THE UNIVERSITY OF HONG KONG

Faculty of Business and Economics

2019 Spring Semester, Midterm Examination

ECON1210
Introductory Microeconomics

Version A ANSWER KEY

March 17, 2019 3:00-4:00p.m.

Read the following instructions carefully!

We expect students to finish all the multiple choice questions in 60 minutes, i.e., slightly more than one minute
per question. CHOOSE THE BEST AVAILABLE ANSWER. Try not to allocate more than 2 minutes on any
single MC question. Please also try to work on the apparently easier questions first. This strategy should help
you lower the risk of losing a lot of marks by getting stuck in one or two of the more difficult questions. If you
are done early, try to double check your answers. To avoid disturbance to other students, NO STUDENT IS
ALLOWED TO LEAVE EARLY.

Please mark the best answer to each multiple choice question on the scantron answer sheet provided. DO
NOT MARK YOUR MC ANSWERS ON THIS QUESTION PAPER, NO SYMPATHY WILL BE GIVEN IF
YOU FAIL TO PUT ALL YOUR MC ANSWERS ON THE SCANTRON ANSWER SHEET WITHIN THE
ALLOWABLE TIME.

On the scantron sheet, please write down your University ID number and your name, and also fill in the boxes
on the upper right corner. One point will be deducted if you fail to include your name, another point for your
failure to include your University ID, and another point for your failure to mark your University ID on the
scantron sheet correctly.

SCORING: One point for a correct answer, minus 0.2 point for a wrong answer, zero point for a blank answer.
For instance, if a student gets 30 questions correct, 5 incorrect and leaves remaining blank, he/she will get a
score of (30 − 0.2 × 5) = 29.

Please turn off your mobile phone.

NO CHEATING PLEASE!! The one seating next to you should NOT have the same version of exam as yours.
If two students sitting next to each others are found to have the same version of exam paper, they are BOTH
CONSIDERED CHEATING. To help reduce the temptation to cheat, the invigilators will keep close watch of
students during the exams. For students who must use the washroom during the exam, the invigilators may
record their names and student IDs and take away their mobile phone during their washroom visit.
1. Which version of the exam paper do you have?
(a) version A
(b) version B
(c) version C
(d) version D
NOTE:
This question is NOT a real question. It is only an indicator on the version students answer. There is no right
or wrong. Of course, if students indicate the wrong version, their answers will be graded against the “wrong”
set of answer keys. In that case, their grades will be seriously affected.
2. Recently, it is observed that the price of good X falls and the price of good Y rises. Which of the following
events might have happened?
(a) Good X and good Y are complements and there was initially an increase in supply of good X **
(b) Good X and good Y are complements and there was initially a decrease in supply of good X
(c) Good X and good Y are substitutes and there was initially an increase in supply of good X
(d) Good X and good Y are substitutes and there was initially a decrease in supply of good X
(e) (a) and (d)
ANSWER AND DISCUSSIONS:
Consider “initially a decrease in supply of good X.” If there is a decrease in supply of good X, given a demand
for good X, the price of good X will rise. If the price of good X rises, given that X and Y are substitutes, we
would expect an increase in demand for good Y. Given a supply of good Y, an increase in demand will cause
the price to rise. To summarize, if X and Y are substitutes, a decrease in supply of good X will cause the price
of good X to rise and the price of good Y to rise.
The remaining cases are summarized in the table below:

Initial cause X-Y relationship PX QX DY PY

An increase in supply of good X Complements ↓ ↑ ↑ ↑
A decrease in supply of good X Complements ↑ ↓ ↓ ↑
An increase in supply of good X Substitutes ↓ ↑ ↓ ↓
A decrease in supply of good X Substitutes ↑ ↓ ↑ ↑

3. Refer to the table below.

Price per burger Quantity Demanded Quantity Supplied

$10 2400 1200
15 2300 1350
20 2000 1400
25 1900 1537
30 1600 1600
35 1400 1800
40 1100 1900

Evaluate whether the following statements are TRUE or FALSE.

(I) In this market, it is possible to have an excess supply of 750 units at a price of $45.
(II) If the price per burger is $15, there is an excess demand of 950 units.
(III) If the price per burger is $35, we expect the price to increase because there is an excess
supply in the market.

(a) The first statement is true; the second statement is true; the third statement is true.

