1986

Section A
86.1
Economics is a science because
A.
economic predictions are stated in the form of if A happens then B will necessarily
follow.
B.
of the widespread application of mathematical and statistical methods in economic
research.
C.
it can be forecast the future accurately.
D.
it helps to improve society.
86.2

Economic theory is useful because

A.
its assumptions are realistic.
B.
it is always true.
C.
it can be rejected by evidence.
D.
it tells us what is right or wrong.

86.3

Firms exist because

A.
the government wants to impose business taxes.
B.
that is the only way to produce goods and services in the most efficient way.
C.
it is costly to determine a large number of prices for goods and services.
D.
workers in general are uninformed and therefore do not know what to produce.

86.4

Two linear (straight line) demand schedules having the same intercept on the price axis, with
one schedule being flatter than the other, means that at any given price
A.
the elasticity of demand is larger with the flatter schedule.
B.
the elasticities of demand of the two schedules cannot be compared.
C.
the elasticities of demand of the two schedules are the same.
D.
the elasticities of demand of the two schedules are unitary.

86.5

Several housing experts in Hong Kong have stated that the market for housing will saturate in
two years and will not be able to absorb more housing units.
A.
The experts meant the market demand for housing, which is shifting outward now,
will stop shifting in two years.
B.
The experts meant the market demand for housing will bend downward and becomes
vertical at some point.
C.
the experts meant that at some point the demand for housing will cease to exist.
D.
Economists do not know what the experts meant.

86.6

A divergence between private and social cost

A.
is inefficient and should be eliminated by government regulation.
B.
can be resolved by private contracting.
C.
means that income distribution is more unequal.
D.
is not the same as a divergence between private and social net products.

86.7

Which of the following is NOT a form of competition?

A.
racial discrimination
B.
waiting in line
C.
paying a price for a product
D.
breathing in a desert

86.8

Which of the following is an example of a public good?

A.
the postal service
B.
a lighthouse
C.
a loaf of bread
D.
public medical services.

86.9

The more human capital an individual worker brings to the labour market,
A.
the lower will be his marginal product because he produces more.

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B.
C.
D.

the higher will be his real wage.

the more hours of labour he will be able to supply.
the more difficult it will be for him to find work because of his exceptional ability.

86.10

Which of the following is NOT within the scope of economic analysis?

A.
A change in the average family size in a country.
B.
A decrease in the crime rate in a city.
C.
An increase in demand for education.
D.
Forecasting the Hong Kong stock market index in 1987.

86.11

Which of the following statements about cost is FALSE?

A.
Sunk cost is irrelevant to choice.
B.
When there is a choice, there may be no cost.
C.
Cost is a forward looking concept because it is based on anticipations.
D.
Cost is the highest valued opportunity forgone.

86.12

A firm is a price searcher if

A.
there is actually only one firm selling a given product in the market.
B.
the demand curve facing the firm is downward sloping.
C.
the firm earns a profit.
D.
it produces a level of output where price exceeds marginal cost.

86.13

An indifference curve drawn between a good and a bad is

A.
downward sloping.
B.
upward sloping.
C.
vertical.
D.
horizontal.

86.15

Consumer surplus is
A.
the amount left over after a consumer makes a purchase.
B.
the quantity supplied to a consumer exceeding the quantity he prefers.
C.
the difference between what a consumer is willing to pay over and above what he
actually pays.
D.
the area underneath the consumers demand curve.

86.16

We observe that customers in restaurants is waiting for seats during lunch hours. This implies
that
A.
the price of meals does not reflect the customers preference.
B.
demand for food during lunch hours is inelastic.
C.
the costs of changing menu prices are too high given the fluctuation in demand.
D.
there are not enough restaurants in the market.

86.17

Which of the following will change the demand for good X?

A.
a change in supply of good X.
B.
a change in the price of a closely related good.
C.
a change in the price of good X.
D.
none of the above.
A monopolist producing a level of output at MC = MR is said to be inefficient because
A.
the marginal use value of the output to consumers exceeds the marginal cost of
production.
B.
the average revenue exceeds the marginal revenue.
C.
the price of the output equals the marginal revenue.
D.
the marginal use value of the output is not equal to the price of the output.

