Chapter 1 : Basic Economic Concepts

Part A - Short questions

1. (a) Define scarcity. (2 marks)
(b) “If the demand for a good is very small, it cannot be scarce.” Do you agree? Explain. (3 marks)

2. “If the government allocates goods and services to citizens equally, the problem of scarcity does not
exist.” Do you agree? Explain. (3 marks)

3. (a) What is scarcity? (2 marks)

(b) “If the supply of a good is limited, it must be scarce.” Comment on the statement. (4 marks)

4. (a) Define opportunity cost. (2 marks)

(b) Mary is given a coupon of $1,000 from a department store. Is there any opportunity cost to Mary of
using the coupon? (5 marks)

5. “Miss Lee buys a property and uses it for a coffee shop business. Since she owns the property, she does
not need to pay rent. There is no cost for her to use the property for a coffee shop business.” Do you agree
with this statement? Explain. (3 marks)

6. During an economic recession, many students prefer to continue their studies instead of working. Explain
the phenomenon with the concept of opportunity cost. (5 marks)

7. Mrs. Wong is a doctor and she employs a domestic helper to do the housework and take care of her two
children. Explain with the concept of opportunity cost why she employs a domestic helper instead of doing
the housework herself. (6 marks)

8. A company is going to spend $200 million on one of the following projects. The projects are arranged
according to its order of preference as below:
Order of preference Projects
1 Constructing a residential building
2 Constructing a commercial building
3 Constructing a golf course
Explain whether the opportunity cost of constructing a commercial building will change in the following
situations.
(a) Playing golf becomes the most popular sport. (5 marks)
(b) The price of residential buildings goes up rapidly. (3 marks)

9. Mr. Chan has a dinner with his friends in a restaurant. Explain whether his opportunity cost of having
dinner in the restaurant will change under the following situations.
(a) The food was not as good as Mr. Chan expected and he was dissatisfied with the dinner. (3 marks)
(b) The cook spent one hour more than usual preparing the meal. (3 marks)
10. Pauline is planning to join one of the tours as shown below during the holiday.
Order of preference Destination
1 Thailand
2 Korea
3 Taiwan
(a) What is Pauline’s opportunity cost of joining a tour of Korea? (2 marks)
(b) If the tour of Thailand is full, how will this affect Pauline’s opportunity cost of joining a tour of Korea?
(2 marks)

11. Grace is a student. She can choose to learn one of the following during her leisure time. Her order of
preference is shown below.
The first choice: piano
The second choice: violin
The third choice: flute
(a) What is Grace’s opportunity cost of learning piano? (2 marks)
(b) If Grace discovers that playing violin is not enjoyable at all, will this affect her opportunity cost of
learning piano? Explain. (3 marks)

12. Mr. Lee attends a communication skills class every Saturday night. Each lesson costs him $500 and the
fee is non-refundable. He decides not to attend the class this week and goes to watch a movie instead. The
price of the movie ticket is $100.
(a) What is Mr. Lee’s opportunity cost of watching the movie? (2 marks)
(b) If the movie is boring and Mr. Lee falls asleep when he is watching the movie, will Mr. Lee’s
opportunity cost of watching the movie change? Explain your answer. (3 marks)

13. Fiona and Yuki are both top models.

(a) Explain whether their opportunity costs of being a model are the same. (2 marks)
(b) Suppose an economic downturn leads to the same reduction in income for both. Explain whether both
will quit their jobs as a model at the same time. (4 marks)

14. The Hong Kong Brands and Products Expo is being held every year. Exhibitors often offer free food
samples to buyers. Explain whether these food samples are free goods? (4 marks)

15. Recently, the Hong Kong Government launches the Government Wi-Fi Programme. People can enjoy
free wireless Internet access (WiFi) services in many public libraries. Are the free WiFi services free goods?
(4 marks)

16. Kenneth receives a scholarship from the university. He uses the money to pay for the tuition fee.
(a) Is there any opportunity cost involved when Kenneth uses the scholarship to pay for the tuition fee?
Explain. (3 marks)
(b) Explain why the scholarship is not a free good. (3 marks)
17. Statement 1: Rainfall is a free good.
Statement 2: Rainfall is an economic good.
Explain in what situation each of the above statements is true. (6 marks)

18. Mrs. Tong is the owner of a coffee shop. She buys the ingredients and prepares cakes and drinks herself.
She employs a waitress to help her serve customers. Explain the economic role(s) performed by Mrs. Tong
using the circular flow model. (3 marks)

19. Mr. Wan is the owner of a bookstore. He employs Timothy as the shop assistant. In order to increase the
competitiveness of his bookstore, he provides free delivery service to his customers.
(a) Explain whether the free delivery service is a free good. (4 marks)
(b) Explain the economic role(s) performed by Mr. Wan with the circular flow model. (3 marks)