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 (b) The first statement is true; the second statement is true; the third statement is false.
(c) The first statement is false; the second statement is true; the third statement is true.
(d) The first statement is false; the second statement is true; the third statement is false. **
(e) The first statement is false; the second statement is false; the third statement is false.
ANSWER AND DISCUSSIONS:
“In this market, it is possible to have an excess supply of 750 units at a price of $45.” is false. 45 is beyond
the range shown in the table. But, because demand is downward sloping, a price higher than 40 will lead to
a quantity demanded lower than 1100; because supply is upward sloping, a price higher than 40 will lead to a
quantity supplied higher than 1900. Thus, we must have an excess supply higher than 800 (1900-1100) units.
“If the price per burger is $15, there is an excess demand of 950 units.” is true. At price 15, Qd = 2300,
Qs = 1350, excess demand = Qd − Qs = 950.
“If the price per burger is $35, we expect the price to increase because there is an excess supply in the market.”
is false. It is true that there is an excess supply at the price of 35. But, we should expect the price to decrease
(not increase) in the presence of excess supply.
4. Utopia used to restrict import of coffee from other countries. Recently, Utopia has become a member of
World Trade Organization. As a requirement of membership, Utopia has to remove its import restrictions
imposed on coffee. Now, in addition to Utopian coffee, coffee around the world becomes available in the
country. As a result, we would expect the price elasticity of demand for Utopian coffee in Utopia to
, and the price elasticity of supply of Utopian coffee in Utopia to .
(a) become more elastic; become more elastic.
(b) become more elastic; stay the same.**
(c) become more inelastic; stay the same.
(d) stay the same; stay the same.
(e) stay the same; become more inelastic.
ANSWER AND DISCUSSIONS:
Opening up the market increase the availability of different kinds of coffee in Utopia. The larger number of
substitutes make the price elasticity of demand for Utopian coffee to become more elastic. The price elasticity
of supply is not affected because there is no change in cost of production or other factors.
5. The table below shows Andy’s and Betty’s marginal valuation/willingness to pay of apples.

Q Andy Betty
1 4.8 dollars 3 dollars
2 3.8 2
3 2.8 1
4 1.8 0
5 0.8 0

Think about the market demand curve. What is the marginal buyer’s willingness to pay when the quantity
is 3?
(a) 4.8 dollars
(b) 3.8 dollars
(c) 3 dollars **
(d) 2.8 dollars
(e) 2 dollars

ANSWER AND DISCUSSIONS:

We can easily find out the market demand curve as

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 Q P Q P
1 4.8 dollars 5 2 dollars
2 3.8 6 1.8
3 3 7 1
4 2.8 8 0.8

Thus the marginal buyer’s willingness to pay when the quantity is 3 is 3.

6. In a college town, the demand curve for renting a two-bedroom apartment is P = 8000 − 2Q and the
supply curve is P = 2Q. In this market, the consumer surplus is dollars and the producer
surplus is dollars.
(a) 8,000,000; 8,000,000
(b) 4,000,000; 4,000,000 **
(c) 3,000,000; 3,000,000
(d) 2,000,000; 2,000,000
(e) 1,000,000; 3,000,000
ANSWER AND DISCUSSIONS:
The calculation will involve several steps.
(1) Solving for the market equilibrium: P ∗ = 4000, Q∗ = 2000
(2) Identifying the y-intercept of demand curve: P=8000.
(3) Identifying the y-intercept of supply curve: P=0.
(4) The consumer surplus is
1
× (8000 − 4000) × 2000 = 4000000
2

(5) The producer surplus is

1
× (4000 − 0) × 2000 = 4000000
2

7. Continuing from the previous question (Question 6), suppose the government imposes a rent control of
2000 dollars. The rent control leads to an of apartments.

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 (a) excess supply; 4000
(b) excess demand; 4000
(c) excess supply; 2000
(d) excess demand; 2000 **
(e) excess demand; 1000
ANSWER AND DISCUSSIONS:
First, we recognize that the price control is a price ceiling and the propose level is below the equilibrium price.
(1) Compute the quantity demanded at the regulated price: QD (P = 2000) = 3000
(2) Compute the quantity supplied at the regulated price: QS (P = 2000) = 1000
(3) The excess demand is computed as: ED = QD (P = 2000) − QS (P = 2000) = 2000.

8. Many Utopian citizens will travel to Japan to see the Olympics. How would this affect the exchange rate
between Utopian dollar and Japanese Yen?
(a) Japanese Yen will appreciate (say, from 10 Utopian dollar per Japanese yen to 11 Utopian dollar per
Japanese yen). **
(b) Japanese Yen will depreciate (say, from 10 Utopian dollar per Japanese yen to 9 Utopian dollar per
Japanese yen).
(c) The exchange rate will remain unchanged.
(d) The direction of the change is unpredictable.
ANSWER AND DISCUSSIONS:
First, we recognize that exchange rate is just a price of a currency. Consider the Japanese Yen as a good. The
price of Japanese Yen can be quoted as x Utopian dollars per Japanese Yen.
When people need to buy Japanese goods and services, they will demand for Japanese Yen. When Many
Utopian citizens will travel to Japan to see the Olympic, there will be an increase in demand for Japanese Yen.
Given supply, the price of Japanese Yen will increase. That is, Yen will appreciated, say from 10 Utopian dollar
per Japanese yen to 11 Utopian dollar per Japanese yen.

9. The western nations have promised to donate 500 hundred tons of grain to Utopia next year. The donation
will be evenly distributed to farmers/sellers. The demand curve is downward sloping and the supply curve

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 is upward sloping. Evaluate whether the following statements are TRUE or FALSE.

(I) The Utopian grain consumers cannot benefit from the donation at all, because only the
sellers receive the donation, not the consumers.
(II) The Utopian consumers will consume 500 hundred tons more of grains next year.

(a) The first statement is true, the second statement is true.

