Suggested answers to Mock Paper (2014 February)

Paper 1 (45 marks)

1. C 6. D 11. A 16. D 21. B 26. B 31. D 36. B 41. A
2. D 7. C 12. C 17. A 22. A 27. D 32. C 37. C 42. C
3. B 8. D 13. B 18. A 23. C 28. C 33. B 38. D 43. A
4. A 9. A 14. C 19. D 24. B 29. B 34. D 39. B 44. D
5. C 10. A 15. C 20.C 25. A 30. B 35. B 40. B 45. B

Paper 2
Section A

1.  Buyers and sellers do not have perfect information.

 The flowers are heterogeneous.
 Non-price competition exists.
(Any TWO of the above or other reasonable answers. 2 marks × 2 = 4 marks)

2. a. When 8 units of labour are employed, labour productivity is 1.25 (= 10 ÷ 8). When 9

units of labour are employed, labour productivity is 2 (= 18 ÷ 9). Thus, labour

productivity increases when labour employment increases from 8 units to 9 units.

(2 marks)
b. Economies of scale are advantages associated with large scale production and they
lower the average cost of production. (2 marks)
The case does not exhibit economies of scale because there is a fixed factor
(machines). Economies of scale only exist in the long run. (3 marks)

3. a. Real GDP will be greater than nominal GDP when the current price level is smaller
than 100. (2 marks)
b. No. (1 mark)
The population may have increased. If the percentage increase in population is larger
than the percentage increase in GDP, per capita GDP will decrease. (2 marks)

NSS Exploring Economics (Second Edition) 1 © Pearson Education Asia Limited 2014
Mock Paper (2014 February) (Suggested answers)
4. a. Input prices are less flexible than output prices. (1 mark)
When the price level increases, input prices increase at a slower pace than output
prices in the short run. It becomes profitable for firms to employ more inputs to raise
their outputs. Hence, the aggregate output supplied increases with the price level in
the short run. (2 marks)
(Accept other correct reason for the upward slope of the SRAS curve.)
b. Verbal elaboration:
 The number of tourists visiting Thailand decreases. Therefore, Thailand’s AD will
decrease. Both the price level and output level will fall in the short run. (2 marks)
 The resulting excess supply of input (or deflationary gap) will result in downward
pressure on input prices. (1 mark)
 In the long run, input prices will adjust downwards and the SRAS will increase.
Thus, the price level will further decrease. (2 marks)
Indicate on the diagram:
 AD curve shifts to the left. (1 mark)
 In the short run, both price level and output level decrease. (1 mark)
 SRAS curve shifts downwards. (1 mark)
 Price level decreases further in the long run. (1 mark)

P LRAS0

SRAS0
SRAS1

1 2

P0 E0

P1 E1
P2 E2

AD0

AD1
0 Y
Y1 Yf

Fig. 1

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Mock Paper (2014 February) (Suggested answers)
5. a. Country F can use fewer resources than country J to produce the same units of
handbags. Therefore, Country F has an absolute advantage in the production of
handbags. (2 marks)
b. i. No. Country J cannot gain from trade as the cost of importing 1C is 2H (= 1.75H
+ 0.25H), which is exactly the same as its cost of producing 1C by itself. (2 marks)
ii. No. Country F’s cost of producing 1C is 1.5H, which is greater than the price of
exporting 1C. Thus, Country F cannot gain from trade. (2 marks)

6. a. Unemployment rate of an age group

= Unemployed persons in the age group ÷ Labour force in the age group (1 mark)

Although the unemployment rate of the 40-49 age group was greater than that of the
30-39 age group, the number of unemployed people between 40-49 might not be
larger than those between 30-39. (1 mark)
b.  People in this age group have less education.
 People in this age group have less work experience.
 The labour force in this age group is smaller.
(Any ONE of the above or other reasonable answer, 2 marks)
c. Disagree. (1 mark)
The percentage of females with a university degree in the 20-29 age group
216.4
= 100% = 40.52% (1 mark)
534
The percentage of males with a university degree in the 20-29 age group
186.0
=  100% = 41.34% (1 mark)
449.4
Since the percentage of males with a degree is actually larger than that of females, the
statement is wrong. (1 mark)

7. C = - Market balance of payments = -$600 million (1 mark)

X = $(100 – 600) million = -$500 million (1 mark)
B = -X = $500 million (1 mark)
A = B – 700 – 300 – (-100) = -400 million (1 mark)