20. Explain whether the following statements are positive or normative.

(a) If the Organization of the Petroleum Exporting Countries (OPEC) raises the supply of oil, the price of
oil will fall. (3 marks)
(b) The government should build more public housing estates. (3 marks)

21. Statement 1: Policies should be carried out to ease the problem of income inequality.
Statement 2: The problem of income inequality is getting worse.
Explain whether the above statements are positive or normative. (6 marks)

22. Janice said, “I am too fat.”

Jill said, “I am fatter than you.”
Explain which of the statements is a positive statement and which is a normative statement. (6 marks)

23. Comment on the following statements.

(a) Scarcity exists in every economy except one-man economy. (3 marks)
(b) People do not have to make choice if scarcity does not exist. (3 marks)

24. In 2012, Bank of China (Hong Kong) Limited issued commemorative banknotes to celebrate the 100th
anniversary of the Bank of China. A single note with a face value of HK$100 was sold at $150. Hundreds of
people queued outside the branches for hours to buy the banknotes.
(a) Do you think the commemorative banknotes are scarce? Why? (3 marks)
(b) For those who bought a commemorative banknote for $150, would their cost of buying the banknote be
necessarily equal to $150? Explain. (3 marks)
(c) There were many people queuing up to buy the commemorative banknote. Some of them were touts
( 黃 牛 黨 ). Suppose it was legal to buy the commemorative banknote from touts. Do you think you
would have bought from them? Explain your answer from an economic perspective. (3 marks)
25.
In Macau, the gambling industry is prosperous. Casinos offer a higher pay for their
employees than that offered by other industries. Many young people choose to work in
casinos instead of continuing their studies.
Explain the above phenomenon with the concept of opportunity cost. (3 marks)

26. Wyman owns a property. He uses the property to run a workshop making leather products.
(a) Explain, with an example, under which situation the opportunity cost of using the property to run the
workshop would increase. (3 marks)
(b) Suppose the workshop is suffering from a loss. Explain whether the opportunity cost of using the
property to run a workshop would change. (2 marks)

27. The economy of Country X is overheated. The government considers raising the interest rates on both
deposits and loans of banks.
(a) What is interest? (2 marks)
(b) Explain why raising the interest rates help discourage consumption and investment. (4 marks)

28. Ken borrowed $100,000 from his mother for investment. At her request, he promised to return the
money with a ring to her three years later.
(a) Who has a higher degree of positive time preference in this case, Ken or his mother? Explain. (2 marks)
(b) Why could the ring be regarded as “interest” to both Ken and his mother? Explain. (4 marks)

29. In Hong Kong, many restaurants buy ice from ice making companies to prepare drinks.
(a) Explain why ice is an economic good in this case. (2 marks)
(b) Explain with an example, under what situation ice is a free good. (3 marks)

30. A chained fast food shop offers free breakfasts on the first day of every month. Every person can get a
breakfast for free on that day.
(a) Is the free breakfast a free good? Explain. (3 marks)
(b) It is observed that there are people queuing for the free breakfast outside the outlets of the chained fast
food shop on the day free breakfasts are given.
Suppose the waiting time for each person is the same. Are their costs of queuing up for the free
breakfasts necessarily the same? Explain. (3 marks)

31. In Country A, the problem of drug abuse is very serious. The government plans to impose a heavier
punishment on drug abuse. Also, free treatment programme is provided to drug dependent people.
(a) Using the concept of opportunity cost, explain whether people will have a greater or less incentive to
take drugs after the government imposes a heavier punishment on drug abuse. (3 marks)
(b) “As the treatment programme is free, it is a free good to drug dependent people.” Do you agree with
this statement? Explain. (3 marks)
32. Tina receives two theme park tickets from a telecommunications company as a welcome gift. The tickets
are transferable.
(a) Explain whether the theme park tickets are free goods or economic goods. (3 marks)
(b) Is there any cost involved for Tina to use the tickets to visit the theme park? Explain. (3 marks)
(c) Suppose the tickets are not transferable. Will your answer in (b) change? Explain. (2 marks)

33. Refer to the following circular flow of economic activities of an economy.

Flow A
Money
flow
Flow C Real
flow
Firm Household

Flow D

Flow B

(a) What does flows A to D represent respectively? (4 marks)

(b) Mandy is the owner of a boutique. She employs a few assistants to help her. She uses most of the
income earned to buy clothes for herself. Explain the economic role(s) performed by Mandy. (4 marks)

34.
There is a shortage in the supply of housing, causing the property prices and rental to rise.
To cope with the housing problem, the best way is to make more land available and build
more public housing. Also, the government should put more effort in combating the abuse
of public housing.
Identify positive statement(s) and normative statement(s) from the above paragraph. Explain why they are
positive or normative. (6 marks)

Part B - Long questions

1. Mr. Cheung is a minibus driver. As he owns a minibus, he does not need to rent a minibus from others.

(a) What is Mr. Cheung’s cost of driving his minibus? (2 marks)

