1992

Section A
92.1.
If the fixed cost is positive and the average variable cost is constant, which of the following
statements is true?
A.
The average total cost decreases with expansion in output.
B.
The marginal cost is equal to the average total cost.
C.
The firms average total cost is a straight line.
D.
The average fixed cost is constant.
92.2.

People will invest more in human capital if

A.
the premium of earlier consumption over later consumption falls.
B.
the real rate of interest declines.
C.
medical advances have led to an increase in life expectancy.
D.
All of the above.

92.3.

When diminishing marginal productivity sets in,

A.
the marginal cost diminishes.
B.
the average fixed cost decreases.
C.
the marginal cost rises.
D.
the total product curve is a straight line.

92.4.

Market demand for a private good is derived from the

demand curves because the private good is characterized by
A.
horizontal, non-exclusive
B.
horizontal, exclusive
C.
vertical, non-exclusive
D.
vertical, exclusive

92.5

Scarcity
A.
B.
C.
D.

summation of individual
consumption.

is implied by the existence of price.

is the same as shortage.
applies to all kinds of goods.
All of the above.

92.6.

Selfishness and scarcity

A.
imply constrained maximization.
B.
are realistic assumptions.
C.
are assumptions that may yield testable implications.
D.
A and C above.

92.7

Which of the following preference maps shows that both X and Y are bads?

(U3 > U2 > U1 )

A.

B.

Y
U3

U3
U2
U1
X
C.

U2
U1
X
D.

U1

3
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U1 U 2

U3

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92.8.

According to the law of demand, if taxi drivers impose a $5 additional charge per trip
regardless of distance,
A.
the number of short distance trips will have a larger percentage fall than long
distance trips.
B.
the number of short distance trips will have a smaller percentage fall than long
distance trips.
C.
the number of short and long distance trips will both fall by the same percentage.
D.
the ratio of short to long distance trips will not change.

92.9.

Recently, some housing developers in Hong Kong have begun selling housing units by lottery.
That is, at their asking price, there are too many buyers queuing up to buy the flats. So, in
addition to the purchase price, a buyer must be a winner in the lottery. This implies
A.
competition for private flats is reduced since buyers no longer need to line up for
days.
B.
efficiency is improved.
C.
a change in the form of competition.
D.
the Hong Kong government is imposing a control on the price of flats.

92.10.

Exchange will take place if

A.
a market price exists.
B.
a consumer surplus exists for each and every trading party.
C.
the gains from exchange outweigh transaction costs.
D.
marginal valuations are not equalized across trading parties.

92.11.

Good X and Good Y are complements. At their prevailing prices, both of them have a price
elasticity of demand greater than one. An increase in the price of Good X, ceteris paribus, will
in the total revenue of X and a
in the total revenue of Y.
lead to a
A.
fall, fall
B.
rise, rise
C.
rise, fall
D.
fall, rise
An effective price ceiling imposed on a good by the government will lead to
A.
an increase in production as producers respond to higher consumer demand at the
lower price.
B.
a more even distribution of income.
C.
a dissipation of the value of the good.
D.
a decline in its demand.

92.12.

92.13

Suppose you are given the following choices of payment methods for purchasing a machine
which lasts forever. Which of the following is the lowest price if the annual interest rate is
10%?
A.
the present cash price of $10 000
B.
$6 000 cash now and $5 000 one year from now
C.
$900 at the end of each year forever
D.
$3 500 at the end of each of the next three years

92.14.

Suppose the Environmental Protection Department requires industries to install costly

anti-pollution equipment. Under which of the following situations would you expect the
additional costs to be borne mainly by producers?
A.
Demand is inelastic and supply is elastic.
B.
Demand is elastic and supply is inelastic.
C.
Demand and supply are both inelastic.
D.
Demand and supply are both elastic.

92.15.

Experts complain that voluntary water conservation programs are not working and water
shortages will continue to occur in Hong Kong. Which of the following conclusions is most
consistent with economic theory?
A.
Water shortages are unavoidable as Hong Kongs population has grown rapidly in
recent years.

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B.
C.
D.

There will be no water shortages in Hong Kong if the price is determined in the
market.
Water conservation programs will be more effective if the government imposes a
price ceiling on water.
The demand for water is always inelastic because water is vital to human life.

92.16.

Assume leisure is a normal good. If the income effect of a wage increase is greater than the
substitution effect,
A.
the supply curve of labour will be positively sloped.
B.
the supply curve of labour will be negatively sloped.
C.
the demand curve of labour will shift leftward.
D.
the demand curve of labour will be negatively sloped.

92.17.

When a monopolist charges a price at the inelastic range of the demand schedule,
A.
his average revenue will be negative.
B.
his marginal revenue will be negative.
C.
his marginal revenue will be negative although his total revenue will be at a
maximum.
D.
he can raise his total revenue by lowering his price.

92.18.

A monopsonist will pay a wage rate

A.
lower than the marginal factor cost.
B.
higher than the marginal factor cost.
C.
equal to the marginal factor cost.
D.
lower than the average factor cost.

92.19.

When a monopolist practices perfect price discrimination,

A.
the marginal revenue curve will become a horizontal straight line.
B.
the demand curve will become the marginal revenue curve.
C.
the marginal revenue curve will shift to a position below the demand curve.
D.
the marginal revenue curve and the average revenue curve will coincide.

92.20.