(b) The first statement is true, the second statement is false.
(c) The first statement is false, the second statement is true.
(d) The first statement is false, the second statement is false. **

ANSWER AND DISCUSSIONS:

The key is that even though the donation is distributed to the the farmers, it will end up in the market. The
market will have an increase in supply. Given the demand, the price will be lowered. Thus, the consumers will
benefit.
As demand is downward sloping and the supply is upward sloping, the increase in supply by 500 hundred tons
will lead to a “less than” 500 hundred tons increase of equilibrium quantity.
If the demand is horizontal or and the supply is vertical, the increase in supply by 500 hundred tons will lead
to exactly 500 hundred tons increase of equilibrium quantity.

10. In the market of chocolate, the demand curve is downward sloping and the supply curve is upward
sloping. Suppose that new scientific evidence has shown that eating chocolate is good for one’s health.
This scientific discovery is expected to the consumer surplus and to the
producer surplus.

(a) increase; increase

(b) decrease; decrease
(c) decrease; increase
(d) increase or decrease (depending on the details); increase **
(e) increase; increase or decrease (depending on the details)

ANSWER AND DISCUSSIONS:

With the increase in demand, the equilibrium price and quantity will increase. Producer surplus will certainly
increase.
If the demand curve is linear and the shift of demand is parallelly to the right, consumer surplus will certainly
increase.

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 When the shift is not parallel, consumer surplus may decrease.

11. Two events recently happened.

(I) an increase in the wages of bicycle factory workers

(II) a new study shows the benefit of riding bicycles

Given these events, assuming usual supply and demand curves in the market of bicycles, we would predict
that
(a) the equilibrium quantity of bicycles must fall.
(b) the equilibrium quantity of bicycles must rise.
(c) the equilibrium price of bicycles must rise. **
(d) the equilibrium price of bicycles must fall.
(e) both (a) and (c)
ANSWER AND DISCUSSIONS:

(I) an increase in the wages of factory workers

(II) a new study shows the benefit of riding bicycles

Event Impact on demand Impact on supply Impact on P ∗ Impact on Q∗

(II) – ↓ ↑ ↓
(II) ↑ – ↑ ↑

(I)+(II) ↑ Uncertain

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12. It is seen that the equilibrium price of good X falls and the equilibrium quantity rises. Which of the
following events might have happened?

(I) an increase in demand and an increase in supply.

(II) a decrease in demand and an increase in supply.
(III) an increase in demand and a decrease in supply.
(IV) a decrease in demand and a decrease in supply.

(a) (I) and (II) **

(b) (I) and (III)
(c) (II) and (III)
(d) (II) and (IV)
(e) (III) and (IV)
ANSWER AND DISCUSSIONS:
We can analyze the implications of each of these combinations

Event Change of demand Change of supply Impact on P ∗ Impact on Q∗

(1) – ↑ ↓ ↑
(2) ↑ – ↑ ↑

(1)+(2) uncertain ↑

Event Change of demand Change of supply Impact on P ∗ Impact on Q∗

(1) – ↑ ↓ ↑
(2) ↓ – ↓ ↓

(1)+(2) ↓ uncertain

Event Change of demand Change of supply Impact on P ∗ Impact on Q∗

(1) – ↓ ↑ ↓
(2) ↑ – ↑ ↑

(1)+(2) ↑ Uncertain

Event Change of demand Change of supply Impact on P ∗ Impact on Q∗

(1) – ↓ ↑ ↓
(2) ↓ – ↓ ↓

(1)+(2) uncertain ↓
13. Please rank the following demand curve from the most price elastic to the least price elastic.

(i) Annie drinks a cup of latte every day without paying attention to the price
(ii) Betty eats 10 dollars’ worth of fruit every day.
(iii) The linear, downward sloping demand curve has y-intercept of 10. Due to government
regulation, the price is always higher than 5.

(a) (i), (ii), (iii)

(b) (i), (iii), (ii)
(c) (ii), (iii), (i)
(d) (iii), (ii), (i) **

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 (e) (ii), (i), (iii)
ANSWER AND DISCUSSIONS:
(i) implies an perfectly inelastic demand.
(ii) implies an unitary elastic demand
(iii) implies a relevant segment of demand that is elastic.
14. A new subway line has just been put into operation in the Paradise Valley. Are the following two state-
ments CORRECT?

(I) Bus companies in the Valley have newly discovered that raising the bus fare can increase
their revenue.
(II) Bus companies in the Valley now have fewer passengers if they still charge the original
bus fare.

(a) Both (I) and (II) are correct.

(b) Neither (I) nor (II) is correct.
(c) Only (I) is correct.
(d) Only (II) is correct. **
ANSWER AND DISCUSSIONS:
After the new subway line, the demand for bus services should become more elastic. Thus, to maximize total
revenue, bus companies in the Valley should lower its fare towards the unit elastic point. Thus, (I) is wrong.
(II) should be obvious.
15. Suppose the demand curve has constant price elasticity of −1 and the supply curve has constant price
elasticity of 3. What would happen to the equilibrium price and quantity when the supply increases by
4%?
(a) The equilibrium price falls by 4% and quantity increases by 3%.
(b) The equilibrium price falls by 1% and quantity increases by 1%. **
(c) The equilibrium price falls by 1% and quantity increases by 4%.
(d) The equilibrium price falls by 1% and quantity increases by 3%.
(e) The equilibrium price falls by 1% and quantity decreases by 1%.
ANSWER AND DISCUSSIONS:
We can compute the change in equilibrium price using the formula:

4%
= 1%
| −1 | + | 3 |

The equilibrium price will fall by 1%

Given the change of equilibrium is along the demand curve, we can use the price elasticity of demand to obtain
%∆Q
= −1
%∆P
%∆Q
= −1
−1%
%∆Q = 1%

That is, the equilibrium quantity will increase by 1%.