(b) Suppose his minibus is very old and it has to be repaired frequently. Will his cost of driving his minibus
change? Explain. (3 marks)
(c) Under what condition will Mr. Cheung’s cost of driving his minibus increase? Explain. (4 marks)
2. A cosmetics chain store is going to spend $10 million on one of the following:
First choice: Opening a new branch
Second choice: Hiring Ann Poon, a pop star, as a spokesman
Third choice: Advertising on television, magazines and newspapers
(a) (i) State the definition of opportunity cost. (2 marks)
(ii) What is the opportunity cost of opening a new branch? (2 marks)
(b) If the new branch makes a loss, would it affect the cost of opening a new branch? (3 marks)
(c) (i) What are free goods? (2 marks)
(ii) The cosmetics chain store sometimes offers free skin tests to the customers. Explain whether the
test is a free good. (3 marks)
(d) Suppose Ann Poon, the pop star, has signed a contract with another competing cosmetics chain store to
be its spokesman and she cannot be the spokesman of the company. Explain how it would affect the
cost of opening a new branch. (3 marks)

3. Simon has $4 million and his order of preference for spending the money is as follows:
First choice: Buying a flat in Ho Man Tin
Second choice: Buying a car
Third choice: Buying a yacht

(a) What is Simon’s opportunity cost of buying a flat in Ho Man Tin? (2 marks)

(b) (i) If the performance of the car is much better than expected, how will this affect Simon’s opportunity
cost of buying a flat in Ho Man Tin? (2 marks)
(ii) After Simon bought the flat in Ho Man Tin, the MTR Corporation announced that the Ho Man Tin
MTR station would be built. Property prices in Ho Man Tin rise thereafter. Will this affect
Simon’s opportunity cost of living in the flat? Explain. (3 marks)
(c) Free newspapers are provided in the estate where Simon lives. Are these free newspapers free goods?
Explain. (4 marks)
(d) Residents of the estate said, “More bus routes running between Ho Man Tin and different places should
be provided.” Explain whether this statement is positive or normative. (3 marks)
4. Study the following information.
Modern Magazine
New subscribers can get one of the following free gifts:
1. $500 supermarket cash coupon
2. 100 ml Perfect Moisturiser
3. A toaster
(a) (i) State the definition of a free good. (2 marks)
(ii) “Since the gifts are given to new subscribers free of charge, they are free goods.” Do you agree
with the statement? Explain. (3 marks)
(b) Samantha is a new subscriber of Modern Magazine. Her order of preference is as follows:
First choice: 100 ml Perfect Moisturiser
Second choice: A toaster
Third choice: $500 supermarket cash coupon
(i) Explain whether an opportunity cost is involved in getting the Perfect Moisturiser. (3 marks)
(ii) If the toaster is out of stock, how will this affect Samantha’s opportunity cost of choosing the
Perfect Moisturiser? (2 marks)
(c) Explain the economic role(s) performed by Samantha in this case using the circular flow model.
(3 marks)

5. Alex said, “I am planning to get married this December. I want to buy a new apartment which costs 3
million dollars. Can I borrow one million dollars from you for the down payment?”
Alex’s mother said, “Sure. I can lend you the money. But you have to pay back the full amount ten years
later as I need it for retirement.”
(a) (i) What is interest? (2 marks)
(ii) What is the interest rate when Alex’s mother lends to Alex? Does it indicate anything about Alex’s
time preference? (3 marks)
(b) Suppose a bank offers an investment product which guarantees a 10% annual rate of return. Explain
whether this will affect Alex’s mother’s cost of lending to Alex. (5 marks)
(c) Suppose Alex finally buys a flat near the LOHAS Park MTR station. He finds that the frequency of the
trains running between the LOHAS Park and other stations is low. A member of the Democratic Party
says, “There should be a greater frequency of the train service.” Explain whether the comment made by
the member of the Democratic Party is a positive or a normative statement. (2 marks)

6. Mr. Lee owns a yacht. Every Saturday, he can choose to sail the yacht himself out for fishing or to rent the
yacht out to a travel agent for $1,000 per day.
(a) (i) Define opportunity cost. (2 marks)
(ii) What is Mr. Lee’s opportunity cost of using the yacht himself? (2 marks)
(b) Explain how Mr. Lee’s opportunity cost of using the yacht himself would be affected when
(i) the number of fish caught by Mr. Lee decreases. (3 marks)
(ii) the travel agent stops renting Mr. Lee’s yacht. (3 marks)
(c) Identify whether the fish caught by Mr. Lee from the sea are free goods or economic goods. Explain
 your answer. (3 marks)

