ECONOMICS INQUIRY FOR HKDSE

HONG KONG DIPLOMA OF SECONDARY

EDUCATION EXAMINATION

(Mock Test 8)

Suggested Solution

HKDSE-ECON Suggested Solution-1 (Mock Test 8) © 2013 Aristo Educational Press Ltd.
Paper 1

1. A 11. A 21. D 31. C 41. B

2. C 12. D 22. B 32. D 42. B

3. A 13. A 23. D 33. D 43. B

4. D 14. D 24. D 34. B 44. B

5. C 15. C 25. C 35. C 45. C

6. A 16. C 26. B 36. C

7. B 17. D 27. D 37. A

8. B 18. C 28. A 38. B

9. D 19. B 29. D 39. A

10. C 20. A 30. B 40. A

HKDSE-ECON Suggested Solution-2 (Mock Test 8) © 2013 Aristo Educational Press Ltd.
Paper 2

Section A (50 marks)

1. (a) Monopolistic competition. (1 mark)

(b) Characteristics of monopolistic competition:
- Large number of buyers and sellers: Almost everyone
needs dental service and there are many private dental
clinics in Hong Kong.
- Heterogeneous products (differentiated products):
Services provided by different private dental clinics are
2@, max: 4 marks
different.
- Imperfect information: Neither customers nor private
dental clinic operators know all about the market.
- Price searcher: Dental clinic operators can adjust their
service charges to maximise their profit.

2. (a) Private property rights refers to the exclusive right to use, the exclusive right to derive income and
the right to transfer. (2 marks)
(b) Under this project, the exclusive right to use the premises is not affected. However, the exclusive
right to derive income and the right to transfer are weakened because the owners’ rights of leasing
and selling their premises are confined. (3 marks)

3. (a) To a borrower, nominal interest is the cost or price of earlier availability of money. (2 marks)
(b) No. The interest that the borrower will pay and the lender will receive will be at a rate (the realised
interest rate) higher than their expected rate, implying that the real value of loans and interest
payments increases. Thus, the borrower will lose and the lender will gain. (3 marks)

4. (a) In the long run, all prices are fully flexible. All information is available to the market and thus
there is no misperception about price or wage changes. When prices can fully adjust, the same
level of real output is generated at every price level. The long run aggregate supply curve is thus
vertical. (3 marks)
(b) (i) When the interest rate on savings decreases, private consumption expenditure will increase,
causing aggregate demand to rise. The AD curve shifts to the right fromAD0 to AD1. The
short-run equilibrium is at E1. The price level increases from P0 to P1. (2 marks)

HKDSE-ECON Suggested Solution-3 (Mock Test 8) © 2013 Aristo Educational Press Ltd.
 Price level

LRAS0
SRAS0

P1 E1
P0 E0

AD1
AD0
Quantity of output
0
Yf Y1 (real GDP)

(3 marks)

(ii) In the long run, people in the economy will realise that the price level has increased and adjust
their price expectations upwards. Workers will ask for higher nominal wages. Production cost
increases and the SRAS curve shifts to the left from SRAS0 to SRAS1. The price level rises
further to P2. (3 marks)

Price level

LRAS0 SRAS1
SRAS0

P2
P1 E1
P0 E0

AD1
AD0
Quantity of output
0
Y f Y1 (real GDP)

(3 marks)

5. (a) Country A’s opportunity cost of producing 1 unit of shampoo

= (2 / 3) units of milk power
= 0.67 units of milk powder (1 mark)
Country B’s opportunity cost of producing 1 unit of shampoo
= (3 / 4) units of milk powder
= 0.75 units of milk powder (1 mark)
Since Country A’s opportunity cost of producing 1 unit of shampoo is lower, Country A will export
shampoo. (1 mark)

HKDSE-ECON Suggested Solution-4 (Mock Test 8) © 2013 Aristo Educational Press Ltd.
 (b) For Country A, the gain from exporting 1 unit of shampoo
= (0.7 – 0.67 – 0.01) units of milk powder = 0.02 units of milk powder (1 mark)
For Country B, the gain from importing 1 unit of shampoo
= (0.75 – 0.7) units of milk powder = 0.05 units of milk powder (1 mark)

6. Change in reserve assets

= HK$(22,769 – 1,439 + 152,736 + 14,822) million
= HK$188,888 million (2 marks)
There was a balance of payments surplus. (1 mark)

7. (a) No. The overall Gini coefficient increased from 0.500 to 0.509 which shows that the income
inequality worsened. (3 marks)
(b) The higher the education attainment, the higher the Gini coefficient. (1 mark)
(c) (i) No schooling / Pre-primary. (1 mark)
(ii) As the introduction of the statutory minimum wage directly raised the income of low income
group and the education attainment is generally lower for low paid workers, the Gini
coefficient of the group of no schooling / pre-primary in 2011 had a greater improvement
than other groups. (4 marks)

