1

MOCK PAPER

ECONOMICS PAPER 1

Time allowed: 1 hour

INSTRUCTIONS

1. When told to open this book, you should check that all the questions are there. Look for

the words ‘END OF PAPER’ after the last question.

2. All questions carry equal marks.

3. ANSWER ALL QUESTIONS.

4. You should mark only ONE answer for each question. If you mark more than one answer,

you will receive NO MARKS for that question.

5. No marks will be deducted for wrong answers.

2

There are 45 questions in this paper. Choose the BEST answer for each question.

1. Tom has recently graduated from university. He is deciding whether to go travelling in the

United States (US) or Australia for a month before looking for a job. Which of the

following would reduce his cost of travelling in the US?

A. The weather in the US is unexpectedly bad.

B. The Australian dollar depreciates against the US dollar.

C. Tom’s aunt allows him to stay at her home when he visits New York.

D. Google offers him a chance to work as an intern in Silicon Valley.

2. Interest __________ exist in an economy without money because __________.

A. can … people always prefer to consume a good sooner rather than later

B. can … interest can be paid in goods

C. cannot … people cannot find a medium of exchange

D. cannot … there are no banks in such an economy

3. The trees in a tropical rainforest are

A. free goods because their supply is plentiful.

B. free goods because they grow naturally.

C. economic goods because they are rival in consumption.

D. economic goods because their quantity available is not sufficient to satisfy all human

wants for them.

4. A Hong Kong film production company plans to film a school horror movie starring

young local actors. Which of the following economic questions are related to the above

case?

(1) ‘What to produce’

(2) ‘How to produce’

(3) ‘For whom to produce’

A. (1) and (2) only

B. (1) and (3) only

C. (2) and (3) only

D. (1), (2) and (3)

3

5. The following table shows the input-output relationship of a smartphone producer’s

quality control department.

Labour (units) Tools (units) Number of phones checked per hour

5 1 20

5 2 60

5 3 110

5 4 165

5 5 215

When the __________ unit of tools is added, the marginal product starts to diminish.

A. second

B. third

C. fourth

D. fifth

6. The following table shows the cost schedule of a factory, which has a fixed cost equal to

$5.

Output (units) Total cost ($)

1 20

2 35

3 70

4 110

5 155

Given that the market price of the product is $35. If the price increases by $10, the

profit-maximising output and the corresponding profit will be ___________ and

__________, respectively.

A. 3 units … $60

B. 3 units … $65

C. 5 units … $65

D. 5 units … $70

4

7. A listed company decides to issue new shares to raise funds. Which of the following is

most likely correct?

A. Existing shareholders’ control over the company will weaken.

B. Obtaining new bank loans will become harder for the company.

C. It will be harder for others to take over the company.

D. Bondholders will have a higher risk of not getting back their investment if the

company is liquidated.

8. Which of the following are differences between a partnership and a limited company?

(1) A limited company is a legal entity while a partnership is not.

(2) A partnership does not need to disclose its financial accounts to the public while a

limited company must disclose them.

(3) Transfer of ownership of a partnership is harder than that of a limited company.

A. (1) and (2) only

B. (1) and (3) only

C. (2) and (3) only

D. (1), (2) and (3)

9. Which of the following will reduce the labour supply in Hong Kong?

A. Some construction workers get laid off due to importation of foreign workers.

B. More people opt to retire later.

C. Valentine’s Day becomes a public holiday.

D. All of the above

10. Producer X owns a grape farm in Ningxia. Besides supplying grapes to wineries (釀酒

廠), Producer X also organises sightseeing trips to its farm for visitors. In which stages of

production is Producer X involved?

(1) Primary production

(2) Secondary production

(3) Tertiary production

A. (1) and (2) only

B. (1) and (3) only

C. (2) and (3) only

D. (1), (2) and (3)

5

11. Study the information below.

Which of the following descriptions about the two persons is correct?

A. Joe’s geographical mobility of labour is lower because clerks must work in an office.

B. Katherine’s geographical mobility of labour is lower because teachers’ incomes in

foreign countries are higher.

C. Joe’s occupational mobility of labour is higher because his cost of changing

occupation is lower.

D. Katherine’s occupational mobility of labour is higher because the demand for

philosophy graduates is higher.

12. When the demand for housing units increases,

A. the demand for construction materials will increase because it is a factor of production

of housing units.

B. the supply of industrial buildings will decrease because residential building and

industrial building are in joint supply.

C. the demand for housing for security guards will increase because it is a derived

demand of housing units.

D. All of the above

13. Suppose the tap water in a city is contaminated by heavy metals. Which of the following

is correct?