7. Mr. and Mrs. Chan won two round-trip air tickets to Bangkok in a lucky draw. They are going to visit
Bangkok for five days.
(a) Are the air tickets free goods? Explain. (3 marks)
(b) Mr. Chan is a banker while Mrs. Chan is a cashier. Whose opportunity cost of visiting Bangkok would
probably be higher? Explain. (3 marks)
(c) Explain whether Mr. and Mrs. Chan’s cost of visiting Bangkok would change under the following
situations.
(i) Because of equipment failure, their returning flight is delayed for 3 hours. (2 marks)
(ii) Mr. Chan is sick and has to stay in the hotel for two days during the visit. (2 marks)

8. Mrs. Wu is a lawyer. She employs a personal assistant to help with the paperwork. She is considering
borrowing money from banks to buy new premises to expand her business.
(a) Using the concept of opportunity cost, explain why Mrs. Wu chooses to employ a personal assistant to
help with the paperwork instead of doing it herself. (3 marks)
(b) Suppose the interest rate on bank loans falls. How will this affect Mrs. Wu’s incentive to borrow
money from banks? Explain. (2 marks)
(c) Explain whether each of the following statements is positive or normative.
(i) Mrs. Wu should do the paper work herself as she can do it faster. (2 marks)
(ii) Mrs. Wu’s cost of running the law firm will increase after the expansion. (2 marks)
(d) According to the above information, explain the economic role(s) performed by Mrs. Wu. (2 marks)

9. A property developer obtained a piece of land at a high bid price in a land auction. The site can be used to
build a commercial building, a shopping mall or a hotel. Suppose the money value of the expected return
generated from each project is as follows:
Project Expected return
A commercial building $3,000,000
A shopping mall $2,500,000
A hotel $2,000,000
(a) Is the piece of land scarce? Explain. (3 marks)
(b) What is the opportunity cost of using the site to build a commercial building? (2 marks)
(c) Suppose the expected return of using the site to build a hotel increases to $2,800,000. How will this
affect the opportunity cost of using the site to build a commercial building? (2 marks)
(d) As the location of the site is too far away from the railway station, the project manager suggests that a
free shuttle bus service should be provided.
(i) Explain whether the free shuttle bus service is a free good or an economic good. (3 marks)
(ii) Explain whether the suggestion is positive or normative. (2 marks)
ANSWER KEY
Part A - Short questions
1. (a) Scarcity refers to the situation in which the resources available are not enough to satisfy all people’s
wants. (2 marks)
(b) No. (1 mark)
Although the demand for the good is very small, the quantity available may be insufficient to satisfy all
human wants. (2 marks)

2. No. (1 mark)
Scarcity refers to the situation in which the resources available are not enough to satisfy all people’s wants.
(1 mark)
Even when goods and services are equally distributed among citizens, resources are still insufficient to
satisfy all human wants. There is still scarcity. (1 mark)

3. (a) Scarcity refers to the situation in which the resources available are not enough to satisfy all people’s
wants. (2 marks)
(b) If the quantity of a good available is not sufficient to satisfy all human wants, it is a scarce good. If the
quantity of a good available is sufficient to satisfy all human wants, it is not a scarce good. (2 marks)
Whether the supply of a resource is limited or not, it is scarce when it is not enough to satisfy all
people’s wants. On the other hand, even if a resource is limited in supply, it may not be scarce if it is
enough to satisfy all people’s wants. (2 marks)

4. (a) Opportunity cost of a choice is the value of the highest-valued option forgone. (2 marks)
(b) Uncertain. (1 mark)
If the coupon is transferable, Mary can sell it to others. Her opportunity cost of using the coupon is the
income from selling it (value of the highest-valued option forgone). (2 marks)
If the coupon is not transferable, no opportunity cost is involved in using the coupon because there is
no option that has to be given up. (2 marks)

5. No. (1 mark)
A cost is involved in using the property for a coffee shop business. The opportunity cost of using the
property for a coffee shop business is the value of the highest-valued option forgone (e.g. income that can be
received from renting or selling it out). (2 marks)

6. Opportunity cost is the value of the highest-valued option forgone. (1 mark)

The opportunity cost of continuing their study is the income received from working. (2 marks)
During economic recession, wages usually decrease. This lowers the income from working. Therefore, the
opportunity cost of continuing their study decreases. (2 marks)
7. Mrs. Wong’s opportunity cost of doing the housework herself is the income earned as a doctor. (2 marks)
Mrs. Wong’s opportunity cost of leaving the housework to the domestic helper is the wage paid to the
domestic helper. (2 marks)
Mrs. Wong’s opportunity cost of doing the housework herself is higher than that of leaving the housework to
the domestic helper. Therefore, Mrs. Wong chooses to employ a domestic helper to do the housework.
(2 marks)

8. (a) Uncertain. (1 mark)

If the highest-valued option forgone remains the option of constructing a residential building, the cost
does not change. This raises the value of constructing a golf course only. (2 marks)
If the increase in the value of constructing a golf course makes it the most preferred option, the highest-
valued option forgone becomes constructing golf course. The cost will then change. (2 marks)
(b) The opportunity cost of constructing a commercial building will change (increase). (1 mark)
It is because the value of the highest-valued option forgone (constructing a residential building)
changes. The increase in the price of residential building raises the value of constructing a residential
building. Therefore, the cost of constructing a commercial building will increase. (2 marks)