8. The government should levy a general sales tax on goods and services:
- Levying a general sales tax on goods and services can lower
the level of output and narrows the inflationary gap.
- Levying a general sales tax on goods and services can raise 2@, max: 4 marks
government tax revenue.
- Any reasonable answer(s)

OR

The government should not levy a general sales tax on goods and services:
- As a general sales tax on goods and services is regressive,
levying the tax will widen the income gap between the rich and
the poor.
- If the sales tax on goods and services is not temporary, levying 2@, max: 4 marks
the tax will lower the level of output and may result in
unemployment some time later.
- Any reasonable answer(s)

HKDSE-ECON Suggested Solution-5 (Mock Test 8) © 2013 Aristo Educational Press Ltd.
Section B (54 marks)

9. (a) No. This is because the quantity of Egg McMuffins available is not sufficient to satisfy all people’s
wants, and people prefer of them. (2 marks)
(b) To those senior citizens, they generally did not have to work during that time period. The value of
the highest-valued alternative use of their time in lining up for the free Egg McMuffins is lower
than that of others. Their opportunity cost of lining up is therefore lower. (3 marks)
(c) When the price of Egg McMuffins increased, the quantity demanded of Egg McMuffins would fall.
If the demand for Egg McMuffins was inelastic, the percentage decrease in the quantity demanded
would be smaller than the percentage increase in the price. As a result, the decrease in the total
revenue due to the former would be smaller than the increase in the total revenue due to the latter.
Thus the total revenue would increase. (3 marks)

Price

>

P1
P0
D
Quantity
0 Q1 Q0

(2 marks)

10. (a) Division of labour. (1 mark)

- choosing the best people to do the job
- practice makes perfect
- saving time in training 1@, max: 3 marks
- saving time in moving around different tasks
- any reasonable answer(s)
(b) Advantage:
- Since incomes of workers are more stable, it is easier to
maintain a static team.
- The cost of measuring workers’ output is lower because
wages are paid on a time basis. 2@, max: 2 marks
- The cost of monitoring output quality is lower because
workers do not need to rush for more output.
- Any reasonable answer

HKDSE-ECON Suggested Solution-6 (Mock Test 8) © 2013 Aristo Educational Press Ltd.
 Disadvantage:
- Since workers’ incomes do not directly depend on output,
they tend to be less hard-working and have less incentive
to work hard.
2@, max: 2 marks
- Cost of supervising worker’s performance is higher
because of the problem of shirking.
- Any reasonable answer
(c) The existing salary offered to security guards is lower than the equilibrium level. There is a
shortage of security guards (Q2 – Q1), as indicated by the diagram below. (3 marks)
By increasing the salary offered to security guards, the shortage of security guards decreases to
(Q4 – Q3). The problem of shortage of security guards can be relieved. (3 marks)

Wage

new shortage
original
shortage
D
Quantity of
0 Q1 Q3 Q4 Q2 workers

(3 marks)

11. (a) Yes. Tin Sau Bazaar provides more than 200 stalls at lower rents for people in the district to earn
their living. It creates employment opportunities in the district in the form of self-employment
(2 marks)
Moreover, most of the successful applicants for stall allocation are the underprivileged referred by
social workers, including those with low income, on Comprehensive Social Security Allowance,
unemployed, with employment difficulties such as new arrivals/ethnic minorities and the like.
Through running the stall business, they are encouraged to develop a sense of self-reliance.
(2 marks)
(b) (i) As people that run the stalls are from the lower-income group, if they can increase their
incomes by running the stalls in Tin Sau Bazaar, income inequality can be reduced.
(3 marks)
(ii) Unemployment rate = unemployed population / labour force × 100%
Tin Sau Bazaar provides more than 200 stalls at lower rents for the unemployed people in the
district to earn their living in the form of self-employment by running the stalls. As
unemployed population falls while the labour force remains unchanged, Hong Kong’s
unemployment rate will drop. (3 marks)
(c) Entrepreneurs. (1 mark)
The stall owners make decisions and bear production risks. (2 marks)