A. The supply of catering services will become more elastic.

B. The supply of underground water will become more inelastic.

C. The demand for water filters will become more elastic.

D. The demand for distilled water will become more inelastic.

Katherine

University degree: Philosophy

Career: Teacher

Monthly salary: $18,000

Joe

University degree: Accounting

Career: Clerk

Monthly salary: $9,000

6

14. Refer to the following supply-demand diagram of a remote controlled (RC) helicopter. E0

is the initial equilibrium.

Suppose the production cost of RC helicopters decreases and the government only allows

the use of RC helicopters in certain areas. In the above diagram, the new equilibrium is

most likely at Point _____.

A. E1

B. E2

C. E3

D. E4

15. During winter, the shortage of emergency room services in public hospitals is serious.

Non-urgent patients have to wait for hours before being diagnosed and treated. Suppose

the government increases the fee for public emergency room services by 10%. Which of

the following must be correct?

(1) The shortage will become more serious.

(2) The deadweight loss will decrease.

(3) More patients will go to private clinics.

(4) Patients’ total expenditure on public emergency room services will decrease.

A. (1) and (2) only

B. (1) and (4) only

C. (2) and (3) only

D. (2) and (4) only

S2

Quantity

Price

0

D0

D1

D2

S0

S1 E0

E2

E1

E3

E4

7

16. Refer to the following supply and demand schedules of a good.

Price ($) 5 6 7 8 9 10

Quantity supplied (units) 18 22 26 30 34 38

Quantity demanded (units) 30 28 26 24 22 20

Which of the following statements is correct according to the above information?

A. If a price floor is set at $5, the quantity transacted will be 18 units.

B. There will be a surplus of 6 units if a price ceiling is set at $8.

C. If a unit tax of $2 is imposed on the good, total tax revenue will be $52.

D. If a unit subsidy of $3 is provided to producers, consumers’ total expenditure will be

$150.

17. The market structure for the retailing of women’s clothing in Hong Kong is

A. perfect competition because there are many independent sellers.

B. monopolistic competition because there are no dominant sellers.

C. an oligopoly because sellers are price searchers.

D. an oligopoly because sellers’ pricing strategies are interdependent.

18. Which of the following is an example of a divergence between private cost and social

cost?

A. A mother tells a bedtime story to her children even though she is very tired.

B. A dancer practises at home, causing noise that affects the occupants living below her.

C. A movie star acts in a film directed by a director he hates.

D. A passenger gets hurt when he tries to put out a fire on a train.

19. Which of the following measures can increase external benefits in Hong Kong?

A. Increasing the fine for littering (亂拋垃圾)

B. Rewarding people who offer assistance to those who are injured

C. Allowing street artists to perform in more areas

D. All of the above

8

20. If the government provides a $4,000 basic income to every resident,

A. income distribution will become more even because the poor have a greater

percentage increase in their incomes.

B. the Gini coefficient will increase because this increases the incomes of people who are

not in need.

C. the income gap will widen because households with more members will have a larger

increase in incomes.

D. None of the above

21. Which of the following will reduce a deadweight loss?

(1) Lowering an effective price floor

(2) Cutting a unit tax

(3) Increasing a unit subsidy

A. (1) and (2) only

B. (1) and (3) only

C. (2) and (3) only

D. (1), (2) and (3)

22. If the government raises the first registration tax on vehicles,

A. the consumer surplus in the new vehicle market will decrease.

B. the producer surplus in the secondhand vehicle market will increase.

C. society as a whole may gain as traffic congestion may become less serious.

D. All of the above

23. Which of the following is an effect of abolishing the effective quota on chemical

fertiliser?

A. Demand for chemical fertiliser will increase.

B. Total expenditure on chemical fertiliser must increase.

C. The consumer surplus in the agricultural product market will increase.

D. Farmers’ total revenue must increase.

24. Which of the following items should NOT be included in Hong Kong’s GDP in 2016?

A. The remuneration to a British professor who came to Hong Kong for a week to give a

lecture in March 2016

B. The market value of a toy produced in Hong Kong in 2014 which was sold in 2016

C. The commission income of a stockbroker (股票經紀) in 2016

D. Government expenditure on providing water supplies in 2016

9

25. The following table shows economic data for City X in 2015 and 2016.

Year % change in

nominal GDP

% change in

GDP deflator

2015 4 3

2016 1 2

Which of the following conclusions can be drawn from the above data?