9. (a)His opportunity cost will not change. (1 mark)

It is because the poor quality of food lowers the value of having the dinner only, but the value of the
highest-valued option forgone does not change. (2 marks)
(b) His opportunity cost will change (increase). (1 mark)
Because of the longer preparation time, his time cost of having dinner increases. (2 marks)

10. (a)Pauline’s opportunity cost of joining a tour of Korea is the value of a tour of Thailand which is the
value of the highest-valued option forgone. (2 marks)
(b) If the tour of Thailand is full, it is no longer an option for Pauline anymore. The opportunity cost of
joining a tour of Korea changes to the value of a tour of Taiwan. (2 marks)

11. (a) Grace’s opportunity cost of learning piano is the value of learning violin. (2 marks)
(b) Grace’s opportunity cost will change (decrease). (1 mark)
The value of the highest-valued option forgone (learning violin) changes. If Grace discovers that
playing violin is not enjoyable at all, this lowers the value of learning violin. Opportunity cost of
learning piano will therefore decrease. (2 marks)

12. (a)The opportunity cost of watching the movie is the monetary cost of the movie ticket ($100) and the
value of attending the class ($500). (2 marks)
(b) Mr. Lee’s opportunity cost of watching the movie will not change. (1 mark)
The value of the highest-valued option forgone (attending the communication skills class) does not
change. This only affects the value of watching the movie. (2 marks)
13. (a) Their costs may not be the same. (1 mark)
This is because their highest-valued option forgone may not be the same. For example, their
qualifications may be different and they may give up different jobs. (1 mark)
(b) No, they may not quit at the same time. (1 mark)
As long as being a model is the highest-valued option, they will stay in the business. (1 mark)
Their incomes may be different. For example, being a model may still be the highest-valued option for
Fiona but not for Yuki; OR (2 marks)
Their costs may be different. For example, the value of being a model may become less than the cost
for Fiona but this may not be the case for Yuki. (2 marks)

14. Free goods refer to those goods that people do not prefer more of as the quantity available is sufficient to
satisfy all human wants. (1 mark)
The food samples are not free goods. (1 mark)
Their quantity available is not sufficient to satisfy all human wants; OR (2 marks)
More of them are preferred; OR (2 marks)
Provision of them requires the use of scarce resources which have alternative uses. (2 marks)

15. Free goods refer to those goods that people do not prefer more of as the quantity available is sufficient to
satisfy all human wants. (1 mark)
The free WiFi services are not free goods. (1 mark)
Their quantity available is not sufficient to satisfy all human wants; OR (2 marks)
More of them are preferred; OR (2 marks)
Provision of them requires the use of scarce resources which have alternative uses. (2 marks)

16. (a)Yes. (1 mark)

Opportunity cost of a choice is the highest-valued option forgone. (1 mark)
If Kenneth uses the scholarship to pay for the tuition fee, he has to forgo the opportunity to spend the
money in other ways, like taking a trip or buying other things. (1 mark)
(b) Free goods refer to those goods that people do not prefer more of as the quantity available is sufficient
to satisfy all human wants. (1 mark)
The quantity of scholarship available is not sufficient to satisfy all students’ wants; OR (2 marks)
More scholarship is preferred; OR (2 marks)
The provision of scholarship requires the use of scarce resources which have alternative uses. (2 marks)

17. Free goods refer to those goods that people do not prefer more of as the quantity available is sufficient to
satisfy all human wants. (1 mark)
In places with abundant rainfall such as the tropical rainforest, the quantity of rainfall is sufficient to satisfy
all human wants. Rainfall is a free good there. (2 marks)
Economic goods refer to those goods that people prefer more of as the quantity available is not sufficient to
satisfy all human wants. (1 mark)
In places that suffer from drought such as the Sahara, the quantity of rainfall is not sufficient to satisfy all
human wants. Rainfall is an economic good there. (2 marks)
18. Mrs. Tong performs the role of the firm. (1 mark)
She employs factors of production (the waitress, ingredients) and supplies goods and services (the cakes and
drinks, catering service). (2 marks)

19. (a)Free goods refer to those goods that people do not prefer more of as the quantity available is sufficient
to satisfy all human wants. (1 mark)
The free delivery service is not a free good. (1 mark)
Its quantity is not sufficient to satisfy all human wants; OR (2 marks)
More of it is preferred; OR (2 marks)
Provision of it requires the use of scarce resources such as labour. These resources have alternative
uses. (2 marks)
(b) Mr. Wan performs the role of the firm. (1 mark)
He employs factors of production (e.g. labour, books, etc) and provides services (book retailing) to the
household. (2 marks)

20. (a)It is a positive statement. (1 mark)

