1989

SECTION A
89.1

A free good is a good

A.
that involves no opportunity costs in obtaining it.
B.
for which the concept of scarcity odes not apply.
C.
that has zero marginal use value.
D.
All of the above.

89.2

Utility maximization
A.
is useful only if we can specify which object generates utility and the cost of
acquiring that object.
B.
is not useful because utility is not observable.
C.
cannot be refuted by empirical findings.
D.
cannot be asserted to hold for all societies.

89.3

Which of the following would raise the cost of owning a swimming pool?
A.
Neighbourhood children discover the presence of the pool and often invite
themselves for a swim and make a mess of the house.
B.
The pool water turns out to be very dirty because of the water supply, and no one
wants to swim in it.
C.
Oil, which is expected to have a high value, is discovered underground beneath the
pool.
D.
After the pool is built, the owner discovers that it could have been built with much
less materials.

89.4

The law of demand is asserted to hold because

A.
it has not been rejected by evidence.
B.
it cannot be rejected by evidence.
C.
it is logically impossible to have a Giffen good.
D.
the postulate of the convexity of the indifference curve proves it.

89.5

A video renting shop charges a consumer $100 membership which carries the right to rent
video tapes at a constant price per tape. For any consumer who becomes a member
A.
the average use value of renting video tapes is $100.
B.
the expected consumer surplus within the membership period is at least $100.
C.
the total use value of renting video tapes is $100.
D.
all of his consumer surplus will be extracted.

89.6

Equilibrium
A.
is a description of fact.
B.
can be reached without the specification of constraints.
C.
is a concept.
D.
implies that economic activities are at rest.

89.7

Exchange occurs
A.
because individuals place different marginal use values on the same good.
B.
because the demand curves of individuals are different.
C.
because some individuals have a surplus of some goods.
D.
All of the above.

89.8

College teachers frequently receive funds from the administration for research purposes.
These are not granted in take-home cash, but are funds for specific usages such as making
Xerox copies of research materials. Generally, therefore, the teachers would prefer a smaller
amount if they could take cash instead. As a result, we observe that they make more Xerox
copies than if the funds were given to them in cash. This is because
A.
the quantity of Xerox copies demanded is a negative function of price.
B.
funds restricted to specific purposes are subject to a higher propensity to consume.
C.
the Xerox copies are essentially free to them.
D.
they make more copies to convince the administration that more research funds are
needed.

89.9

Which of the following statements about cost is correct?

A.
The longer I have been waiting in line at the bus stop, the more costly it would be for
me to quit the line.
B.
For the same price, a poor haircut costs more than a good haircut.
C.
John does everything faster and better than Joe, so the cost for John to do anything is
lower than it is for Joe.
D.
None of the above.

89.10

The long waiting time required to use the congested Cross Harbour Tunnel implies that
A.
waiting in line is not a cost of using the tunnel.
B.
the higher the toll charged, the shorter will be the waiting time.
C.
the use of a monetary price cannot solve the congestion problem.
D.
non-price competition is a fairer means of competition because the lower income
group cannot afford to pay.

89.11

Profit cannot be used to predict behaviour because

A.
in economics, there is no such thing as profit.
B.
profit arises only if it is unexpected.
C.
profit will not persist under competition.
D.
profit dos not exist in an economy without free markets.

89.12

Diminishing returns begins to occur when

A.
the marginal product begins to rise.
B.
the marginal product begins to fall.
C.
the average product begins to rise.
D.
the average product begins to fall.

89.13

A monopolist
A.
earns a higher rate of profit than a competitive firm.
B.
is always protected by government.
C.
is a price searcher.
D.
is necessarily an inefficient producer.

89.14

Sunkist oranges are regarded as the finest quality oranges produced in California. However, it
is observed that a relatively small quantity of Sunkist oranges is sold in Los Angeles, but they
are plentiful in Hong Kong. This phenomenon is explained by
A.
the fact that Hong Kong and Californian consumers have different preferences for
oranges.
B.
the hypothesis that the demand curve for oranges is negatively sloped.
C.
the super-abundance of oranges in California.
D.
the fact that Sunkist oranges are advertised in Hong Kong.

89.15

Which of the following is/are transacted in the market places?

