cost of producing 6X = 3Y
(1)
Country A gains 1Y from importing 6X.
(1)
Section B
9.
(a) The invisible trade balance = Value of export services – Value of import services
(1)
The value of export services (or the exports of services) tends to decrease.
(1)
The invisible trade balance decreases.
(1)
(b) The USD appreciated against the RMB.
The HKD also appreciated because of the linked exchange rate system.
(1)
(2)
(c) The recent changes in the exchange rates increased the prices of Hong Kong’s goods
and services in RMB and reduced the quantity demanded of Hong Kong’s tourist
services. Therefore, the number of tourists in Hong Kong decreased.
(2)
Economics Mock Exam Paper 2 (Set 14)
Suggested Answers
Marks
(d) Verbal elaboration:
Exports of services decrease.
(1)
Aggregate demand decreases.
(1)
The price level and real GDP will decrease in the short run.
(1)
Indicate on the diagram:
–A leftward shift of AD
(1)
–P↓ + Real GDP↓
(1)
Price level
SRAS
P0
P1
AD0
AD1
0
Y1
Aggregate output
Y0
10. (a) Verbal elaboration:
The rent is set below the market equilibrium.
(1)
There is a shortage.
(1)
The demand for public housing increases
(1)
because public and private housing units are substitutes.
(1)
The shortage will increase, leading to a longer waiting time.
(1)
Indicate on the diagram:
–P below equilibrium
(1)
–A rightward shift of the demand curve
(1)
–A larger shortage
(1)
Unit price ($)
S
ED0
P0
ED1
0
D0
D1
Quantity
Economics Mock Exam Paper 2 (Set 14)
Suggested Answers
Marks
(b) The average size of households decreases. / The proportion of households with
retired people increases.
(1)
The number of low-income households increases.
(1)
The Gini Coefficient tends to increase.
(1)
(c) The increase in rent will increase the income of property owners.
(1)
As property owners are usually rich, this tends to increase the disposable income of
the rich.
(1)
The disposable income of the poor will remain unchanged.
(1)
Hong Kong’s income inequality tends to worsen.
(1)
11. (a) Not necessarily
(1)
Both the nominal GDP and the price level fell by 12.5%.
(1)
The real GDP remained unchanged.
(1)
OR
Not necessarily
(1)
The real GDP remained unchanged at $180 million in both years.
(2)
(b) (i)
(ii)
The inflation rate was –12.5%.
(1)
Realised real interest rate = Nominal interest rate – Actual inflation rate
(1)
The realised real interest rate was higher than the nominal interest rate
because the inflation rate was negative.
(2)
OR
The realised real interest rate was higher.
(1)
Realised real interest rate = Nominal interest rate – Actual inflation rate
= 2.5% – (–12.5%)
(iii)
= 15%
(2)
No
(1)
Expected real interest rate = Realised real interest rate when inflation is
fully anticipated.
(c) The country has a fiscal deficit.
An increase in government spending or a tax cut may increase the fiscal deficit.
(2)
(1)
(2)
Economics Mock Exam Paper 2 (Set 14)
Suggested Answers
Marks
12. (a) Verbal elaboration:
The domestic supply of private cars increases.
(1)
The domestic price increases and the import quantity decreases.
(1)
Indicate on the diagram:
–Able to show the changes in the supply
(1)
–P↑ + imported quantity↓
(1)
Unit price ($)
S
0
S1
Price with quota, P1
Price without quota, P0
IM1
World price
IM0
0
D
Quantity
(b) The prices of both higher and lower-quality private cars will rise by the amount
of the price of the quotas.
(1)
The price of higher-quality private cars will decrease relative to the price of lower-quality
private cars.
(1)
(c) Advantages:
–Legal entity
–Limited liabilities
@1
–More sources of capital
max: 3
–Lasting continuity
[Mark the FIRST THREE points only.]
(d) (i)
(ii)
Lateral expansion
(1)
The firm expands to produce goods that are related but not directly competitive.
(1)
Motives:
–Diversify the products to reduce risk or increase income
–To benefit from economies of scale
@1
–Better utilise existing resources
max: 2
–Any other relevant point
[Mark the FIRST TWO points only.]
Economics Mock Exam Paper 2 (Set 14)
Suggested Answers
Section C
Marks
13. (a) The price is $34 and the output is 4 units.
(2)
At this price and output combination, MR = MC (=$28).
(1)
Able to calculate the MR
(1)
Price ($)
40
38
36
34
32
30
28
26
Quantity demanded (units)
1
2
3
4
5
6
7
8
Total revenue ($)
40
76
108
136
160
180
196
208
Marginal revenue ($)
40
36
32
28
24
20
16
12
(b) No,
because MB > MC and there is a deadweight loss.
(c) A seller charges buyers according to the marginal benefits to them of the good.
(1)
(2)
(1)
As information cost exists, it is difficult for sellers to know the marginal benefits
to buyers. Therefore, first degree price discrimination is difficult to implement in
the real world.
(d) Refusal to supply essential facilities / Abuse of dominance
Firm A is the only seller of the raw material.
(2)
(1)
(1)
When it refuses to supply an essential raw material to its rivals, it can drive
competitors out of the market and reduce competition.
(e) Resale price maintenance
This reduces price competition among the distributors.
(1)
(1)
(2)
Economics Mock Exam Paper 2 (Set 14)
Suggested Answers
Marks
14.
Good Y
E
G
D
A
C
F
0
(a)
B
A’
Good X
Verbal elaboration:
Country A will gain because the consumption possibilities of Country A can increase.
(1)
Indicate on the diagram:
(b)
–Able to draw the trade line passing through point C
(1)
–Able to indicate the increase in consumption possibilities by area AEC
(1)
Good X
(1)
because the cost for Country A to produce Good X is lower than the terms of trade.
(2)
(c) (i)
Verbal elaboration:
Country A will produce at point F in order to consume at point D.
(1)
Indicate on the diagram:
–Able to draw the trade line passing through point F and D
(ii)
(1)
Verbal elaboration:
Yes. If it produces at point A’, it can consume more of Good X and Good Y.
(1)
Indicate on the diagram:
–Able to show that Country A can consume more of Good X and Good Y
(e.g. point G)
(1)
OR
Verbal elaboration:
Yes, the consumption possibilities can further expand.
(1)
Indicate on the diagram:
–The increase in consumption possibilities
(1)
Economics Mock Exam Paper 2 (Set 14)
Suggested Answers
Marks
(d) (i)
Health / Education (knowledge) / Living standard (income)
Either two,
(2)
(ii)
Air pollution may reduce life expectancy and lower the HDI.
(2)
Air pollution may reduce productivity and lower the HDI.
(2)