The statement describes what it is and does not involve value judgment. (2 marks)
(b) It is a normative statement. (1 mark)
It is because the statement contains the word “should”, which implies value judgment on what is
desirable. (2 marks)

21. Statement 1 is a normative statement. (1 mark)

It is because the statement contains the word “should”, which implies value judgment on what is desirable.
(2 marks)
Statement 2 is a positive statement. (1 mark)
The statement describes what it is and does not involve value judgment. (2 marks)

22. Janice’s statement is a normative statement. (1 mark)

It describes what it ought to be and involves value judgment on what is desirable or the best (“too fat” means
she should be thinner). (2 marks)
Jill’s statement is a positive statement. (1 mark)
It describes what it is and does not involve value judgment (whether she is fatter than Janice can be verified
by measuring their weight). (2 marks)

23. (a) The statement is incorrect. (1 mark)

Scarcity refers to the situation in which the resources available are not enough to satisfy all people’s
wants. As long as the resources available are not enough to satisfy the wants of the person in a one-man
economy, scarcity exists. (2 marks)
(b) The statement is correct. (1 mark)
If scarcity does not exist, the resources available are sufficient to satisfy all people’s wants. People
therefore do not have to make choice. (2 marks)
24. (a) Yes. (1 mark)
As people are willing to pay a cost to compete for the commemorative banknotes, this implies the
quantity of the banknotes available is not enough to satisfy all people’s wants. Thus, the
commemorative banknotes are scarce. (2 marks)
(b) Not necessarily. (1 mark)
Other than the $150 cost of the commemorative banknotes, there is a time cost as these people spent
time on queuing. The time spent may have alternative uses. Therefore, their cost of buying the
banknote may be higher than $150. (2 marks)
(c) Any reasonable answer. For example:
Yes. (1 mark)
I would have paid a higher price so that I would not have needed to queue up for the banknote because
the non-monetary cost to me, i.e. the value of the highest-valued alternative use of the time spent
queuing up, was relatively high. I would have preferred to pay a higher price and spend the time doing
other things. (2 marks)
OR
No. (1 mark)
I would not have bought from touts because the non-monetary cost to me, i.e. the value of the highest-
valued alternative use of the time spent queuing up, was relatively low. I did not have other important
things to do. (2 marks)

25. The opportunity cost for these young people to continue their studies is the income from working in
casinos. As the jobs in casinos are usually well-paid, the opportunity cost for the young people to
continue their studies is high. Therefore, they choose to work in casinos instead of continuing their
studies. (3 marks)

26. (a)The opportunity cost of using the property to run the workshop is the return from leasing or selling the
property. For example, if the rental income increases or the value of the property increases, the
opportunity cost increases. (3 marks)
(b) No. (1 mark)
This is because this only affects the value of using the property to run the workshop but not the cost.
(1 mark)

27. (a)Interest is the cost or price of earlier availability of resources. It is the premium paid by the borrower
for obtaining goods or resources earlier as well as the premium or compensation received by the lender
for deferring consumption of goods or resources. (2 marks)
(b)When the interest rate on deposits increases, the cost of present consumption increases as people forgo
more interest from their savings. Thus, their present consumption will decrease. (2 marks)
When the interest rate on loans increases, the cost of borrowing increases. Thus, firms are less willing
to invest. (2 marks)
28. (a) Ken. (1 mark)
Ken is willing to pay a cost (a ring) to his mother, implying that he is keener to use the money at
present. Thus, Ken has a higher degree of positive time preference. (1 mark)
(b) To Ken, the ring was the premium paid for obtaining the money earlier. (2 marks)
To Ken’s mother, the ring was the premium/compensation received for deferring consumption with the
money. (2 marks)

29. (a)The quantity of ice is not sufficient to satisfy all human wants and more of it is preferred. (2 marks)
OR The ice is produced from scarce resources which have alternative uses. (2 marks)
(b)Ice is a free good when its quantity available is sufficient to satisfy all human ants so that people do not
prefer to have more. For example, in the Arctic, the quantity of ice available is sufficient to satisfy all
human wants and people do not prefer to have more. In this case, ice is a free good. (3 marks)

30. (a) No. (1 mark)

More of the breakfasts are preferred; OR (2 marks)
The breakfasts are produced from scarce resources which have alternative uses. (2 marks)
(b) No. (1 mark)
These people may have different alternative uses of the time, so their time costs of queuing up for the
free breakfasts may not be the same. (2 marks)

31. (a)After the government imposes a heavier punishment on drug abuse, the opportunity cost of abusing
drugs increases. Therefore, people will have lesser incentive to take drugs. (3 marks)
(b) No. (1 mark)
More of the treatment programme is preferred. OR (2 marks)
The treatment programme is provided using scarce resources which have alternative uses. (2 marks)

32. (a) Economics goods. (1 mark)