86.18

86.19

Shortages are generally the result of

A.
price controls.
B.
unexpected increase in demand leading to situations where increases in supply could
not respond with sufficient speed.
C.
unexpected decreases in supply caused by natural disasters.

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D.

all of the above.

86.20

Assume only two inputs are used in agriculture: land and labour. If adding labour to work on
a limited area of land were NOT subject to diminishing marginal productivity.
A.
people would be infinitely wealthy.
B.
wage rates would be zero.
C.
land rents would be zero.
D.
scarcity would no longer exist.

86.21

An excise tax raises costs, but price rises only because the supply decreases. The burden of
this tax will fall entirely on the consumers if
A.
the market demand has unitary elasticity.
B.
the market supply is perfectly elastic.
C.
the market demand is perfectly elastic.
D.
the market supply is upward sloping.

86.22

Third degree price discrimination is conducted by charging different prices to different

customers or to customers in different markets. Which one of the following is NOT price
discrimination of this type?
A.
The MTR in Hong Kong charges students lower rates.
B.
Taxi-drivers in Guangzhou collects Renminbi (RMB) from local residents and
Foreign Exchange Certificates (FEC) from foreigners according to the same nominal
meter fee, although dollar for dollar, FECs are worth more than RMB in the black
market.
C.
Medical doctors charge different prices to different patients for the same treatment.
D.
Dollars for dollars, shops in Shenzhen charge a lower price if a customers pays in
FECs instead of RMB.

86.23

Consumer surplus is extracted by a monopolistic seller when

A.
consumers are prohibited by the seller from buying more than a stipulated quantity.
B.
the seller increases the price of his product during a period of peak demand.
C.
members of a club are required to pay membership fees before they are allowed to
buy in that club.
D.
all of the above.

86.24

In the labour market, it is said, a worker is paid a wage equal to his marginal revenue product.
Therefore,
A.
in the University of Hong Kong, a professor is paid twice the salary of a lecturer
because the professor knows twice as much and is twice as productive.
B.
civil servants in Hong Kong have enjoyed significant increases in real wages during
the last decade because of significant increases in their productivities.
C.
a businessman earns a windfall profit because he is more productive.
D.
none of the above.

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86.25

The smoke from a metal processing factory in Hong Kong pollutes a large government
housing estate nearby, and the toxic nature of the smoke may threaten the lives of residents
who are scheduled to move into the estate soon. Economic analysis tells us that
A.
the polluting factory must be relocated.
B.
the residents must not be allowed to move into the housing estate.
C.
life is invaluable and must be saved, therefore either the factory or the housing estate
must be relocated.
D.
to maximize social gain, there is no enough information to decide on the proper
course of action.

86.26

Dynasty is a wine produced jointly by the French and the Chinese in China. As the finest
table wine produced in China, it is served only in the finest restaurants in China. This is
because
A.
only foreigners like French wine and they visit primarily the finer restaurants in
China.
B.
the Chinese government prohibits the selling of this wine in poorer restaurants.
C.
the Chinese want to earn foreign currencies, and therefore the wine is sold only to
foreigners, who visit primarily the finer restaurants.
D.
with more costly settings and services in the finer restaurants, good wine becomes
relatively cheaper.

86.27

A firm is a price taker when

A.
there are many firms selling the same product in the market.
B.
the demand curve facing the firm is horizontal.
C.
the firms cost curves are identical to those of many other firms in the same industry.
D.
the firm does not have to decide on the quantity to be produced.

86.28

Suppose you are given $100 000 by a rich uncle. At an annual interest rate of 12%
A.
your wealth increases by $100 000, your income increases by $12 000,
maximum annual rate of saving is $100 000.
B.
your wealth increases by $100 000, your income increases by $100 000,
interest income per year is $12 000.
C.
your wealth increases by $100 000, your income increases by $12 000,
maximum consumption is $12 000.
D.
your wealth increases by $100 000, your income increases by $12 000,
maximum annual rate of saving is $12 000.

and your
and your
and your
and your

86.29

The Theorem of Exchange states that

A.
exchange occurs because people gain from it.
B.
exchange occurs because the marginal use values of individuals are not the same.
C.
exchange occurs because each and every individual maximizes for himself.
D.
all of the above.