16. As the inputs get cheaper, the equilibrium price of computers decreases by 1%, and the equilibrium
quantity increases by 2%. What does this tell us about the price elasticity of demand / supply?

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 (a) The demand is inelastic.
(b) The demand is elastic.**
(c) The supply is inelastic.
(d) The supply is elastic.
(e) Not enough information
ANSWER AND DISCUSSIONS:
Cheaper inputs will cause an increase in supply. The change in equilibrium is a movement along a demand
curve. Thus, we can use the information to compute the price elasticity of demand but not the price elasticity
of supply.
We can compute the price elasticity of demand as

%∆Q 2%
= = −2
%∆P −1%

17. A decrease in the price of salmon from 55 to 45 dollars causes the quantity supplied to decrease from 105
to 95 units. The elasticity of supply (using the mid-point formula) is
(a) 0.5 **
(b) 1
(c) 1.5
(d) 2
(e) 2.5
ANSWER AND DISCUSSIONS:
We can compute the price elasticity of supply as

(95 − 105)/ [(95 + 105)/2] −10/100

= = 0.5
(45 − 55)/ [(45 + 55)/2] −10/50

18. In the following pairs, the supply of the first product is more price elastic than the second EXCEPT for

(I) lemonade v.s. ivory

(II) short-run housing supply v.s. long-run housing supply
(III) Hong Kong market for coal v.s. global market for coal

(a) (I) and (III)

(b) (II) only **
(c) (I) only
(d) (II) and (III)
(e) (III) only
19. Evaluate whether the following statements are CORRECT. (Assume regular demand and supply, unless
specified otherwise.)

(I) When the supply curve is perfectly elastic, an increase in demand does not affect the
equilibrium price but only increases the equilibrium quantity.
(II) When the supply curve is perfectly inelastic, an increase in supply does not affect the
equilibrium quantity but only decreases the equilibrium price.
(III) When the demand curve is perfectly inelastic, an increase in supply does not affect the
equilibrium quantity but only decreases the equilibrium price.

(a) only (I) is correct.

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 (b) only (II) is correct.
(c) only (III) is correct.
(d) only (I) and (II) are correct.
(e) only (I) and (III) are correct. **
20. Suppose a commodity tax is levied on a product. The supply curve is linear and upward sloping and the
demand curve is linear and downward sloping. The tax lowers the consumer surplus by $10,000 and lowers
the producer surplus by $7,500. The deadweight loss is $2,500. What is the government tax revenue?
(a) $15,000 **
(b) -$15,000
(c) $20,000
(d) -$20,000
(e) not enough information
ANSWER AND DISCUSSIONS:
After the implementation of a commodity tax, equilibrium quantity will decrease. Referring to the graph below,
consumer surplus will fall from ACE to AGD; producer surplus will fall from OCE to OHF. The area of FDE is
the deadweight loss. The area GDFH is the the tax revenue. Thus, we can see that

∆CS + ∆P S = TR + DW L

Using this relationship, we can compute that

T R = ∆CS + ∆P S − DW L
= 10000 + 7500 − 2500
= 15000

21. Continue with the previous question (Question 20). Suppose we also know that the tax rate is $10 per
unit. The tax lowers the quantity traded from units to units.
(a) 1000; 500
(b) 1500; 500

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 (c) 2000; 1500**
(d) 2000; 1000
(e) not enough information
ANSWER AND DISCUSSIONS:
Given that the tax revenue is 15000 and the tax rate, we can compute the equilibrium quantity after tax

15000
= 1500
10

We can us the DWL to compute the reduction in quantity due to the tax
1
DW L = ∆Q × tax
2
1
2500 = ∆Q × 10
2
∆Q = 500

The original quantity is then 2000.

The tax lowers the quantity traded from 2000 units to 1500 units.
22. The cross price elasticity between good X and good Y is found to be positive. We conclude that good Y
and good Y are .
(a) normal goods
(b) inferior goods
(c) substitutes **
(d) complements
(e) none of the above
ANSWER AND DISCUSSIONS:
Imagine an increase in the price of good Y.