A. The real GDP of City X in 2016 was higher than that in 2015.

B. The percentage changes in real GDP were the same in 2015 and 2016.

C. In 2015, the living standard in City X improved.

D. The cost of living increased in both 2015 and 2016.

26. Which of the following can increase the long run aggregate supply?

A. Tighten immigration restrictions by only allowing immigrants who originate from

developed countries

B. Establish more private universities

C. Increase government expenditure on elderly care services

D. All of the above

27. Suppose the government provides subsidies to startup technology firms. This increases

__________ and hence causes a rightward shift in the __________ curve.

A. government consumption expenditure … aggregate demand

B. government consumption expenditure … short run aggregate supply

C. gross investment expenditure … aggregate demand

D. gross investment expenditure … short run aggregate supply

10

28. The following shows the AS-AD diagram of Country Q. The country was initially at E0.

When there is a sudden rise in energy prices, the country will be at Point _____. If the

government reduces profits taxes in response, the country will shift to Point _____.

A. E1 … E0

B. E1 … E3

C. E2 … E0

D. E2 … E4

29. Which of the following would cause a leftward shift in the money demand curve?

(1) Stock prices are rising steadily.

(2) People have less desire to consume.

(3) More small shops accept electronic payments.

A. (1) and (2) only

B. (1) and (3) only

C. (2) and (3) only

D. (1), (2) and (3)

30. Which of the following will reduce Hong Kong’s M1 money supply?

(1) Jesse transfers $150,000 from her demand deposit account to her savings deposit

account.

(2) Mandy deposits $300,000 cash into her account with a deposit-taking company.

(3) Simon withdraws $500,000 from his savings account with a bank and remits the entire

amount to his son in Canada.

A. (1) and (2) only

B. (1) and (3) only

C. (2) and (3) only

D. (1), (2) and (3)

Y

P

0

SRAS1

SRAS2

AD0

AD1

AD2

SRAS0

E0

E4

E2

E3

E1

LRAS

11

31. Study the following news extract.

In 2016, Octopus launched a smartphone app, ‘O! ePay’. The app allows users to pay one

another through their smartphones without using any cash.

The new feature has strengthened the function of Octopus as a

A. medium of exchange.

B. store of value.

C. unit of account.

D. standard of deferred payments.

32. The following shows a banking system’s balance sheet.

Assets ($) Liabilities ($)

Reserves 400 Deposits 1,600

Loans 1,200

If the actual reserve ratio exceeds the required reserve ratio by 5%, which of the

following statements about the banking system is INCORRECT?

A. The maximum banking multiplier is 5.

B. The required reserves are $320.

C. If $100 is withdrawn from the banking system, the maximum amount of loans is

$1,500.

D. If $100 is deposited into the banking system, the maximum increase in deposits is

$900.

33. The following table gives information about a banking system.

Actual reserve ratio 20%

Cash held by the public $15 billion

Total amount of deposits $90 billion

According to the above information, what is the monetary base of the banking system?

A. $18 billion

B. $33 billion

C. $105 billion

D. $108 billion

12

34. Yvonne holds a bond with a nominal interest rate of 4% and she expects the inflation rate

to be 2%. Her expected real interest rate is _____ and the cost of holding cash is _____.

A. 2% … 0%

B. 2% … 4%

C. 6% … 0%

D. 6% … 4%

35. Which of the following measures can alleviate inflationary pressure in an economy?

A. Increasing the discount rate

B. Cutting tax allowances for corporations

C. Raising the required reserve ratio

D. All of the above

36. The following diagram shows the structure of an income tax in Country G.

Which of the following is/are correct about the tax structure?

A. The tax allowance is $8,000.

B. The tax is proportional when income is between $8,000 and $15,000.

C. The tax is regressive when income is greater than $15,000.

D. All of the above

37. Suppose the central bank keeps raising money supply by 1% every year. Which of the

following is correct according to the quantity theory of money?

A. Nominal GDP will be constant in the long run.

B. The inflation rate will be constant at 1% in the long run.

C. Real GDP will grow at 1% every year.

D. The price level will be constant in the long run.

Income ($) 0

Tax payment ($)

8,000

2,700

15,000

13

38. Which of the following parties will NOT lose when unanticipated inflation occurs?

A. An accountant whose salary increases by 5% annually according to the contract he

signed with his firm

B. A landlord who leases a parcel of farmland to a peasant for $90,000 per year

C. A company which has issued inflation-indexed bonds.

D. All of the above will lose.

39. The following table shows the real GDP growth rate of Economy T from 2009 to 2016.

Year 2009 2010 2011 2012 2013 2014 2015 2016

Real GDP

growth rate -2.1% -1.0% 0.3% 2.1% 3.4% 3.2% 1.5% 0.1%

Which of the following economic phenomena would likely be observed in Economy T in

2016?