HKDSE-ECON Suggested Solution-7 (Mock Test 8) © 2013 Aristo Educational Press Ltd.
12. (a) Monetary base = Currency in public circulation + Bank reserves
$1,000 million = Currency in public circulation + $500 million
Currency in public circulation
= $1,000 million – $500 million
= $500 million (2 marks)
Monetary supply = Cash in public circulation + Bank deposits
$2,500 million = $500 million + Bank deposits
Bank deposits
= $2,500 million – $500 million
= $2,000 million (2 marks)
Bank deposits = Reserves + Loans
$2,000 million = $500 million + Loans
Loans
= $2,000 million – $500 million
= $1,500 million (2 marks)
(b) (i) New deposits = Reserves / New required reserve ratio
= $500 million / 20%
= $2,500 million (1 mark)
New loans = New deposits – Reserves
= $2,500 million – $500 million
= $2,000 million (1 mark)
(ii) A decrease in the required reserve ratio will lead to an increase in money supply. At a given
price level, an increase in money supply causes the equilibrium interest rate to decrease. This
stimulates investment expenditure and private consumption expenditure, causing aggregate
demand to increase. (2 marks)
In the short run, the price level will increase from P0 to P1, and the output level will increase
from Y0 to Y1. (2 marks)

Price level

SRAS

P1
P0

AD1
AD0
Quantity of output
0 Y0 Y1 (real GDP)

(2 marks)

HKDSE-ECON Suggested Solution-8 (Mock Test 8) © 2013 Aristo Educational Press Ltd.
Section C (16 marks)

13. (a) To maximise profit, the tutorial school will produce at Q1 where its marginal revenue equals its
marginal cost, and charge P1, as shown in the figure below. (2 marks)

Price

P1

MC

D
Quantity
0 Q1 MR
(2 marks)
Under simple monopoly pricing, part of the consumer and producer surpluses under perfect
competition becomes a deadweight loss to society. At profit-maximising output, marginal benefit is
higher than marginal cost. Consumers are willing and able to pay a price higher than the marginal
cost for more of the good. Simple monopoly pricing results in economic inefficiency as there are
potential gains which are not captured by consumers or the monopolist. (3 marks)
(b) Yes. This is because for the same course, the tutorial school charges different average course fee for
different number of students enrolled, and the fee difference cannot be explained by cost difference.
(3 marks)
(c) (i) Sole distributor. Other sellers cannot compete with the sole distributor because they cannot
get supplies from the supplier. (2 marks)
(ii) Price-fixing. Such agreement avoids price competition between the firms and the firms can
enjoy a greater profit. (2 marks)
(d) - Improve the efficiency of resource use and maximise total
social surplus
- Give firms clear instructions about what anti-competitive 1@, max: 2 marks
behaviours are
- Any reasonable answer

HKDSE-ECON Suggested Solution-9 (Mock Test 8) © 2013 Aristo Educational Press Ltd.
14. (a) (i)

Good Y
45

40

35

30

25

20

15

10 PPFB

5 PPFA

Good X
0 5 10 15 20 25 30 35 40 45
(2 marks)
(ii) Country A’s opportunity cost of producing good X
= 2 units of good Y / 3 units of good X
= 0.67 units of good Y
Country A’s opportunity cost of producing good Y
= 3 units of good X / 2 units of good Y
= 1.5 units of good X
Country B’s opportunity cost of producing good X
= 3 units of good Y / 3 units of good X
= 1 unit of good Y
Country B’s opportunity cost of producing good Y
= 3 units of good X / 3 units of good Y
= 1 unit of good X
Country A’s opportunity cost of producing good X is lower than the terms of trade (0.67 units of
good Y < 0.7 units of good Y). It will export good X. On the other hand, Country B’s opportunity
cost of producing good Y is lower than the terms of trade (1 unit of good X < 1.42 units of good X).
It will export good Y. (4 marks)

HKDSE-ECON Suggested Solution-10 (Mock Test 8) © 2013 Aristo Educational Press Ltd.
 (iii) With technological improvement, the amount of Good X and Good Y that Country A and
Country B can produce with 1 unit of resources becomes:

Good X (units) Good Y (units)

Country A 4 OR 3
Country B 3 OR 3

Country A’s opportunity cost of producing good X becomes 0.75 units of good Y (= 3 units of
good Y / 4 units of good X), which is higher than the terms of trade (0.7 units of good Y),
Country A will not trade with Country B any more. (4 marks)
(b) (i) Japan’s Human Development Index rank
= Japan’s Gross National Income rank – Japan’s per capita rank minus HDI rank
= 21 – 11
= 10 (1 mark)
Hong Kong’s Human Development Index rank
= Hong Kong’s Gross National Income rank – Hong Kong’s per capita rank minus
= 7 – (-6)
= 13 (1 mark)
Singapore’s Human Development Index rank
= Singapore’s Gross National Income rank – Singapore’s per capita rank minus
= 3 – (-15)
= 18 (1 mark)
Japan has the highest Human Development Index while Singapore has the lowest Human
Development Index. (1 mark)
(ii) - They have much physical capital.
- They have much human capital.
1@, max: 2 marks
- They have advanced production technology.
- Any reasonable answer(s)

HKDSE-ECON Suggested Solution-11 (Mock Test 8) © 2013 Aristo Educational Press Ltd.