A.
sunshine.

B.
C.
D.

a scenic view.
the barking of dogs.
All of the above.

89.16

A firm exists because

A.
without the firm, goods and services will not be produced.
B.
workers do not know what to produce without direction.
C.
it is more costly to determine a large number of prices.
D.
competition is imperfect.

89.17

An excise tax will raise the market price a good by the greatest amount if
A.
both demand and supply are price elastic.
B.
both demand and supply are price inelastic.
C.
demand is price elastic and supply is price inelastic.
D.
demand is price inelastic and supply is price elastic.

89.18

The demand curve for a factor of production is downward sloping because

A.
the product market is perfectly competitive.
B.
the factor market is imperfect.
C.
of the law of diminishing marginal returns.
D.
the product demand curve is downward sloping.

89.19

How will the price of a durable good change relative to the price of a non-durable good if the
interest rate falls?
A.
The price of the durable good will rise relative to that of the non-durable good.
B.
The price of the durable good will fall relative to that of the non-durable good.
C.
The relative price will remain unchanged.
D.
None of the above.

89.20

Interest will not exist without money. This statement is

A.
true because interest is the premium of present over future money.
B.
true because in the loan market, we pay interest when we borrow.
C.
false because interest is the premium of present over future consumption.
D.
false because interest is a payment for liquidity.

89.21

The pareto condition states that

A.
it is not possible to reallocate resources to make one individual gain without making
another individual lose.
B.
it is possible to reallocate resources to improve the welfare of all.
C.
each and every individual is satisfied.
D.
a desirable distribution of income is achieved.

89.22

A chemical manufacturer emits smoke which inflicts damage to crops grown by farmers
nearby, and the damage is sufficiently significant to cause farming bankruptcies. To attain
economic efficiency
A.
a compulsory compensation to the neighbouring farmers should be imposed on the
manufacturer by the government.
B.
the government should rule that the chemical manufacturer install pollution free
equipment.
C.
the farmers should grow their crops elsewhere.
D.
Any of the above may be correct because there is not enough information.

89.23

A divergence between private and social costs

A.
is unavoidable.
B.
is inefficient and calls for government intervention.
C.
may be resolved by private contracting if private property rights are clearly defined

D.

and enforced.
creates a more unequal distribution of income.

89.24

A public good is
A.
a free good.
B.
a good produced by the government.
C.
the same as a public utility.
D.
a good that can be consumed by many individuals at the same time.

89.25

Which of the following statements about price discrimination is FALSE?

A.
Perfect price discrimination is more efficient than simple monopoly pricing.
B.
Price discrimination always results in a higher level of sales.
C.
Price discrimination may occur in one single market if consumers have different
information costs.
D.
Price discrimination tends to be more common in the sale of services than it is in the
sale of manufactured goods.

89.26

Which of the following will most likely be NOT available without government provision?
A.
water supply
B.
national defence
C.
education
D.
postal services

89.27

Which of the following is NOT a case of price discrimination?

A.
Free tuition is awarded to some students in a private college.
B.
A theatre offers a lower ticket price to students than to non-students for the same
seats.
C.
The price per orange is cheaper by the dozen.
D.
Tourists in China are charged more for train or airline fares than local people.

89.28

Which of the following statements about cost is FALSE?

A.
Cost is the highest value that an individual is willing to pay.
B.
Cost may be a flow or a stock concept.
C.
Rent is a cost.
D.
Cost does not exist without choice.

89.29

Specialization rests on comparative not absolute advantage. Consider two individuals A and B,
each of whom could produce two commodities: shoes and clothes. When we say Mr A has a
comparative advantage over Mr B in producing shoes, we mean all of the following EXCEPT
that
A.
the marginal cost of producing shoes is lower for A than for B.
B.
Mr As maximum alternative sacrifice to produce one pair of shoes is less than that
of B.
C.
Mr As shoes/cloths output ratio is higher than that of B.
D.
by putting in the same amount of work, A could produce more shoes than B.

89.30

Which of the following statements about interest is FALSE?

A.
Interest is a price.
B.
Interest is a flow concept.
C.
Interest is the whole of income.
D.
When a man buys a house with his own cash, the interest cost of his house to him is
zero.

SECTION B1
89.1.
What is price?

(10 marks)

89.2.