More of the theme park tickets are preferred; OR (2 marks)
Scarce resources with alternative uses are used to provide the entertainment service. (2 marks)
(b) Yes. When Tina uses the tickets to visit the theme park, she has to forgo the income from transferring
the tickets to others. (3 marks)
(c) Yes. If the tickets are not transferable, there is no alternative use. Thus, there is no cost in using the
tickets to visit the theme park. (2 marks)

33. (a) Flow A: cost of production / factor income (1 mark)

Flow B: firm’s revenue / household’s consumption expenditure (1 mark)
Flow C: factors of production (1 mark)
Flow D: final goods and services (1 mark)
(b) As the owner of a boutique, Mandy performs the role of the firm. She employs factors of production.
(2 marks)
Mandy also performs the role of the household when she spends the income earned on final goods and
services (the clothes). (2 marks)
34. Positive statement: “There is a shortage in the supply of housing, causing the property prices and rental
to rise.” It describes what it is, with no value judgement. (2 marks)
Normative statements: “To cope with the housing problem, the best way is to develop more land and build
more public housing.” and “Also, the government should put more efforts in combating the abuse of public
rental housing.” They describe what ought to be (note that the phrase “the best way” and the word “should”
are used). They involve value judgement on what is desirable or the best. (4 marks)

Part B - Long questions

1. (a) Mr. Lee’s cost of driving his minibus is the income that he can obtain from renting out his minibus.

(2 marks)

(b) Mr. Cheung’s cost of driving his minibus will increase. (1 mark)
Since the spending on repairs and maintenance is positively related to the frequency of driving the
minibus, Mr. Cheung’s cost of driving his minibus will increase. (2 marks)
(c) If the rent of minibus increases, Mr. Cheung’s opportunity cost of driving his minibus will increase.
(2 marks)
When he chooses to drive the minibus himself, he gives up more rental income. (2 marks)

2. (a) (i) Opportunity cost of a choice is the value of the highest-valued option foregone. (2 marks)
(ii) The opportunity cost of opening a new branch is the value of hiring a pop star as the spokesman.
(2 marks)
(b) It would not affect the cost of opening a new branch. (1 mark)
It is because the value of the highest-valued option forgone (hiring a pop star as the spokesman) does not
change. It would only decrease the value of opening a new branch. (2 marks)
(c) (i) Free goods refer to those goods that people do not prefer more of as the quantity available is
sufficient to satisfy all human wants. (2 marks)
(ii) No, the free test is not a free good. (1 mark)
Its quantity is not sufficient to satisfy all human wants; OR (2 marks)
More of it is preferred; OR (2 marks)
The provision of it requires the use of scarce resources which have alternative uses. (2 marks)
(d) Since the option of hiring Ann Poon as a spokesman is no long available, the cost of opening a new
branch becomes the value of advertising on television, magazines and newspapers, which is now
the highest-valued option forgone. (3 marks)
3. (a) Simon’s opportunity cost of buying a flat in Ho Man Tin is the option of buying a car. (2 marks)
(b) (i) Simon’s opportunity cost of buying a flat in Ho Man Tin will increase. (1 mark)
It is because the value of the highest-valued option forgone (buying a car) changes. The fact that the
car is much better than expected raises the value of buying the car, so the opportunity cost of
buying a flat in Ho Man Tin will increase. (2 marks)
(ii) The cost of living in the flat is the highest-valued option forgone of living in the flat. (1 mark)
For example, the cost may be the income that he can receive from selling the flat. (1 mark)
The increase in the price of properties in Ho Man Tin raises his cost of living in the flat. (1 mark)
(c) Free goods refer to those goods that people do not prefer more of as the quantity available is sufficient
to satisfy all human wants. (1 mark)
The free newspaper is not a free good. (1 mark)
The quantity of newspapers is not sufficient to satisfy all human wants, OR (2 marks)
More newspapers are preferred; OR (2 marks)
The production of newspapers requires the use of scarce resources such as paper. These resources have
alternative uses. (2 marks)
(d) It is a normative statement. (1 mark)
It is because the statement contains the word “should”, which implies value judgment on what is
desirable. (2 marks)