PY ↑ −→ QY ↓
−→ QX ↓ (negative cross price elasticity) if X and Y complements
−→ QX ↑ (positive cross price elasticity) if X and Y substitutes

23. The demand and supply curves for product X are Qd = 120 − 20P , Qs = 10P , respectively. The
equilibrium price of X is dollars and the equilibrium quantity is units.
(a) 5; 50
(b) 4; 40 **
(c) 3; 30
(d) 2; 20
(e) 1; 10
ANSWER AND DISCUSSIONS:
We can compute the equilibrium price and quantity as

Qd = Qs
120 − 20P = 10P
P = 4

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 and
Q = 10P = 40

24. Continue from the previous question (Question 23). The government decides to levy $3 commodity tax
on product X. As a result of the tax, buyers will pay dollars more and sellers will receive
dollars less.
(a) 0.5; 2.5
(b) 1; 2 **
(c) 1.5; 1.5
(d) 2; 1
(e) 2.5; 0.5
ANSWER AND DISCUSSIONS:
We know that with tax P d = P s + 3. Given this, we can compute the equilibrium price and quantity as

Qd = Qs
120 − 20P d = 10P s
120 − 20(P s + 3) = 10P s
Ps = 2

and
Pd = Ps + 3 = 5
As the equilibrium price without tax is 4, we conclude that As a result of the tax, buyers will pay 1
dollars more and sellers will receive 2 dollars less.
25. The price paid by consumers of Good X decreases by $6 per unit after the provision of a $10 per unit
subsidy. We can conclude that in the markets, Good X has a demand or a
supply.
(a) less elastic; less elastic
(b) more elastic; more elastic
(c) less elastic; more elastic **
(d) more elastic; less elastic
(e) unit elastic; unit elastic
26. When the per-unit tax on a product is doubled, the tax revenue collected from this product is also doubled.
Which of the following can explain this phenomenon the best?

(a) The demand is perfectly elastic.

(b) The demand is perfectly inelastic. **
(c) The demand is more elastic than the supply.
(d) The demand is less elastic than the supply.
(e) None of the above can explain the phenomenon.

ANSWER AND DISCUSSIONS:

“When the per-unit tax on a product is doubled, the tax revenue collected from this product is also doubled.”
It must be the case the quantity transacted remains unchanged. It can happen only when either demand is
perfectly inelastic or the supply is perfectly inelastic.

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27. Suppose both the supply and demand curves are linear. A tax of $10 per unit is imposed, which causes
the equilibrium quantity to decrease from 100 units to 80 units. The total reduction in the consumer
surplus and producer surplus equals
(a) $900**
(b) $800
(c) $400
(d) $100
(e) not enough information
ANSWER AND DISCUSSIONS:
After the implementation of a commodity tax, equilibrium quantity will decrease. Referring to the graph below,
consumer surplus will fall from ACE to AGD; producer surplus will fall from OCE to OHF. The area of FDE is
the deadweight loss. The area GDFH is the the tax revenue. Thus, we can see that

∆CS + ∆P S = TR + DW L

T R = 10 ∗ 80 = 800

1
DW L = (100 − 80) × 10 = 100
2
Using this relationship, we can compute that

∆CS + ∆P S = T R + DW L
= 800 + 100
= 900

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28. The following table shows the market demand schedule and the supply schedule.

Price (dollars) Quantity Demanded Quantity Supplied

8 40 80
7 50 70
6 60 60
5 70 50
4 80 40

If the government provides a $2 subsidy to the producers,

(a) price paid by consumers become $7.

(b) government expenditure equals $140. **
(c) consumers enjoy a strictly larger subsidy share compared to producers.
(d) consumer’s total expenditure is higher than that without a subsidy.
(e) the deadweight loss is $20.
ANSWER AND DISCUSSIONS:
When a $2 subsidy is implemented, the price received by the sellers is larger then the price paid by the consumers
by the amount of $2, an yet the quantity supplied should be equal to the quantity demanded. From the table,
we can identify the equilibrium

Price (dollars) Quantity Demanded Quantity Supplied

8 40 80
7 50 >‌>70
6 60 60
5 >‌>70 50
4 80 40

Given the transacted quantity is 70, the tax revenue will be 140 (= 70 × 2).
The subsidy is equally split between the producers (7 − 6 = 1) and consumers (6 − 5 = 1).
The consumer’s expenditure is lower than that without a subsidy. (70 × 5 versus 60 × 6).
The deadweight loss is not easy to calculated without further assumptions. If we assume linear demand and
supply curves, we will have DW L = 21 (70 − 60) × 2 = 10.
29. The following table shows the market demand schedule and the supply schedule.

Price (dollars) Quantity Demanded Quantity Supplied

8 40 80
7 50 70
6 60 60
5 70 50
4 80 40

If the government wants to increase the quantity traded by 20 units, how much subsidy should the go-
vernment provide?
(a) 1 dollar per unit
(b) 2 dollars per unit
(c) 3 dollars per unit
(d) 4 dollars per unit **
(e) not enough information

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 ANSWER AND DISCUSSIONS:
From the table, we can identify the equilibrium quantity without subsidy is 60, and the price at 6. If we want
to increase the traded quantity by 20, we would want to have the traded quantity to be 80. Then, the subsidy
must be 4 (= 8 − 4).

Price (dollars) Quantity Demanded Quantity Supplied

8 40 >‌>80
7 50 70
6 60 60
5 70 50
4 >‌>80 40

30. Cindy would like to attend a two-hour Japanese lesson which cost her 400 dollars. If she does not attend
the lesson, she can teach yoga class with an hourly wage of $100. Or play “overcooked”, a video game, for
two hours with a total of $150 enjoyment. Assume there are no extra costs for the above events. Cindy
should attend the Japanese lesson if the her benefit from the Japanese lesson is at least
dollars.
(a) 200
(b) 350
(c) 550
(d) 500
(e) 600 **
ANSWER AND DISCUSSIONS:
The opportunity cost of attending the Japanese lesson will be the sum of explicit cost and implicit cost. The
explicit cost is $400, which is the lesson fee. For the implicit cost, when we are calculating the opportunity cost,
we only consider the highest valued option forgone (second best choice). In this case, the highest value forgone
opportunity is teaching yoga class, since teaching yoga class gives her higher value than playing overcooked.
Therefore, the total cost is $400 + $100 x 2 = $600
31. Which the following statements regarding the consequences of subsidies are CORRECT?