(1) Increasing unemployment rate

(2) Low inflation rate

(3) Increasing net exports

A. (1) and (2) only

B. (1) and (3) only

C. (2) and (3) only

D. (1), (2) and (3)

40. Suppose a country’s currency appreciates rapidly against that of its trading partners.

__________ can help alleviate the undesirable effect on the country’s output level.

(1) Imposing import quotas on foreign goods

(2) The central bank buying government bonds from the market

(3) Increasing the standard tax rate of income taxes

A. (1) and (2) only

B. (1) and (3) only

C. (2) and (3) only

D. (1), (2) and (3)

14

41. The following table shows the amounts of Good M and Good N that Country A and

Country B can produce with all of their resources. Both countries allocate resources

evenly in the production of the goods.

Good M (units) Good N (units)

Country A 20 AND 25

Country B 8 AND 12

Which of the following is correct?

A. Country A has absolute advantages in the production of both goods over Country B.

B. If both countries produce and trade with each other according to the principle of

comparative advantage, the total production of Good N will be 24 units.

C. 1M = 1.2N is a mutually beneficial terms of trade for both countries.

D. If the cost of transporting 1M is 0.1N, the trade between the countries cannot be

mutually beneficial.

42. The following is the supply-demand diagram of Good X in a small open economy.

The economy imports Good X at the world price (PW) but an import quota of Q2 – Q1

units is imposed. Which of the following are correct?

(1) The quantity of domestically produced Good X is Q1.

(2) If the government increases the quota, the price will remain unchanged.

(3) If the quota decreases, the total revenue of local producers from Good X will increase.

A. (1) and (2) only

B. (1) and (3) only

C. (2) and (3) only

D. (1), (2) and (3)

Q

$

0

S

D

Q1

PW

Q2

Import quota

15

43. Suppose the US dollar depreciates. Under the linked exchange rate system, which of the

following would be the effect of the above event?

A. More Hong Kong people will travel to Europe.

B. Hong Kong tourists’ expenditure on Japan’s goods and services in terms of Hong

Kong dollars will increase.

C. The mainland’s total export value to Hong Kong in terms of renminbi will decrease.

D. Hong Kong’s imports from the US will increase.

44. Which of the following will improve the current accounts of both Hong Kong and the

mainland of China?

A. A Shenzhen manufacturer exports smartphones to Hong Kong, which are then

re-exported to the US.

B. A British singer holds a concert in Beijing and then visits Hong Kong as a tourist.

C. A mainland investor uses his capital gain from property investment in Europe to

purchase luxuries in Hong Kong and the mainland.

D. All of the above

45. The following table shows the production and consumption data for Country G which

engages in international trade according to the principle of comparative advantage.

Good X (units) Good Y (units)

Production before trade 15 AND 25

Production after complete

specialisation 30 AND 0

Consumption after trade 20 AND 40

According to the above information, we can conclude that

(1) Country G has a comparative advantage in producing Good X.

(2) the terms of trade is 1X = 4Y.

(3) Country G’s gain from trading 1 unit of Good X is equal to 0.5 units of Good Y.

A. (1) and (2) only

B. (1) and (3) only

C. (2) and (3) only

D. (1), (2) and (3)

END OF PAPER

1

MOCK PAPER

ECONOMICS PAPER 2

Time allowed: 2 hours 15 minutes

This paper must be answered in English.

INSTRUCTIONS

1. This paper consists of three sections, A, B and C. Answer ALL questions in Sections A

and B. Attempt any ONE question in Section C.

2. Write your answers in the spaces provided. DO NOT write in the margins. Answers

written in the margins will not be marked.

2

Section A (50 marks)

1. Harold can go home from the office either by bus or by the MTR. He usually takes the

bus because he feels it is more comfortable. Explain how his cost of taking the bus would

change under the following situations.

a. The number of tourists travelling by the MTR decreases. (2 marks)

b. The bus route is heavily congested. (2 marks)

2. A traditional television broadcasting company takes over a popular online media site

which mainly produces funny videos targeting youngsters.

a. To which type of expansion does this belong? Explain your answer briefly.

(2 marks)

b. Besides economies of scale, suggest THREE motives for the above expansion.

(3 marks)

c. The company uploads some old dramas onto its website. Only local internet users can

watch the dramas. Explain whether the dramas are public goods. (3 marks)

3

3. The following diagram shows the market for smartphones made in Country K.

People are concerned about the safety of Country K’s smartphones after a number of them

exploded. In response, producers in Country K are using better quality batteries to

improve safety. With the aid of the above diagram, explain under what circumstances the

price of Country K’s smartphones would increase. (7 marks)

Price ($)

Quantity 0

S

D

4

4. In 2016, air pollution in northern China was very serious. Some people said the problem

was caused by heavy industrial activities in the region.

a. Explain how externality was involved in the above case. (3 marks)

b. Explain how the government may relieve the problem by taxation. (3 marks)

5. The following table gives nominal and real GDP of Country X in 2015 and 2016.

Year Nominal GDP ($ million) Real GDP ($ million)

2015 900 800

2016 927 808

Base year: 2014

a. Calculate the GDP deflators in 2015 and 2016. (2 marks)

b. i. Explain whether inflation occurred between 2015 and 2016. (2 marks)

ii. Ellen borrowed $10,000 from a colleague in 2015. She promised to repay a total

of $11,000 in 2016 and did not expect any changes in the price level. With

reference to your answer in (b)(i), explain whether she would gain or lose.