8.  Chilled chicken and live chicken are close substitutes. (1 mark)

 As the supply of live chicken was suspended and people generally wanted to eat
chicken to celebrate the festival, many people would shift to chilled chicken. Thus,
the demand for chilled chicken would increase. (2 marks)
 As a result, the price of chilled chicken would increase. (1 mark)

NSS Exploring Economics (Second Edition) 3 © Pearson Education Asia Limited 2014
Mock Paper (2014 February) (Suggested answers)
Section B
9. a. Conglomerate expansion
(1 mark)
Advantages:
 Enjoy economies of scale
 Reduce risk through product diversification
 Extend its brand name to other products
 Invest in other more profitable industries
(Any THREE of the above. 1 mark × 3 = 3 marks)
b. Advantages:
 Workers have a stronger incentive to serve customers to their satisfaction.
 The need for supervision against shirking and unsatisfactory service is reduced.
 Employers can shift part of the business risk to their workers.
(Any ONE of the above or other reasonable answer, 2 marks)
c. i. Sandy obtained more information about salespeople and this encouraged her to
change her occupation. This implies an increase in her occupational mobility.
(2 marks)
ii. No. The change in the value of being a saleswoman will not affect the value of the
best alternative forgone. (2 marks)
d. Verbal elaboration:
If the government imposes a tax on tourists coming to Hong Kong, fewer tourists will
come to Hong Kong. Therefore, the demand for jewellery will decrease. (2 marks)
The price and quantity transacted of jewellery will decrease. (2 marks)
Indicate on the diagram:
 Demand curve shifts to the left. (1 mark)
 Price decreases. (1 mark)
 Quantity transacted decreases. (1 mark)

NSS Exploring Economics (Second Edition) 4 © Pearson Education Asia Limited 2014
Mock Paper (2014 February) (Suggested answers)
 Price ($) Jewellery

P1

P2
D1

D2
Quantity
0 Q2 Q1

10. a. Verbal elaboration:

 The interruption by terrorist attacks causes a decrease in the supply of oil (from S1
to S2). (1 mark)
 Extreme cold weather in North America drives up the demand for oil (from D1 to
D2). (1 mark)
 As supply decreases and demand increases, the oil price would increase (from P1
to P2). (1 mark)
 When the increase in demand is greater than the decrease in supply, the quantity
transacted of oil would increase (from Q1 to Q2). (1 mark)
Indicate on the diagram:
 Increase in demand > Decrease in supply (1 mark)
 Price and quantity transacted increase. (1 mark)

Price ($) Oil

S2
S1
P2

P1

D2
D1
Quantity
0 Q1 Q2

b. The increase in oil prices would lead to a decrease in the short run aggregate supply.
As a result, the real GDP would decrease and so the employment level would decrease.
(2 marks)
c. No. (1 mark)

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Mock Paper (2014 February) (Suggested answers)
 People did not want to have more snow during the heavy snowstorm. (1 mark)

11. a.  Publicly-funded degree places are scarce and cannot satisfy all students’ wants for
them. Hence, students have to compete for degree places. (2 marks)
 Students compete with each other through different means, such as examinations.
Every form of competition is discriminatory. For example, examinations
discriminate against those who get lower scores. Students with lower scores have
less chance to gain publicly-funded degree places. (3 marks)

NSS Exploring Economics (Second Edition) 6 © Pearson Education Asia Limited 2014
Mock Paper (2014 February) (Suggested answers)
 b. i. Education can improve the skills and knowledge of our labour force. Hence,
labour productivity will improve. The full employment output level will increase.
(2 marks)
ii. As more sub-degree graduates will be able to articulate to subsidised degree
programmes each year, fewer graduates will join the labour force. Therefore, this
policy will reduce the labour force. (2 marks)
iii. With a government subsidy, students from low-income families have more
chances to attain tertiary education and find jobs with a higher income in the
future. They can raise the overall income of their families. Hence, income
distribution will become more even when there are more publicly-funded degree
places.
OR
As more people can attain tertiary education, the number of professionals
increases. Income differences among professionals are generally greater than
those among low-skilled workers. Therefore, increasing the number of
publicly-funded degree places tends to widen the income gap.
(Any ONE of the above or other reasonable answer, 3 marks)