While the prices of fresh produce, such as vegetable, tend to fluctuate daily, those for
consumer durables, such as refrigerators, are more stable. This happens because
A.
the demand for consumer durables is less than that for fresh produce.
B.
peoples preferences for different types of fresh produce vary daily, while their
preferences for consumer durables tend to remain constant.
C.
the sole agents of consumer durables have a greater control of the market than
farmers who are selling fresh produce.
D.
it is costly to keep buffer stocks of fresh produce, and fresh produce tends to have
significant seasonal fluctuations in supply.

92.21.
Total output
L1
L2

Input

Refer to the diagram above. Assume that lines L1 and L2 are parallel. At what point will
diminishing marginal returns begin to set in?
A.
M

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B.
C.
D.

N
O
P

92.22.

Which of the following implies a divergence between private and social costs?
A.
A factory pollutes the neighbouring housing for workers, and this housing is owned
by the factory.
B.
Increasing textile exports to the USA leads to higher clothing prices in Hong Kong.
C.
Mr Smith plays the piano which his neighbour loves to hear, but he plays it so often
that the marginal benefit of his music to the neighbour is exactly zero.
D.
None of the above.

92.23.

Suppose the construction of a flyover causes the value of nearby properties to fall. To attain
economic efficiency,
A.
the flyover builder should compensate the nearby property owners.
B.
the flyover builder should install a noise reduction device.
C.
the nearby buildings should be relocated.
D.
There is not enough information to answer the question.

92.24.

If private ownership of a forest is abolished, and the forest is subject to common exploitation,
A.
the rate of depletion will remain unchanged.
B.
the trees will become a public good.
C.
the private cost of cutting trees will differ from the social cost.
D.
the trees will become a free good because they no longer have a price.

92.25.

The imposition of a lump-sum tax on each firm in a price-takers market will

A.
decrease the number of firms in the market.
B.
increase the output of each firm that remains in business.
C.
increase the market price of the output.
D.
All of the above.

92.26.

(Deleted)
When the Pareto condition is satisfied, it means
A.
wealth is evenly distributed.
B.
the societys welfare is maximized.
C.
there is no transaction costs.
D.
None of the above.

92.27.

A per unit tax on an inferior good is

A.
regressive.
B.
proportional.
C.
progressive.
D.
There is not enough information to answer the question.

92.28

The opportunity cost of Good X in terms of Good Y is

A.
the amount of Good Y which has to be given up to obtain a unit of Good X.
B.
the slope of the production possibility curve, with the amount of Good X on the
X-axis and the amount of Good Y on the Y-axis.
C.
the price of Good X divided by the price of Good Y.
D.
All of the above.

92.29.

Which of the following about indifference curve analysis is FALSE?

A.
The income effect is positive for a normal good.
B.
The negative income effect outweighs the substitution effect for a Giffen good.
C.
The substitution effect can either be positive or negative.
D.
The income effect can either be positive or negative.
Remarks:
(1)
The positive income effect means the higher the real income, the higher the rate of

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(2)

92.30.

consumption.
The negative substitution effect means holding real income constant, the lower the
relative price, the higher the rate of consumption.

Which of the following statements about the firms is FALSE?

A.
The choice of using the market or using the firm will be indeterminate when
transaction costs are zero.
B.
A socialist state is a firm.
C.
Whenever a contract exists, a firm exists.
D.
When a firm emerges, productive activities are no longer directly directed by market
prices.

Section B
92.1.
The cost of an action is defined as the highest-valued option necessarily forsaken. Why is the
word highest essential in this definition?
(12 marks)
92.2.
92.3.

Interest is a price. Why is it a price? What is it a price of?

Give different types of examples to illustrate the generalized concept of capital.

(12 marks)
(12 marks)

92.4

State and explain the necessary conditions for price discrimination.

(12 marks)

92.5.

What is consumer surplus? Explain how it may be extracted by the seller of a good.
(12 marks)

Section C
92.6
In the State of Washington, one who wishes to hunt for mountain goats must obtain a special
goat permit. Each year approximately 8 000 people apply for goat permits. A draw is held to
select 1 000 winners. Each winner may then purchase a goat permit for US$20.00, entitling
him to kill a maximum of one goat over a one-year period. Permits are not legally transferable,
nor can they be resold, in any form. Each year about 250 permit holders succeed in killing a
goat.
If the goat permits were allowed to be resold in a free market, would the new price be higher
or lower? And would more goats be killed? Explain.
(15 marks)
92.7.

In some communities in the United States, water is priced according to the following pricing
scheme. Each individual is required to make an initial lump-sum payment which entitles him
to a specified quantity of water. If he wishes to consume more than this quantity of water, he
can buy additional water on a per gallon basis at a declining price per gallon.
Given that an individual has paid the initial lump-sum fee, do you expect him to consume an
amount less than, equal to, or more than the amount which the fee entitles him? Explain your
answer using the budget line and indifference curves.
(15 marks)

92.8.

Currently in Japan, restrictions on agricultural imports keep the price of agricultural products
as about ten times the world level. Suppose the Japanese government decides to remove all
import restrictions on agricultural products.
What impact do you think the removal of these import restrictions would have on the price of
housing in Japan? Explain.
(15 marks)

92.9.

The provision of a per unit subsidy to the sellers of lunch boxes will cause their total revenue
(excluding the subsidy) to rise.
Explain whether this statement is True, False, or Uncertain.

92.10.

(15 marks)

In a competitive market the wage rate is equal to the marginal revenue product of labour but

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in a monopoly market, the monopolist will use its market power to pay workers less than their
marginal revenue product.
Explain why this statement may be False or Uncertain.

(15 marks)

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Solution
SECTION A
1A

16 B

2D

17 B
18 A

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

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

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