(3 marks)

5

6. In recent years, the number of immigrants has increased sharply in Country A. Most are

employed at below market wages. At the same time, some local low-skilled workers were

fired from their jobs.

a. Under the above situation, the unemployment rate in the country has decreased

slightly. Explain how this may happen. (3 marks)

b. List THREE costs of unemployment to the unemployed. (3 marks)

7. The following shows a banking system’s balance sheet. Suppose banks hold $300 in

excess reserves and the public does not hold cash.

Assets ($) Liabilities ($)

Reserves 900 Deposits 6,000

Loans 5,100

a. Calculate the required reserve ratio. Show your work. (2 marks)

b. Calculate the maximum change in money supply if banks loan all of their excess

reserves. Show your work. (2 marks)

c. Explain how the monetary base would change if the public withdraws some deposits

and holds money in cash. (3 marks)

6

8. Suppose Country X and Country Y produce only ham and cheese. The following table

shows the amount of ham or cheese produced per unit of resources.

Ham (units) Cheese (units)

Country X 10 OR 8

Country Y 16 OR 12

a. According to the principle of comparative advantage, explain which country would

export ham. (3 marks)

b. Suppose the country importing ham imposes a unit tariff on ham which equals

0.07 units of cheese. Explain whether Country X and Country Y would trade.

(2 marks)

END OF SECTION A

7

Section B (54 marks)

9. The government of Country C plans to impose a unit tax on white wine.

a. With the aid of a supply-demand diagram, explain under what situation consumers’

total expenditure on white wine would decrease after the imposition of the unit tax.

(5 marks)

b. Explain how the unit tax would affect the average quality of white wine sold in the

market, with reference to the law of demand. (5 marks)

c. It is common for wine lovers in Country C to travel to Country D to buy white wine.

Explain the effect of the unit tax on Country C’s current account balance. (4 marks)

Price ($)

Quantity 0

8

9

10. Donald Trump became the US president on January 20, 2017. During the election

campaign, Trump promised to introduce expansionary fiscal policies.

a. Some people believe that the US economy was already at full employment when

Trump took office (上任). With the aid of an AS-AD diagram, explain the short run

and long run effects of expansionary fiscal policies if the US economy was originally

at full employment. (10 marks)

b. Trump also promised to build a wall along the US-Mexico border. The cost could be

as high as $21.6 billion. Suggest TWO reasons to explain why only a part of the

amount would be included in the GDP of the US during the construction period.

(4 marks)

0

Aggregate output

Price level

10

11

11. The following diagram shows the number of DSE candidates in recent years.

(Source: The Hong Kong Examinations and Assessment Authority)

a. i. According to the above information, how did the total revenue of tutoring schools

in Hong Kong change from 2013 to 2016? Explain your answer briefly. (2 marks)

ii. Explain how the total income of tutors changed during the period. (2 marks)

b. In Hong Kong, many university students provide private tutoring services to primary

and secondary students. Is the market for private tutoring services perfectly

competitive? Explain your answer with TWO reasons. (3 marks)

c. Tutoring Centre X does not provide basic monthly salaries to its tutors. Instead, it

shares with each tutor 60% of the tutoring fee revenue generated from the tutor.

Explain TWO advantages of the above payment method to Tutoring Centre X over

that of a time rate. (4 marks)

d. Since 2011, several firms specialising in tutoring services have attempted to become

listed in Hong Kong.

Suggest ONE advantage and ONE disadvantage of a listed company over a private

limited company. (2 marks)

Year

12

13

12. Country J’s business prospects are uncertain. The central bank of Country J has carried

out an open market purchase of government bonds to stimulate the economy.

a. With the aid of the following diagram, explain how the above measure would affect

the nominal interest rate. (4 marks)

b. The risk of investing in the stock market in Country J would increase. Explain how

this would affect the effectiveness of the open market purchase on the nominal

interest rate as described in (a). (3 marks)

c. Suppose the central bank increases the money supply by 2%. With reference to the

classical quantity theory of money, explain whether Country J’s real GDP would

increase by 2% in the long run. State the assumption taken to reach your answer.

(4 marks)

d. Investors would lose confidence in Country J’s housing market. Residential property

prices would fall. Developers would stop constructing new residential property and

switch to building commercial buildings. Explain ONE function of prices

demonstrated in this case. (2 marks)

0

Quantity of money

Nominal interest rate

MS

Md

n0

14

END OF SECTION B

15

Section C (16 marks) Answer any ONE question.

