1988 88.1 Utility maximizing behaviour

A. is observable although utility is not measurable. B. is not observable, therefore utility theory should be abandoned. C. can easily be tested. D. can be used to derive refutable implications when used in conjunction with other

specifications. 88.2 In a modern society, women are capable of earning higher real wages than, say, thirty years

ago. This implies that A. more women are now employed, and their marginal productivities have declined. B. there has been a fall in the demand for domestic maids or servants. C. women have become less educated because it now costs them more to go college. D. the cost of raising children has increased.

88.3 A good is a public good if

A. it is provided by the government free of charge. B. it can be consumed concurrently by many individuals. C. no one has to give up any other good to get more of the good in question. D. it is jointly owned by a large number of individuals.

88.4 Most people in Hong Kong travel on the Mass Transit Railway (MTR) or buses. Suppose the

fares of the MTR increase by 20% while the bus fares remain unchanged. The total fare revenue will A. increase for the MTR and remain unchanged for buses. B. decrease for the MTR and increase for buses. C. increase for the MTR but may increase or decrease for buses. D. increase for buses but may increase or decrease for the MTR.

88.5 The statement that a businessman maximizes profit is troublesome because

A. economic profit is often confused with profit in the accounting sense. B. profit is an unexpected windfall, and logically a businessman cannot very well

maximize what is unexpected. C. in competitive equilibrium, profit will be driven down to zero. D. a businessman may be more concerned with reputation than profit.

88.6 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 price of the product falls, the quantity of the product demanded increases. C. When the quantity of the factor employed increases, the price of the factor rises. D. The price of the product is falling over time.

88.7 In a market exchange situation, equilibrium is reached

A. the distribution of each good exchanged is more even with, than without, the exchange.

B. the utility of each individual is maximized, and the total utility of all individuals is also maximized.

C. for each individual involved, the marginal use value of each good exchanged is equal with each individual spending the same amount.

D. for each individual involved, the marginal use value of each good exchanged is equal and this in turn equals the market price.

88.8 Which of the following behaviour is inconsistent with the postulate of maximization? A. A drug addict forbids his son to take drugs. B. A doctor knows well that smoking causes cancer and yet keeps on smoking. C. A young business man donates 90% of his income to charity every month. D. A man, whose hourly wage rate doubles, choose a slower means of transportation to

get to work. 88.9 Economic analysis shows that cash subsidies give the subsidized a higher level of preference

than subsidies in kind so the use of cash subsidies is a better policy for society than subsidies in kind. Which of the following statements about the above quotation is true? A. The analysis is positive but the policy deduction is normative. B. The analysis is normative but the policy deduction is positive. C. Both the analysis and the policy deduction are positive. D. Both the analysis and the policy deduction are normative.

88.10 The Coase Theorem implies that

A. private property rights are a prerequisite for market transactions. B. if property rights are clearly defined, harmful effects inflicted by one individual upon

another will not occur. C. the divergence between private and social costs will disappear if the right to the

action causing the divergence is denied. D. government intervention is essential to internalize externalities.

88.11 A sales tax tends to lead to an increase in price. But the price will NOT increase if

A. the market demand is unitarily elastic. B. the market demand is perfectly elastic. C. the market supply curve is upward rising. D. the market supply is perfectly elastic.

88.12 Economics asserts that

A. indifference curves are negatively sloped. B. the law of demand can never be rejected by evidence. C. utility is a measure of welfare. D. the Giffen paradox is a logical possibility.

88.13 If the government maintains farm prices by buying up surpluses or selling to fill shortages,

then farmers would A. have a stable income. B. face a perfectly elastic demand schedule. C. increase output because of the price stabilization programme. D. face a unitarily elastic demand curve.

88.14 The following shows the demand schedule facing the only milk supplier who offers free delivery in a certain area:

Price per bottle ($) 2.00 2.50 3.00 3.50 Quantity demanded per month (bottles) 40 30 20 10 If the supplier now charges $3 per month for the delivery service, regardless of the quantity

delivered, then at a price of $2.50 per bottle, the quantity demanded per month would be A. 30 bottles. B. less than 30 bottles. C. more than 30 bottles. D. unknown because of insufficient information.