(I) It can be the case that the price paid by buyers reduces by exactly the amount of the
subsidy.
(II) Subsidies may not cause any deadweight loss, even when the government expenditure is
strictly positive.

(a) Both (I) and (II) are correct. **

(b) Neither (I) nor (II) is correct.
(c) Only (I) is correct.
(d) Only (II) is correct.
ANSWER AND DISCUSSIONS:
(I) is possible if the demand is vertical (perfectly inelastic) so that the buyers will take up all the burden or
benefit of subsidy.
(II) is possible if the quantity traded with subsidy is the same as the one without subsidy. Vertical demand or
vertical supply will do it.
32. Hermione can choose among three different career paths. Her choice of preference is as follows,

First Choice: being a fund manager at E&F Bank

Second Choice: being a tutor at HKU
Third Choice: being a housewife

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 Assuming her preference (the ranking of options) remains unchanged, which of the following will decrease
her opportunity cost of being a fund manager at E&F Bank?
(a) E&F Bank increases the bonus amount of their fund managers
(b) HKU requires all tutors work longer hours **
(c) HKU gives all tutors additional days of leave
(d) Government grants all housewife a monthly cash subsidy
(e) The recent development of smart home appliances makes household chores less painful
ANSWER AND DISCUSSIONS:
The key is that her choice of preference remains unchanged. That is, what was a third priority remains a third
priority even after the events listed in the available choices. Since Hermione’s first choice would be being a
fund manager, the value of her opportunity cost would depend on the benefit of being a tutor (Her second
best choice). Therefore, if tutors have to work longer hours, Hermione’s opportunity cost will decrease. Being
a housewife is the third priority, it is not considered as the highest valued option forgone. Thus, we will not
take changes of its value into account.
33. Yesterday, Jason bought a can of coffee at a price of $10. Since his last purchase, the price has fallen.
Today, Jason bought a can of coffee at the price of $7. Evaluate whether the following statements are
TRUE or FALSE.

Statement 1: Jason’s benefit from a can of coffee is between $7 to $10.

Statement 2: Jason will buy a can of coffee if the price is $8 per can.
Statement 3: Jason definitely will not buy a can of coffee if the price is $11 per can.

(a) The first statement is true, the second statement is true, the third statement is true.
(b) The first statement is true, the second statement is true, the third statement is false.
(c) The first statement is true, the second statement is false, the third statement is false.
(d) The first statement is false, the second statement is true, the third statement is false. **
(e) The first statement is false, the second statement is false, the third statement is false.
ANSWER AND DISCUSSIONS:
Jason is willing to buy at $10 yesterday, so his benefit from a can of coffee is equal or higher than $10.
Statement 1 is false.
Similarly, Jason’s benefit is equal or higher than $10, so he is willing to buy at $8. Statement 2 is true.
Jason’s benefit is equal or higher than $10. We are not sure whether he will buy at $11. Statement 3 is false.
34. Sophia can gather 20 kgs of sea scallops or catch 10 kgs of shrimps in a week. Terrence can gather x kgs
of sea scallops or catch 1 kg of shrimps in a week. Evaluate whether the following statements are TRUE
or FALSE.

Statement 1: If x is less than 2, Terrence will have comparative advantage in gathering scallops.
Statement 2: Sophia will have absolute advantage in gathering both seafood if and only if x is less
than 10.

(a) Statement 1 is true; Statement 2 is true.

(b) Statement 1 is true; Statement 2 is false.
(c) Statement 1 is false; Statement 2 is true.
(d) Statement 1 is false; Statement 2 is false.**
ANSWER:
If x is less than 2, Terrence’s opportunity cost of gathering scallops will be larger than 1/2 kgs of shrimp,
Sohphia’s opportunity cost of gathering scallops.
Sophia will have absolute advantage in gathering both seafood if and only if x is less than 20, not 10.

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35. The equation below shows Jane’s benefit of consuming n cups of coffee and coffee is perfectly divisible
and can be consumed at any arbitrary quantity (say, 5.24 cups).

Total benefit ($): T B(n) = 50n − n2

Average benefit ($): AB(n) = 50 − n
Marginal benefit ($): M B(n) = 50 − 2n

Suppose the price of a cup of coffee is $x. Evaluate whether the following statements are TRUE or FALSE.

Statement 1: Jane would choose the consumption to maximize the difference between average benefit
and price, i.e., AB(n) − x.
Statement 2: Given x = 21, Jane will consume more than 11.5 cups.

(a) Statement 1 is true; Statement 2 is true.