13. Farm K is a country’s only milk provider. It practises simple monopoly pricing.

a. i. With the aid of the diagram below, explain how Farm K sets the

profit-maximising output (Qm) and price (Pm) of its milk. (3 marks)

ii. Using the same diagram in (a)(i), explain whether the output level is efficient.

(2 marks)

b. Suppose the government imposes a unit tax on milk.

i. Explain the change in the price and quantity transacted of milk in the country.

(2 marks)

ii. How would the efficiency of the market change? (1 mark)

c. Farm K sells milk at a lower price in schools.

i. Explain why this pricing arrangement constitutes price discrimination. (2 marks)

ii. To which type of price discrimination does this behaviour belong? (1 mark)

iii. State TWO conditions for this type of price discrimination besides monopoly

power. (2 marks)

d. Suppose Farm K enters the milk market in another country, Country G. The milk

market is oligopolistic. Farm K forms a cartel with other oligopolists in Country G

and restricts their output.

i. In which kind of anti-competitive behaviours may Farm K be engaging in?

(1 mark)

ii. Explain how this anti-competitive behaviour harms consumers in Country G.

(2 marks)

Price ($)

Quantity 0

D

Marginal cost

16

17

14. The following diagram shows the production possibilities frontier (PPF) for Country Z.

Country Z always consumes m units of bananas (as indicated in the diagram) and

maximises the amount of peanuts it can consume.

a. Indicate Country Z’s consumption point under autarky as Point A. (1 mark)

b. Country Z starts to engage in international trade. TOT is the terms of trade line.

i. Explain whether Country Z has a comparative advantage or disadvantage in

producing bananas. (3 marks)

ii. Indicate Country Z’s production point after specialisation as Point B and the

consumption possibilities frontier (CPF) after trade. (2 marks)

iii. Indicate Country Z’s consumption point after trade as Point C. Indicate the

amounts of exports and imports as X and I, respectively. (3 marks)

iv. Explain whether Country Z is better off after trade. (3 marks)

c. Explain how the following events affect Country Z’s Human Development Index

(HDI).

i. Country Z’s citizens like eating food with high sugar and high fat content.

(2 marks)

ii. More families allow girls to go to school. (2 marks)

0

Peanuts (units)

Bananas (units) m

TOT

PPF

18

END OF SECTION C

Suggested answers to Mock Paper

Paper 1 (45 marks)

1. C 6. D 11. C 16. D 21. A 26. B 31. A 36. D 41. B

2. B 7. A 12. A 17. B 22. D 27. C 32. C 37. B 42. D

3. D 8. B 13. D 18. B 23. C 28. B 33. B 38. C 43. C

4. A 9. C 14. B 19. C 24. B 29. D 34. B 39. D 44. A

5. D 10. B 15. C 20. A 25. D 30. A 35. D 40. A 45. A

Paper 2

Section A

1. a. The cost would increase. (1 mark)

As the number of tourists decreases, the MTR would be less crowded. Thus, the value

of taking the MTR would increase. (1 mark)

b. The cost would increase. (1 mark)

Due to the heavy congestion, the travel time would increase. Therefore, the time cost

of taking the bus would increase. (1 mark)

2. a. Lateral expansion (1 mark)

The broadcasting company expands its business into related but not competing

products. (1 mark)

b. The company can make better use of its resources (e.g., actors).

The company can extend its brand name to online media.

The company can spread the risk through product diversification (e.g., online

programmes).

The company can attract a younger audience.

(Any THREE of the above or other reasonable answers. 1 mark × 3 = 3 marks)

c. No. (1 mark)

The dramas are excludable in consumption as overseas internet users cannot watch

them. (2 marks)

3. Indicate on the diagram:

Leftward shift in demand curve (1 mark)

Leftward shift in supply curve (1 mark)

Increase in price (1 mark)

Verbal elaboration:

Due to safety concerns, the demand for Country K’s smartphones decreases. (1 mark)

As producers use better quality batteries, production costs increase. The supply of

Country K’s smartphones decreases. (1 mark)

If the decrease in supply is greater than the decrease in demand, the price of Country K’s

smartphones would increase. (2 marks)

4. a. Industrial activities created air pollution which may harm the health of citizens living

in the region without providing them with any compensation. Negative externality

was involved. (or external costs were involved.) (3 marks)

b. By imposing a tax, the government can increase the private cost of heavy industrial

activities. Factories would reduce production. Hence, the problem of external costs

and air pollution would be relieved. (3 marks)

5. a. GDP deflator in 2015 = 900 ÷ 800 × 100 = 112.5 (1 mark)

GDP deflator in 2016 = 927 ÷ 808 × 100 = 114.7 (1 mark)

b. i. Inflation occurred between 2015 and 2016 (1 mark)

because the GDP deflator increased. (1 mark)

ii. Ellen would gain (1 mark)

because the real value of her repayment was lower than she expected. (2 marks)

Price ($)

Quantity 0

P0

S

D

S’

D’

P1

6. a. Unemployment rate = Unemployed persons ÷ Labour force × 100% (1 mark)

In such a situation, both the number of unemployed and the labour force increase at

the same time. If the percentage increase in the number of unemployed is smaller than

the percentage increase in the labour force, the unemployment rate will decrease.