12. a. Cash held by the public = $(1,000 – 200) billion = $800 billion (2 marks)
Money supply = $(800 + 1,000) billion = $1,800 billion (2 marks)
b. Required reserves = $(200 – 100) billion = $100 billion (1 mark)
$100
Required reserve ratio =  100% = 10% (1 mark)
$1,000
Maximum amount of deposits = $200 billion ÷ 10% = $2,000 billion
Therefore:
Maximum possible change in the money supply = $(2,000 – 1,000) billion
= +$1,000 billion (2 marks)
c. i. Hong Kong investors will hold more cash to avoid losses or risk. The asset
demand for money will increase. Thus, money demand will increase. (2 marks)
ii. Verbal elaboration:
 The increase in money demand will cause an increase in the interest rate.
(1 mark)
 Both consumption and investment expenditures will decrease and so will
aggregate demand. Therefore, the output level and the price level will decrease
in the short run. (2 marks)

NSS Exploring Economics (Second Edition) 7 © Pearson Education Asia Limited 2014
Mock Paper (2014 February) (Suggested answers)
 Indicate on the diagram:
 AD curve shifts to the left. (1 mark)
 Output level and price level decrease. (1 mark)

SRAS

P1 E1

P2 E2

AD1
AD2
0 Y
Y2 Y1

Section C

13. a. i. Exclusive dealing (1 mark)

The possible adverse effects on consumers are:
 Competition is restricted and so the prices of products increase.
 Consumers may only buy a particular good from the exclusive retailer.
Consumers’ choices among retailing services decrease.
(Any ONE of the above or other reasonable answer, 1 mark)
ii. Abuse of dominant position (1 mark)
The possible adverse effects on consumers are:
 Competition is restricted and so the prices of products increase.
 Consumers’ choices decrease as some suppliers face unfair competition and
choose to exit the market.
(Any ONE of the above or other reasonable answer, 1 mark)
iii. Resale (or retail) price maintenance (1 mark)
Price competition is restricted and so the prices of products increase. (1 mark)

NSS Exploring Economics (Second Edition) 8 © Pearson Education Asia Limited 2014
Mock Paper (2014 February) (Suggested answers)
 b. Verbal elaboration:
 As the demand curve is a straight line, the MR curve is a straight line which
bisects 0C. (1 mark)
 The monopolist will produce at the output level where marginal revenue is equal
to marginal cost (or the marginal revenue curve intersects the marginal cost curve)
to maximise its profits. (1 mark)
 Some potential gains have not been captured as the marginal benefit is greater
than the marginal cost. There exists a deadweight loss. This implies that
monopolisation leads to inefficiency. (2 marks)
Indicate on the diagram:
 Correct position of marginal revenue curve (1 mark)
 Correct position of profit-maximising output level and price (1 mark)
 Correct position of deadweight loss (1 mark)

Deadweight loss
S = MC
Pm

D = MB
MR
0 Qm Quantity
C

c. The arrangement constitutes price discrimination. Members and non-members are

charged different prices for the same good. Members are charged lower prices
because they are more sensitive to price changes and so have higher demand elasticity.
(3 marks)

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Mock Paper (2014 February) (Suggested answers)
14. a. Verbal elaboration:
Country A exports 10 units of Good X and imports 20 units of Good Y. (2 marks)
Indicate on the diagram:
 TOT line with correct slope (2 marks)
 Correct position of production point after trade (2 marks)
Good Y (units)

TOT line (Slope = 2)

50

40 Consumption point after trade

Production point before trade
30

20 Production point after trade

10
Country A’s PPF
Good X (units)
0 10 20 30 40 50

b. Before trade, Country A’s production point was its consumption point. By comparing
the consumption points before and after trade, we find that Country A’s gains from
trade are 5 (= 25 – 20) units of Good X and 5 (= 40 – 35) units of Good Y. (2 marks)
c.  Life expectancy at birth: Free trade may allow a country to import advanced
medical equipment, technology and knowledge. This may improve people’s health.
(2 marks)
 Educational attainment: Free trade may provide more opportunities (e.g., overseas
university programmes) for people to receive higher education. (2 marks)
 Per capita GNI (PPP): A free trade policy can stimulate economic growth. This
may lead to an increase in per capita GNI. (2 marks)
d. According to the United Nations, sustainable development refers to ‘development that
meets the needs of the present without compromising the ability of future generations
to meet their own needs’. (1 mark)
There are costs of economic growth which do not agree with the goals of sustainable
development:
 Pollution and other environmental damage
 Exhaustion of natural resources
 Uneven income distribution
 Economic instability
(Any ONE of the above or other reasonable answer, 1 mark)

NSS Exploring Economics (Second Edition) 10 © Pearson Education Asia Limited 2014
Mock Paper (2014 February) (Suggested answers)