2001-AL ECON

PAPER 1 B & C

HONG KONG EXAMINATIONS AUTHORITY HONG KONG ADVANCED LEVEL EXAMINATION 2001

2001-ASL ECON
B&C

ECONOMICS A-LEVEL PAPER 1 ECONOMICS AS-LEVEL Question-Answer Book for Section B and Section C
This paper must be answered in English

Candidate Number Centre Number Seat Number

INSTRUCTIONS FOR CANDIDATES

1. 2. 3. Write your Candidate Number, Centre Number and Seat Number in the spaces provided on this cover. Write your Candidate Number in the spaces provided on EACH answer sheet in this book. Answer each question on the TWO pages provided for that particular question. NO marks will be given for answers written on the wrong page. There are SIX questions in Section B and THREE questions in Section C. Attempt ALL questions and keep your answers SHORT. If you have used any supplementary answer sheets, you should write your Candidate Number on every supplementary answer sheet and fasten it with a white string to the page in this book where the relevant question is.

4.

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Hong Kong Examinations Authority All Rights Reserved 2001

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Marks Marker No. Examiner No. Checkers Initial Candidate No. Paper/Section Question No.

IB 1

What is the law of demand ? What is a Giffen good ? Is a Giffen good consistent with the law of demand ? (7 marks)

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IB 1 (Continued)

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IB 2

What is cost ? If someone purchased a flat (an apartment) and after a year the market value of that flat fell by half, does this mean that the cost of living in that flat has gone up, gone down, or remained the same ? (7 marks)

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IB 2 (Continued)

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IB 3

If the market price of a haircut charged by barber shops rises during holidays because customers have more free time to get their hair cut, does this mean that to customers haircuts are really more expensive during holidays because of an increase in market demand ? (7 marks)

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IB 3 (Continued)

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IB 4
(7 marks)

What is investment ? When you read a book, are you investing or consuming ?

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IB 4 (Continued)

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IB 5

In agriculture, when two persons work together on a given piece of land, helping each other, the output may be more than double that of one person working singly on the same piece of land. Is this consistent with the law of diminishing marginal productivity ? (6 marks)

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IB 5 (Continued)

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IB 6

A first-class airplane ticket to the United States is selling at four times the price of an economy-class ticket. Is this price discrimination ? Movie theatres in Hong Kong sell tickets at much lower prices on Tuesdays than on other weekdays. Is this price discrimination ? (6 marks)

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IB 6 (Continued)

END OF SECTION B
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Marks Marker No. Examiner No. Checkers Initial Candidate No. Paper/Section Question No.

IC 7

Royalty vs. Fixed Payment A book writer is paid royalty, that is, a percentage of the price of each book sold. A newspaper or magazine writer is paid by the number of articles or by the number of words written, i.e., at piece rate. (a) How would you explain the difference in payment methods of book writers and newspaper writers ? (5 marks) Royalty rates are different among book writers; piece rates are different among newspaper writers. For which of these payment methods would there be a larger difference in the rates among writers ? (5 marks) Why do publishers of books pay writers in the form of royalty and not in lump-sums to buy the copyright outright ? (5 marks)

(b)

(c)

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IC 7 (Continued)

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IC 8

One Dollar per Chicken The cost of buying, preparing and cooking a chicken in a Hong Kong restaurant is over $20. Some restaurants sell cooked chickens to dine-in customers for $1 each, way below cost. (a) Why would these restaurants do this ? Why dont they reduce the price a little for each of all the other dishes instead ? (5 marks) (b) Some customers have little preference for chicken. To them a cooked chicken is worth, say, no more than $10 in use value, also way below cost. If such customers make up a large proportion of those who dine in these restaurants, would you expect the one-dollar-per-chicken pricing be adopted ? Explain. (5 marks) (c) Under what condition would the one-dollar-per-chicken pricing not imply economic waste (deadweight loss) in the textbook usage of the term ? (5 marks)

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IC 8 (Continued)

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IC 9

The Jimmy Lai Paradox Hong Kong businessman Jimmy Lai operated adM@rt, which sold and delivered goods to customers after they placed orders by telephone or through the Internet. After experiencing heavy losses, adM@rt tried to cut losses by reducing the level of operation, and was faced with the following paradox: the total loss roughly equalled the total revenue regardless of the level of sales. What is paradoxical here is not that total loss equalled total revenue, but the ratio of loss to revenue, i.e., the loss ratio, remained roughly constant over a wide range of sales volume : adM@rt lost $1.00 for $1.00 of revenue, and another major similar operator in the United States lost 40 cents on the dollar, also at varying levels of sales. (a) Grouping together the goods adM@rt sold or treating them as one good, draw its average and marginal cost curves, and the demand curve and the marginal revenue curve facing adM@rt to show the constant loss ratio as described. (4 marks) Did adM@rt come closer to being a competitive firm than a monopolistic firm ? Why ? What was the nature of the products adM@rt was selling ? (3 marks) In its range of sales volume, was adM@rt operating at constant, increasing, or decreasing cost ? Why ? (3 marks)

(b)

(c)

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IC 9 (Continued)

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