(2 marks)

b. The living standard of the unemployed and their families drops.

The unemployed may have family problems.

If workers are unemployed for a long time, their knowledge, skills and experience

will be lost or become outdated.

(Accept other reasonable answers. 1 mark × 3 = 3 marks)

7. a. Required reserves = $900 − $300 = $600 (1 mark)

Required reserve ratio = $600 $6,000 100% = 10% (1 mark)

b. Maximum amount of deposits = $900 × 1/10% = $9,000 (1 mark)

Maximum change in money supply = $9,000 − $6,000 = $3,000 (1 mark)

c. Monetary base = Cash held by the public + Reserves held by bank (1 mark)

The monetary base would remain unchanged as the increase in cash held by the public

is equal to the decrease in reserves held by the bank. (2 marks)

8. a. Country X’s cost of producing 1 unit of ham = 8 ÷ 10 = 0.8 units of cheese (1 mark)

Country Y’s cost of producing 1 unit of ham = 12 ÷ 16 = 0.75 units of cheese (1 mark)

As Country Y’s cost of producing ham is lower than that of Country X, Country Y

will specialise in the production of ham and export ham. (1 mark)

b. Country X and Country Y would not trade because the tariff (0.07 units of cheese) is

greater than the difference in their costs of producing ham (0.05 units of cheese).

(2 marks)

Section B

9. a. Indicate on the diagram:

Upward shift in supply curve (1 mark)

Increase in total expenditure < Decrease in total expenditure (1 mark)

Verbal elaboration:

As the unit tax is imposed, the supply of white wine decreases from S to ST. (1 mark)

If the demand for white wine is elastic, the percentage increase in price would be

smaller than the percentage decrease in quantity transacted. As a result, consumers’

total expenditure would decrease. (2 marks)

b. Due to the imposition of the unit tax, the prices of both low-quality and high-quality

white wine increase by the same amount. The relative price of high-quality white

wine (in terms of low-quality white wine) decreases. According to the law of demand,

relatively more high-quality white wine would be sold. As a result, the average quality

of white wine sold in the market would increase. (5 marks)

c. As white wine in Country D is a substitute for white wine in Country C, white wine

lovers in Country C would buy more white wine when they travel to Country D.

(2 marks)

Country C’s imports of services would increase. Hence, Country C’s current account

balance would deteriorate. (2 marks)

Price ($)

Quantity 0

S

D

ST

Unit

tax P2

P1

Q1 Q2

Increase in total expenditure

Decrease in total expenditure

10. a. Indicate on the diagram:

Full employment equilibrium at the beginning (1 mark)

Rightward shift in aggregate demand curve (1 mark)

Short run: Increases in price level and output level (1 mark)

Leftward shift in short run aggregate supply curve (1 mark)

Long run: Further increase in price level while output level is restored to Yf

(1 mark)

Verbal elaboration:

Due to expansionary fiscal policies, government consumption and investment

expenditures would increase. (1 mark)

Hence, aggregate demand would increase from AD to AD’. (1 mark)

In the short run, the price level would increase from P1 to P2 and the output level

would increase from Yf to Y2. (1 mark)

As the output level is higher than the full employment output level, the excess

demand for inputs would lead to an increase in input prices. Short run aggregate

supply would decrease from SRAS to SRAS’. (1 mark)

In the long run, the price level would further increase to P3 but the output level would

be restored to Yf. (1 mark)

b. Some of the materials used to build the wall may be produced in previous years.

Their values have been included in the GDP in those years. (2 marks)

Some of the materials may be imported from other countries. Their values should

be included in the GDP of those countries. (2 marks)

Y2

Yf

P1

○1

○2

○1 Short run effects

○2 Long run effects

0

Aggregate output

Price level

LRAS

AD

SRAS

SRAS’

AD’

P2

P3

11. a. i. As the number of DSE candidates kept decreasing, the demand for tutoring

services decreased. (1 mark)

Thus, the total revenue of tutoring schools in Hong Kong would decrease.