(b) Statement 1 is true; Statement 2 is false.
(c) Statement 1 is false; Statement 2 is true.
(d) Statement 1 is false; Statement 2 is false. **

ANSWER:
We maximize total economic surplus

Total Economic Surplus = Total Benefit − Total Cost

(TES) (TB) (TC)

The TES can be written as

T ES = n × AB − n × P
= n × (AB − P )

But, maximizing AB − P is not the same as maximizing T ES.

We should continue to expand ∆ units as long as the benefit due to the marginal ∆ unit is larger than the cost
of this marginal ∆ unit. At equilibrium, we should have

M B(n) = M C(n)
50 − 2n = 21
2n = 29
n = 14.5

Thus, 14.5 cups.

36. OKU hires five workers to fix the broken windows caused by a typhoon in its two campuses: “Old Campus”
and “New Campus”. The major decision is the allocation of the workers among the two campuses, so as
to maximize the broken windows repaired. The following table shows the number of broken windows that
will be repaired in a campus as a function of the number of workers deployed in the corresponding campus.

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 For instance, when 2 workers are sent to main campus, a total of 30 broken windows will be repaired there.

Number of Worker Old Campus New Campus

1 20 30
2 30 45
3 38 50
4 40 53
5 43 55
6 45 56

(a) 0 worker to Old Campus and 5 workers to New Campus.

(b) 1 worker to Old Campus and 4 workers to New Campus.
(c) 2 workers to Old Campus and 3 workers to New Campus.
(d) 3 workers to Old Campus and 2 workers to New Campus. **
(e) 4 workers to Old Campus and 1 worker to New Campus.
ANSWER:
To solve the problem, we allocate the additional worker one at a time to the campus that yields the highest
marginal benefits.
For the first worker, the MB is obviously highest for New Campus, so we place the first worker there.
Second worker, if placed Old Campus will yield MB = 20; if placed in New Campus will yield MB = 15.
Therefore, the second worker should be placed in Old Campus.
The third worker if placed in Old Campus will yield MB = 10 and if placed in New Campus will yield MB =
15. The third worker should be placed in New Campus.
Now, fourth worker: Old Campus MB = 10, New Campus MB = 5. Hence, the forth worker should be placed
in Old Campus.
If we continue this exercise until we reach the five worker, we can conclude 3 workers to Old Campus and 2
workers to New Campus.
37. Karis and Oni are the only farmers in Islandia, a small island nation. Karis can harvest 5 bananas or 20
pineapples per day. Oni can harvest 20 bananas or 5 pineapples per day. Islandia is currently a closed
economy, i.e., no trade with the rest of the world. Islandians like to consume equal amount of bananas
and pineapples per day. If the two Islandians specialize in the production of fruit they have comparative
advantage at, who will produce bananas and how many bananas will they consume in total?
(a) Karis, 20 bananas
(b) Oni, 20 bananas **
(c) Karis, 25 bananas
(d) Oni, 25 bananas
(e) Karis, 40 bananas
ANSWER:
Note the symmetry in the productivity of the two farmers.
The O.C. for Karis to produce a unit of banana is 4 units of pineapple. Similarly, the O.C for Oni to produce
a unit of banana is 0.25 unit of pineapple. The O.C. for Oni to produce banana is lower than Karis. Thus,
Oni has comparative advantage to produce banana. They will specialize their production according to their
comparative advantage, so Oni will produce 20 bananas and Karis will produce 20 pineapple.
38. The following tables shows the number of hours needed for Vivian and Veronica to bake a dozen of egg
tarts or a dozen of muffins.

Egg tarts Muffins

Vivian 2 3
Veronica 2 1

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 We can conclude that has/have comparative advantage in making egg tarts and
has/have comparative advantage in making muffins.
(a) Vivian ; Vivian
(b) Vivian ; Veronica **
(c) Veronica ; Vivian
(d) Veronica ; Veronica
(e) both ; both
ANSWER:
The table is a input table. Veronica needs shorter hours than Vivian to bake a dozen of muffins. They both use
the same hour for egg tarts. So Veronica has comparative advantage in baking Muffins. Vivian has comparative
advantage in baking egg tarts.
We can also compute the opportunity cost of making egg tarts to conclude on the comparative advantage.
Vivian’s OC of making a dozen of egg tarts is 2/3 dozen of muffins. Veronica’s OC of making a dozen of egg
tarts is 2 dozen of muffins. As Vivian’s OC is lower, Vivian has comparative advantage in baking egg tarts.
39. The following graph shows the Neverland’s production possibilities. Neverland is a small nation. Suppose
the world price of Tea is $2 per kg and the world price of Banana is $1 per kg, and Neverland decides to
open up to the world market and trade. How many kgs of banana could they consume if they were to
consume 10 kgs of tea?

(a) 1
(b) 8 **
(c) 11
(d) 12
(e) 17
ANSWER AND DISCUSSIONS:
We can first evaluate the income at the three production combinations, under the world price.
At (0,17), the income will be 17.
At (8,12), the income will be 28.
At (12,0) the income will be 24.
Thus, we conclude they are better off producing (8,12).
Given that they will have an income of 28, we can subtract their expenditure on tea, we will get the expenditure
on banana (28 − 10 × 2 = 8). From this expenditure, we obtain that they will consume 8 units of bananas.