88.15 Consider an individual who is perfectly indifferent in choosing one of the following 5 combinations of good X and Y:

X 10 15 21 26 30 Y 5 4 3 2 1 The individual denies A. the postulate of maximization. B. the postulate of diminishing marginal rate of substitution. C. the postulate of substitution. D. the existence of economic goods.

88.16 Utility

A. refers to the numbers assigned to rank preferences. B. is a measure of satisfaction obtained from consuming economic goods. C. is a measure which a government will seek to maximize. D. uses a numbering system that must always be positive.

88.17 A restaurant opens near a housing estate. The cooking smell annoys the residents nearby.

Economic analysis indicates that A. the residents of the housing estate should be encouraged to sue the restaurant owner. B. resource allocation will be more efficient if the restaurant owner pays the residents to

tolerate the smell. C. it is more beneficial to society if the government forbids the restaurant to operate

near the housing estate. D. the mere presence of the annoying smell does not necessarily represent inefficient

use of resource. 88.18 Competition exists in

A. capitalist economies only. B. socialist economies only. C. mixed economies only. D. any society.

88.19 A monopolist producing an output at which MR = MC is inefficient to society because

A. individuals capture more consumers surplus in a competitive market than in a monopolistic market.

B. the maximum value of an additional unit of output to society is higher than the maximum sacrifice the society will have to make to produce that unit.

C. the monopolist tends to produce output of lower quality than a competitive producer. D. in restraining competition, idle or unemployed resources will occur.

88.20 if a luxury is defined as a good for which the income elasticity of demand is greater than one, then we cannot have all luxuries in the economy. This statement is A. true because there must exist at least one good with income elasticity less than one. B. true because there must be some necessities in the world. C. false because it all depends on what we produce. D. false because it all depends on the consumption pattern of the society.

88.21 Economic rent is A. a payment which does not affect the availability of a good. B. a payment in excess of cost. C. a profit obtained without risk. D. a payment necessary to keep a resource at its present use.

88.22 (Deleted)

88.23 Under private property rights, the main criterion used to allocate resources is A. seniority. B. price. C. rank D. wealth

88.24 Which of the following statements about cost is INCORRECT? A. Haste does not make waste; haste makes a higher cost. B. The more the methods of production to choose from, the lower tends to be the unit

cost. C. The higher the interest, the higher the cost. D. The higher the market value of a good, the higher will be its cost of production.

88.25 Which of the following is NOT an example of price discrimination? A. For the same treatments, doctors charge rich patients more poor ones. B. Given the same show, a theatre offers discounts for students. C. Airlines offer discounts for group tickets. D. In a private school, scholarships are given to students with better grades.

88.26 Which of the following statements about interest is INCORRECT? A. Interest is the price we pay for the earlier availability of goods. B. Interest is not part of income, but the whole of income. C. Interest is a monetary phenomenon because without money there will be no interest. D. interest is a premium of future over present consumption.

88.27 A firm exists because A. it engages in production. B. the coordination of production cannot be done without a firm. C. there are costs involved in using the price mechanism. D. with transaction costs there are middlemen in society.

88.28 The Pareto condition CANNOT be reached if A. production is conducted under monopoly. B. the presence of transaction costs calls for the existence of middleman. C. with information costs, one consumer pays more for a good than another consumer. D. none of the above.

88.29 Which one of the following statements about the law of demand is FALSE? A. It cannot be derived. B. It cannot be rejected by evidence. C. It explains human behaviour. D. It has not been rejected by evidence.

88.30 Which one of the following statements about an economic theory is INCORRECT? A. A useful theory must contain implications that are refutable by facts. B. A testable implication must contain variables that are observable. C. If a theory is to be useful, both its assumptions and predictions must be realistic. D. The implications of a theory are said to be confirmed when they are not rejected.

SECTION B1 88.1. What is the law of demand? Is this law consistent with the Giffen paradox? (8 marks) 88.2. The maximum one is willing to pay is value; the maximum one will have to sacrifice is cost.

Why is the word maximum associated with both value and cost? (8 marks) 88.3. What is consumers surplus? Can you think of one example in the real world in which this

concept helps to explain pricing behaviour? (8 marks)

SECTION B2 88.4. What is monopoly? Does a monopolist have to face competition? Explain. (8 marks) 88.5 Explain why the marginal cost curve always cuts the lowest point of the average cost curve. (8 marks) 88.6 As a behavioural postulate, wealth maximization is preferred to income maximization. Do

you agree? Explain. (8 marks) SECTION C 88.7 The Hong Kong Cross Harbour Tunnel is often congested and takes time to cross. Time is

valuable. In principle, it is possible to raise the toll to reduce or even eliminate the traffic congestion.