(1 mark)

ii. The demand for tutors is derived from the demand for tutoring services. (1 mark)

As the demand for tutoring services decreases, the demand for tutors would

decrease. Therefore, their total income would decrease. (1 mark)

b. No. (1 mark)

No one in the market has perfect information, such as about teaching quality and

teaching methods.

Tutors are price searchers. They can set their own prices to maximise their profits.

Tutors may engage in non-price competition such as advertisements.

Tutors provide heterogeneous services.

(Any TWO of the above or other reasonable answers. 1 mark × 2 = 2 marks)

c. Tutors have a greater incentive to improve their teaching quality to attract more

students. This can improve the revenue of Tutoring Centre X. (2 marks)

When the number of students decreases, Tutoring Centre X can transfer part of the

loss to tutors. (2 marks)

(Accept other reasonable answers.)

d. Advantage:

A listed company has a wider source of capital.

Shares of a listed company can be transferred more easily.

(Any ONE of the above or other reasonable answer. 1 mark)

Disadvantage:

A listed company needs to disclose its audited annual financial accounts to the

public.

A listed company has a greater risk of being taken over.

(Any ONE of the above or other reasonable answer. 1 mark)

12. a. Indicate on the diagram:

Rightward shift in money supply curve (1 mark)

Decrease in nominal interest rate (1 mark)

Verbal elaboration:

As the central bank purchases government bonds from the market, nominal money

supply increases. (1 mark)

As a result, the nominal interest rate decreases. (1 mark)

b. As the risk of investing in the stock market increases, it becomes less desirable to hold

stocks. (1 mark)

Asset demand for money increases. (1 mark)

The effectiveness of the open market purchase on lowering the nominal interest rate

would decrease. (1 mark)

c. No. (1 mark)

The classical quantity theory of money: MV ≡ PY, where M = money stock,

V = velocity of circulation of money, P = general price level, Y = real GDP. V and Y

are assumed to be constant. (2 marks)

An increase in money supply causes the same percentage increase in the price level

without affecting real GDP in the long run. (1 mark)

d. Allocative function (1 mark)

As the relative price of commercial buildings increases, developers allocate more

resources to increase the quantity supplied of commercial buildings. (1 mark)

0

Quantity of money

Nominal interest rate

MS

Md

n0

MS2

n1

Section C

13. a.

i. Indicate on the diagram:

Correct marginal revenue (MR) curve (1 mark)

Correct positions of Pm and Qm (1 mark)

Verbal elaboration:

Under simple monopoly pricing, Farm K will produce at Qm where marginal

revenue (MR) equals marginal cost (MC). (1 mark)

ii. Indicate on the diagram:

Deadweight loss (1 mark)

Verbal elaboration:

At Qm, marginal benefit (MB) is greater than marginal cost (MC). A deadweight

loss exists. The output level is inefficient. (1 mark)

b. i. Farm K’s marginal cost increases. (1 mark)

Thus, the price would increase and the quantity transacted would decrease.

(1 mark)

ii. Efficiency would deteriorate. (1 mark)

c. i. Buyers of milk in schools are charged a lower price for the same good (milk)

produced at the same cost. (2 marks)

ii. Third-degree price discrimination (1 mark)

iii. Buyers are separate. / The resale of goods between buyers is difficult or costly.

Farm K has low information costs.

Different groups of buyers have different price elasticities of demand.

(Any TWO of the above, 1 mark × 2 = 2 marks)

d. i. Output agreement (1 mark)

ii. The cartel can act as a monopolist and charge the monopoly price. Consumers lose

because they have to pay a higher price. (2 marks)

Price ($)

Quantity 0

D

Marginal cost

Pm

Qm

Deadweight loss

MR

14.

a. Indicate on the diagram:

Correct position of Point A (1 mark)

b. i. The slope of the tangent of the PPF at Point A is smaller than the slope of the TOT

line, indicating Country Z’s cost of producing bananas is lower than the terms of

trade. (2 marks)

Therefore, Country Z has a comparative advantage in producing bananas.

(1 mark)

ii. Indicate on the diagram:

Correct position of Point B (1 mark)

Correct position of CPF (1 mark)

iii. Indicate on the diagram:

Correct position of Point C (1 mark)

Correct indication of X and I (2 marks)

iv. Country Z is better off after trade (1 mark)

because it can consume the same amount of bananas and a greater amount of

peanuts. (2 marks)

c. i. An unhealthy diet would decrease citizens’ life expectancy. Hence, Country Z’s

HDI would decrease. (2 marks)

ii. With more girls going to school, the mean years of schooling in Country Z would

increase. Therefore, Country Z’s HDI would increase. (2 marks)

0

Peanuts (units)

Bananas (units)

TOT

PPF

I

X

CPF

A

B

C

m