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40. Peter can produce 8 square yards of shelter or 16 pounds of food per week. John can produce 4 square
yards of shelter or 4 pounds of food per week. They decide their time allocation together. Suppose the
shelter consumption to food consumption ratio must be 1:1. Then Peter should produce
square yards of shelter and John should produce square yards of shelter.
(a) 8 ; 0
(b) 8 ; 2
(c) 4 ; 4 **
(d) 2 ; 4
(e) None of the above
ANSWER AND DISCUSSIONS:
To find the production combination, we need to find the intersection point of the PPC and the line Y=X.
After identifying the comparative advantage, we can also start from the point that is closest to the desire ratio.
That is, 4 square yard of shelter by John and 16 pounds of food by Peter. If we want to move towards the
desire ratio, we will need to increase shelter production. Peter will have produce this additional shelter, giving
up 2 pounds of food for each square yard of shelter.

Shelter Food
John Peter John+Peter John Peter John+Peter
4 0 4 0 16 16
4 1 5 0 14 14
4 2 6 0 12 13
4 3 7 0 10 10
4 4 8 0 8 8

41. What might cause a supply curve of good X to shift downward?

(a) An increase in the price of a substitute

(b) An expectation that the product’s own price will increase in the future.
(c) An advance in the production technology.**
(d) Endorsement of the product by a popular celebrity.

ANSWER and DISCUSSIONS:

If there is an advance in the production technology, cost of production will be lower, which leads to an increase
in supply.
An increase in substitute price will cause demand to shift, not supply.
An expected increase in price means that sellers would want to shift some of their supply to the future to take
advantage of the higher price. So current supply decreases.
42. The demand for good X can be summarized by the following demand relation:

QX = 10 − 3PX − 2PY + 0.7 · income

From the relation, we can conclude that X is a/an good; good X and good Y are .
(a) normal; substitutes
(b) normal; complements **
(c) inferior; substitutes
(d) inferior; complements
(e) public; competitive goods

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 ANSWER and DISCUSSIONS:
When income increases, demand for x increases. Hence x is an normal good. When the price of y increases,
the demand for x decreases. Hence x and y are complements.
43. Which of the followings can be the market demand curve in a market consisting of three individuals each
with a linear demand curve?

(I) (II) (III)

(IV) (V)

(a) (I) only

(b) (I) and (V) only**
(c) (I) and (III) only
(d) (II) and (IV) only
(e) all of them
ANSWER and DISCUSSIONS:
The graph with a straight line can happen when we have three individuals with identical linear demand curves.

The graph with an inward curve consisting of three linear segments can happen when we have three individuals
each with different linear demand curves.

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The others are not feasible.
Why are the other demand curves not feasible? Let’s do the reverse. Suppose we have (IV) but with only
one kink (i.e., a simpler version of IV). If you subtract the market demand curve by what you consider as an
individual linear demand curve, you will obtain the other demand curve. And, you will find that for this curve,
you have a smaller quantity demanded for a lower price. That is a violation of the downward sloping demand.
The remaining one have similar problems.
As an example, consider a simpler case as shown in the first figure below.

A market demand curve as shown by the black curve AFB. Suppose the market demand curve are the sum of
two individual demand curves.
Let’s assume an linear demand curve for one of the person, say, the blue curve AHG.
Now, for each price, do the subtraction of quantity demanded (market quantity demanded minus the assumed
individual quantity demanded), we will obtain the red curve AIJ. Although AIJ is still downward sloping,
obviously it is not linear.
Of course, we can also assume another linear demand curve, as in the case of second figure below.

In this case, we see the demand curve of the remaining individual is no longer downward sloping.

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44. Suppose Friday can catch a fish with x hours or gather a coconut with y hours. It follows that Friday’s
opportunity cost of catching fish multiplied by his opportunity cost of gathering coconuts is

(a) 1/(xy)
(b) xy
(c) x2 y 2
(d) 1 **
(e) unknown, because there isn’t enough information.
ANSWER AND DISCUSSIONS:
The Opportunity cost of catching fish and gathering coconuts are reciprocal of each other, so their product
always equal one.

45. The following table shows the amount of resources (in man-hours) required to produce good A or good B
in Dreamland and Happyland, respectively.

A B
Dreamland x 16
Happyland 1 2

Evaluate whether the following statements are TRUE or FALSE.

Statement 1: If x is less than 4, the term of trade of “1B = 3A” will yield strictly positive gains from
trade for both parties.
Statement 2: If x = 8, no term of trade will yield strictly positive gains from trade for both parties.

(a) Statement 1 is true; Statement 2 is true. **

(b) Statement 1 is true; Statement 2 is false.
(c) Statement 1 is false; Statement 2 is true.
(d) Statement 1 is false; Statement 2 is false.

ANSWER AND DISCUSSIONS:

When x is less than 4, the OC of producing B for Dreamland is more than 4 unit of A. The OC of producing
B for Happyland is 2 unit of A. The term of trade must lie strictly between these two OCs for the two parties
to yield strictly positive gains from trade. Thus, Statement 1 is TRUE.
No term of trade will yield strictly positive gains from trade for both parties if none of them have comparative
advantage. That happens when x = 8. Thus, Statement 2 is TRUE.

– End of Paper –

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