4. (a)(i)Free goods refer to those goods that people do not prefer more of as the quantity available is
sufficient to satisfy all human wants. (2 marks)
(ii) No. (1 mark)
Their quantity is not sufficient to satisfy all human wants; OR (2 marks)
More of them are preferred; OR (2 marks)
The production of free gifts requires the use of scarce resources which have alternative uses.
(2 marks)
(b) (i) An opportunity cost is involved in getting the Perfect Moisturiser. (1 mark)
Opportunity cost of a choice is the value of the highest-valued option forgone. (1 mark)
Samantha’s opportunity cost of choosing the Perfect Moisturiser is the value of a toaster. (1 mark)
(ii) If the toaster is out of stock, it is no longer an option for Samantha. Her opportunity cost of
choosing the Perfect Moisturiser changes to the $500 supermarket cash coupon. (2 marks)
(c) Samantha performs the role of the household. (1 mark)
She buys final goods and services (magazine) from the firm (magazine publishing company). (2 marks)
5. (a)(i) Interest is the cost or price of earlier availability of resources; OR (2 marks)
Interest is the premium for obtaining goods or resources earlier as well as the premium for
deferring present consumption of goods and resources. (2 marks)
(ii) The interest rate is zero as Alex has to pay back the principal only. (1 mark)
However, the zero interest rate does not indicate that Alex has a zero time preference. (1 mark)
Alex still has a positive time preference as he still prefers earlier availability of the apartment (he
has the option of waiting until he can save enough for the down payment.) (1 mark)
(b) Uncertain. (1 mark)
Alex’s mother’s cost of lending the one million dollars to Alex is the value of the highest-valued option
forgone of the money. (1 mark)
Since we are not given the information of other alternatives, we are not sure whether the availability of
this investment product will affect her cost or not. (1 mark)
If all other investment opportunities offer annual rates of return less than 10%, the availability of this
investment product will raise her cost of lending to Alex. (1 mark)
If there exist other investment opportunities with annual rates of return more than 10%, the availability
of this investment product does not affect her cost. (1 mark)
(c) The comment is a normative statement. (1 mark)
This is because the statement contains the word “should”, which implies value judgment on what is
desirable. (2 marks)

6. (a)(i) Opportunity cost of a choice is the value of the highest-valued option foregone. (2 marks)
(ii) Mr. Lee’s opportunity cost of using the yacht himself is $1,000, i.e. renting the yacht out to a travel
agent. (2 marks)
(b) (i) Mr. Lee’s opportunity cost of using the yacht himself would not be affected. (1 mark)
It is because the value of the highest-valued option forgone (renting the yacht out to a travel agent
for $1,000 per day) does not change. The decrease in the number of fish caught by Mr. Lee would
only decrease the value of using the yacht himself. (2 marks)
(ii) Mr. Lee’s opportunity cost of using the yacht himself would be affected. (1 mark)
Since the choice of renting the yacht out is no longer available, the yacht provides no other uses
than Mr. Lee’s own sailing. Mr. Lee thus involves no opportunity cost of using the yacht himself.
(2 marks)
(c) The fish caught by Mr. Lee from the sea are economic goods. (1 mark)
It is because the quantity of the fish is not sufficient to satisfy all people’s wants and people prefer
more of it. (2 marks)
7. (a) No. (1 mark)
More of the air tickets are preferred; OR (2 marks)
Scarce resources with alternative uses are used to provide the flight service. (2 marks)
(b) Mr. Chan. (1 mark)
Mr. and Mrs. Chan’s opportunity costs of visiting Bangkok are their income forgone during the trip or
the highest-valued alternative use of the time. As the income of a banker is usually higher than that of a
cashier, Mr. Chan’s opportunity cost of visiting Bangkok would probably be higher. (2 marks)
(c) (i) Yes. (1 mark)
This is because their time cost of visiting Bangkok increases. (1 mark)
(ii) No. (1 mark)
This is because this only affects the value of visiting Bangkok but not the cost. (1 mark)

8. (a) Mrs. Wu’s opportunity cost of doing the paperwork herself is the income earned as a lawyer while
her opportunity cost of employing a personal assistant to help with the paperwork is the salary
paid to the assistant. As Mrs. Wu’s cost of doing the paperwork herself is higher than that of
employing an assistant, Mrs. Wu chooses to employ an assistant to help with the paperwork
instead of doing it herself. (3 marks)
(b) When the interest rate on bank loans falls, the cost of borrowing from banks decreases. Mrs. Wu’s
incentive of borrowing money from bank will increase. (2 marks)
(c) (i) Normative statement. (1 mark)
It describes what ought to be. It involves value judgement on what is desirable or the best.
(1 mark)
(ii) Positive statement. (1 mark)
It describes what it is, with no value judgement. (1 mark)
(d) Mrs. Wu performs the role of the firm. She employs factors of production. (2 marks)

9. (a) Yes. (1 mark)

As people are willing to pay a cost to compete for the piece of land, this implies the quantity of land
available is not enough to satisfy all people’s wants. Thus, the piece of land is scarce. (2 marks)
(b) The opportunity cost of using the site to build a commercial building is $2,500,000. (2 marks)
(c) If the expected return of using the site to build a hotel increases to $2,800,000, using the site to build a
hotel becomes the highest-valued option forgone. The opportunity cost of using the site to build a
commercial building increases from $2,500,000 to $2,800,000. (2 marks)
(d) (i) An economic good. (1 mark)
More of the shuttle bus service is preferred; OR (2 marks)
Scarce resources with alternative uses are used to provide the shuttle bus service. (2 marks)
(ii) Normative statement. (1 mark)
It describes what ought to be. It involves value judgement on what is desirable or the best.
(1 mark)