86.30

Suppose the expected market rental annuity of a flat is $60 000 per year. The government
imposes rent controls restricting the annual rent to $20 000. Once rented, the landlord cannot
evict a tenant, i.e. the tenant has a right to the tenancy in perpetuity. The annual rate of interest
is 10%. If the flat is now vacant, the landlord can, as a condition for occupying the flat, sell a
broken chair to a prospective tenant for approximately
A.
$60 000
B.
$400 000
C.
$200 000
D.
$40 000

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Section B1
86.1
What is profit?

(8 marks)

86.2

Why is there no such thing as a free lunch?

(8 marks)

86.3

What does price do?

(8 marks)

SECTION B2
86.4
From the social standpoint, a monopolist is a more efficient producer if he extracts consumer
surplus than if he does not do so. Do you agree? Explain.
(8 marks)
86.5

Explain the difference between scarcity and shortage.

(8 marks)

86.6

Whenever there is an employee, there is a firm. Do you agree? Explain.

(8 marks)

SECTION C
86.7
At a buffet dinner, a customer is allowed to eat as much as he wishes by paying a lump-sum
fixed charge per head.
(a)
The following indifference map shows the equilibrium of food consumption of an individual
in a restaurant which charges a price per plate of food served.

Money
Income

(b)

(c)
86.8

Food

Use a similar diagram to show that, given the same expenditure the individual spends
on a dinner, he will eat more at a buffet dinner.
(8 marks)
Use a demand curve to show the quantity of food consumed by an individual in a
buffet dinner. Assuming the marginal cost curve of producing food is horizontal,
show the economic waste incurred.
(8 marks)
How will you argue that the economic waste in (b) above may not be a waste?

The Hong Kong government has long adopted a policy of selling land to the highest bidder,
while at the same time restricting the amount of land sales. It is often complained that the
government therefore has adopted a policy of high-land prices, causing high rents and
hurting the development of business and industry.
(a)
Assume the Hong Kong government wants to maximize the total revenue of land
sales. Use a demand curve and a vertical supply curve to show that this maximization
may or may not be consistent with a high-land-price policy. Explain.
(8 marks)

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(b)

(c)

86.9

86.10

Suppose, instead of selling land to the highest bidder, the government gives away
land freely by means of a lottery, but the amount of land so given away is the same
as for the land-sale scheme. Will the rents increase, decrease, or stay the same in the
two situations? Explain.
(8 marks)
Suppose, instead of maximizing the total revenue of land sales, the government sells
land to maximize social benefits. Suppose also all available land requires no
additional improvements such as the construction of roads, sewers, water and
electricity supply. Should the government sell all available land at once? Explain.
(8 marks)

Consider an exhaustible resource which, once depleted, will never be replenished again.
Suppose this resource is highly valuable, and its total reserve is fully known. Suppose further
this reserve is owned entirely by one private party who is offering the resource for sale.
(a)

Assume the market demand for this resource remains stable through time. Will an
increase in interest rate lead to a faster or a slower depletion rate? Explain.
(8 marks)

(b)

Suppose the private owner offers the entire reserve of the resource for sale (i.e., an
outright sale). Will he be able to obtain a higher price or a lower price if the interest
rate rises? Explain.
(8 marks)

(c)

Suppose now the market demand for this resource rises sharply and, once risen,
remains stable through time. Will the resource owner be earning a profit or a rent?
(8 marks)

The following data show that a factory, in the process of production, pollutes and inflicts
damage on the neighbouring properties.
Level of
Output
100
200
300
400
500
600
700
800

Total
Revenue
$
180
360
540
720
900
1080
1260
1440

Total Private Cost

$
130
270
420
580
750
930
1130
1440

Total Damage to
Property Owners
$
34
66
96
124
150
174
196
216

(a)

If the factory owner seeks to maximize his own gain and ignores the damage
inflicted on his neighbours, what will be the level of output? Explain.
(8 marks)

(b)

Assume all transaction costs are zero. If the factory owner has the right to inflict
damage on his neighbours, what will be the level of output? Explain.
(8 marks)

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Solution
SECTION A
1A

16 C

2C

17 B
18 A

3C
4C
5D
6B
7D
8B
9B
10 D
11 B
12 B

19 A
20 C
21 B
22 D
23 C
24 D
25 D
26 D

13 B

27 B
28 D

15 C

29 D
30 B

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