Cost will not be affected unless the highest-valued option is affected. Do you agree? Use
one example to illustrate your view.
(10 marks)

89.3.

What are transaction costs? Can you explain why these costs arise?

SECTION B2
89.4.
Capital is the same as wealth. Do you agree? Explain.
89.5

(10 marks)

(10 marks)

In demand analysis, what is the difference between holding real income constant and
holding money income constant? Under which of the above conditions may be the Giffen
Paradox arise?
(10 marks)

SECTION C
89.6
Before and after World War II, the Hong Kong government imposed rent control on all
domestic premises in the city, with controlled rent significantly below the market rent.
However, when a flat was vacant, the landlord could charge a prospective tenant a large
lump-sum, called key money, for acquiring the right to lease. following this, once the tenant
moved in, he would only have to pay the controlled rent.
(a)

Let

K
=
key money
Rm =
the would-be free-market rent
(you may use Rm if this rent is expressed in terms of annuity)
Rc =
the constant controlled rent, which is significantly below Rm or
Rm
r
=
the constant rate of interest
Suppose the rent control is expected to last forever. How would the key money, K,
be determined in the market?
(8 marks)

(b)

What would you expect of the change, if any, in the turnover rate of tenants under
rent control, as compared to a free-market situation? Explain.
(8 marks)

(c)

Suppose the law allows the landlord to evict the tenant at will if the former chooses
to reconstruct a leased building. What would happen to the rate of housing
reconstruction of leased buildings under rent control? Explain.
(9 marks)

89.7

89.8

89.9

The Financial Secretary of Hong Kong has been proposing the imposition of a sales tax,
arguing that this would broaden the tax base so as to stabilize government revenue.
(a)

One argument against the sales tax is that in the case of Hong Kong, this tax is very
close or equivalent to an import tax. Hong Kongs free port image would therefore be
damaged. Why would a sales tax approximate an import tax in Hong Kong? Explain.
(8 marks)

(b)

If a sales tax and an import tax are nearly the same, which of these will incur a lower
cost of transactions? Explain.
(8 marks)

(c)

The Financial Secretary suggests that the sales tax would be imposed on wholesale
but not on retail transactions. What change would you expect of the wholesale/retail
structure in Hong Kong if the sales tax is introduced? Explain.
(9 marks)

Traffic congestion has long been a noted problem in Hong Kong. In an attempt to reduce
traffic congestion, several years ago the Hong Kong government sharply raised the import tax
for automobiles. The government has also considered installing electronic devices so that tolls
could be charged for the use of certain roads, a policy which was rejected. Recently, some
have suggested that a quota be placed on the import of automobiles.
(a)

What would be the effect of imposing a high automobile import tax on the rate of
automobile utilization in Hong Kong? Explain
(6 marks)

(b)

What would be the effect of the import quota on the market values of used cars?
Explain.
(6 marks)

(c)

What would be the effects of electronic road pricing if the metering devices were
installed on some roads and not on other roads? Explain.
(6 marks)

(d)

On efficiency grounds, would you support a policy of a sharply higher gasoline tax
to reduce traffic congestion, rather than the three methods above? Explain. (7 marks)

Because of the much lower wages and rents inside China (wages about one-tenth and rents
about one-fifth of those in Hong Kong), industries in Hong Kong are moving north to
mainland China on a massive scale, in spite of difficulties caused by foreign exchange
controls and other regulations there.
(a)

There are some who are quite concerned about this development, arguing that it will
eventually be detrimental to the economy of Hong Kong. Do you agree? Explain
(8 marks)

(b)

The decision of Hong Kong industrialists to move north is driven by profit motive,
taking advantage of cheap rents and wages. Will China gain from this capitalist
exploitation? Explain.
(8 marks)

(c)

In spite of the above development, the news media still report a labour shortage in
Hong Kong. What does shortage in economics mean? Is there really a labour
shortage in Hong Kong at present? How would you interpret the terms shortage
used in the news media?
(9 marks)

Solution
SECTION A
1D

16 C

2A

17 D
18 C

3C
4A
5B
6C
7A
8A
9D
10 B
11 B
12 B
13 C
14 B
15 D

19 A
20 C
21 A
22 D
23 C
24 D
25 B
26 B
27 C
28 A
29 D
30 D