(a) If congestion occurs, explain why a tunnel user will generate a divergence between

private and social costs, and why an increase in toll charges will reduce or eliminate this divergence. (7 marks)

(b) Assume all transaction costs are zero so that the toll may be adjusted by the hour to

reduce congestion; assume further that the total toll revenue received under this variable-toll system is the same as that of a system where a single toll is used. (i) Which of the above systems is more likely to reduce traffic congestion? Explain. (5 marks) (ii) Which of the above system will result in more tunnel users? Explain (5 marks)

(c) It is sometimes argued that if the tunnel required no maintenance or other servicing

costs, then without congestion, the marginal cost of serving an extra car would be zero. Therefore, the imposition of any toll which tends to discourage users would be inefficient. Without congestion, it is said, efficient pricing requires that no fee be charged. Do you agree with this view? Explain. (7 marks)

88.8 In Hong Kong, a licence is required to operate a taxi, and the number of licences is restricted

by the government. Extra or new licences are issued and auctioned by the government from time to time, and a licensee may sell his licence in the free market. The taxi fares are also regulated, although adjustments are sometimes made. During the summer of 1987, the market price of a taxi licence in Hong Kong reached HK$600 000.

(a) Is the market value of a taxi licence a capital value? Explain. (6 marks) (b) What are some of the more important factors which affect the market value of a taxi

licence? (8 marks) (c) Taxi drivers are sometimes impolite to customers.

(i) Do you think that these drivers would be more polite if the taxi fares were not regulated? (4 marks)

(ii) What change in the regulated fare would instantly turn taxi drivers into angels? And would this new rate lead to an increase in the market value of a taxi licence? (6 marks)

88.9 Wage workers may be paid by the hour, by piece rates, by gratuities (tips), or by still other

forms.

(a) If workers are not monitored or supervised at all, how will they behave under the hourly-rate system as against the piece-rate system? (6 marks)

(b) What do you think are the general characteristics of work that determine the choice

of piece-rates versus hourly-rates? Explain. (6 marks) (c) Why are gratuities (tips) popular in the service sector but not in the sector producing

physical goods or commodities? (6 marks) (d) What do you think is the general reason that explains the adoption of different terms

of payments to workers? (6 marks)

88.10 Two currencies are circulated in China, the Foreign Exchange Certificate (FEC) and the

Renminbi (RMB). The FEC is convertible into foreign currencies at officially controlled exchange rates; the RMB is not similarly convertible. As a result, although the FEC and the RMB have the same nominal value, dollar for dollar the FEC is worth significantly more than the RMB in the black or free market.

(a) In high quality restaurants in Beijing, foreigner are strictly required by law to pay

in FEC while local Chinese pay in RMB, both groups paying the same nominal price of the same services.

(i) Is this price discrimination? Explain. (4 marks) (ii) Is it possible that these restaurants earn more by requiring the two groups to

pay in different currencies? Explain. (5 marks) (b) In Guangzhou the enforcement is less strict. As a result, high quality restaurants there

choose to accept either FEC or RMB from any customer. However, in doing so they charge a substantial premium if a customer chooses to pay in RMB.

(i) Is this price discrimination? Explain. (4 marks) (ii) Do you think that these restaurants tend to earn more by accepting either

currency from any customer? Explain. (5 marks)

(c) Assume that the price elasticity of demand of foreigners as a group in Beijing is roughly the same as that of foreigners in Guangzhou, and that the price elasticity of demand of local Chinese as a group in Beijing is also roughly the same as that of local Chinese in Guangzhou. Can you infer from (a) and (b) above that those restaurants in Beijing necessarily earn less as a result of the requirement that foreigners must pay in FEC? Explain. (6 marks)

SolutionSolution SECTION A

1 D 16A 2 D 17D 3 B 18D

4 D 19B 5 B 20A 6 B 21A 7 D 22B 8 D 23B 9 A 24D 10 A 25C 11 B 26C 12 A 27C 13 B 28D 14 A 29B 15 B 30C

SolutionSECTION A