Demand and Supply Intensive Revision Paper Answer

Section A: Multiple Choice Questions (18 marks)

Choose the BEST answer for each question.

Questio 1 2 3 4 5 6 7 8 9 10
n
Answer B A A D A A C D A D
Questio 11 12 13 14 15 16 17 18
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Answer B B B D C B D A

1. Which of the following is assumed to be constant when the market demand

curve for residential property is derived?

(1) price of residential property

(2) cost of production of residential property
(3) real income of people
(4) mortgage interest rate

A. (1) and (2) only

B. (3) and (4) only
C. (2), (3) and (4) only
D. (1), (2), (3) and (4)

When the demand curve is derived, all factors affecting demand should be constant.
Otherwise, the demand curve will shift to another position. The price and the quantity
demanded of residential properties are the variables being studied and hence they can
change. Factors affecting supply can change, too. To conclude, only factors affecting
demand should be assumed to be constant.

The real income of people will affect their ability to pay and hence it is a factor
affecting demand. The mortgage interest rate will affect the amount of interest
payment people have to pay and hence it is a factor affecting demand, too. They
should be constant when the demand curve of residential properties is derived.

The demand curve of residential properties shows the relationship between the price
and the quantity demanded and hence the price of residential properties should not be
constant.

The cost of production of residential property is a factor affecting supply only, it will
not affect the relationship between the price and the quantity demanded of residential
properties. It is no need to hold it constant.

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2. Refer to the following table showing the demand and supply schedules of Good
A:

Unit price ($) Quantity demanded (unit) Quantity supplied (unit)

6 100 30
7 80 35
8 60 60
9 40 75
10 20 90

What will be the change in quantity transacted if the market price changes from
$7 to $9?

A. increase by 5 units.
B. increase by 30 units.
C. decrease by 5 units.
D. decrease by 40 units.

When the market price is $7, the quantity transacted should be 35 units only.

When the market price is $9, the quantity transacted should be 40 units only.

The change in quantity transacted is 40 – 35 = 5 units.

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3. In which of the following pairs does the demand for the first good create a
derived demand for the second?

A. tertiary education … professors

B. truck … truck drivers
C. sugar … cakes
D. residential properties … commercial properties

The first good is the product and the second good is the factor of production.
When the product is the services of tertiary education, professors are factors of
production.

Please be careful when you study option B. In order to produce truck transportation,
both the trucks and the truck drivers are the factors of production. Trucks cannot
produce truck drivers, truck drivers cannot produce trucks.

For option C, it should be “the demand for cakes creates a derived demand for sugar.
This option has a mistake in order.

For option D, residential and commercial properties are in competitive supply, not
derived demand.

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4. A possible cause of an increase in both the market price and the quantity
transacted of milk powder in Hong Kong could be

(1) increase in income of Hong Kong people.

(2) increase in income of Mainland Chinese.
(3) the price of milk powder is expected to rise further.

A. (1) and (2) only

B. (1) and (3) only
C. (2) and (3) only
D. (1), (2) and (3)

Assume that milk powder is a normal good (or superior good). When the income of
consumers increases, the demand for milk powder will increase. It leads to higher
price and quantity transacted. Therefore, both (1) and (2) are correct.

For option (3), when people expect that the price will be higher in the future, they
tend to buy more now in order to pay a lower price. Therefore, the current demand
will increase and it leads to higher price and quantity transacted.

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5. Which of the following will cause the demand curve of residential property to
shift from D1 to D2?

Unit price

D1 D2

0 Quantity

(1) a reduction of mortgage interest rate

(2) a rise in real income
(3) a rise in the price of construction materials

A. (1) and (2) only

B. (1) and (3) only
C. (2) and (3) only
D. (1), (2) and (3)

(1) A reduction of mortgage interest rate will reduce the interest payment; more
potential buyers are willing and able to pay for the residential properties.
Therefore, the demand for residential properties will increase.

(2) Residential properties are normal good. A rise in real income will increase the
demand for them.

(3) A rise in the price of construction materials will decrease the supply only; it will
not affect the demand for residential properties.

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6. If Good X and Good Y are in joint supply, a rise in the price of Good X would
lead to a fall in the ________________ of Good Y.

(1) price
(2) total sales revenue
(3) cost of production

A. (1) only
B. (2) only
C. (3) only
D. (1), (2) and (3)

A rise in the price of Good X will increase the quantity supplied of Good X, it is
implied by the law of supply. When more Good X is produced, the supply of Good Y
will also increase because two goods are in joint supply. (Joint supply means the
production of one good will also produce another good. An increase in supply of
Good Y will decrease the price but increase the quantity transacted. Therefore, option
(1) is correct.

For option (2), because the price decreases and quantity increases, the change in total
sales revenue is uncertain, it depends on the price elasticity of demand. The total sales
revenue will decrease only if the demand is inelastic, the percentage decrease in price
is greater than the percentage increase in quantity. From the question, the price
elasticity of demand is not given and thus we cannot confirm that the total sales
revenue will necessarily fall.

For option (3), the quantity transacted will increase due to an increase in supply. In
order to produce more quantity of goods, the cost of production should increase.

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7. Suppose both the price and quantity transacted of imported pork decrease. This
is likely to be caused by

A. an increase in the transportation cost resulting from a higher fuel

price.
B. an increase in the income of households given that pork is a normal
good.
C. a decrease in the prices of other meats other than pork.
D. a decrease in the wage rate of meat sellers.

When the price and the quantity transacted decreases, it should be caused by a
decrease in demand for the good. When there is a decrease in price of other meats
other than pork, the demand for pork will decrease because pork and other meats are
substitutes.

Option A: It will increase the cost of production, the supply of pork will decrease.

Option B: it will increase the demand for pork.

Option D: it will decrease the cost of production, the supply of pork will increase.

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8. The diagram below shows the supply and demand curves of USB storage
devices in Hong Kong. The original equilibrium point is at E.

If the production technology of USB has improved and the quality of USB has
improved, the new equilibrium point will be at _______________.

A. E1
B. E2
C. E3
D. E4

The supply will increase when the production technology of USB has improved.

The demand will increase when the quality of USB has improved.

The new equilibrium should be the intersection of D1 and S2, i.e. E4.

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9. DD is the demand curve for Good X. Which of the following reasons can best
explain the change of the equilibrium position in the Good X market from A to
B?
Price

D
Quantity

A. There is an improvement in the production technology of Good X.

B. There is an improvement in the quality of the substitutes of Good X.
C. There is an increase in the price of factors of production of Good X.
D. There is an increase in population.

Look at the question carefully.

Which of the following reasons can best explain the change of the equilibrium
position in the Good X market from A to B?

When the equilibrium position changes from A to B, it implies that the supply curve
shifts to the right.

Price

D S1

A
S2

D
Quantity

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The supply will increase when there is an improvement in the production technology
of Good X.

Option B: The demand will decrease when there is an improvement in the quality of
the substitutes of Good X.

Option C: The supply will decrease when there is an increase in the price of factors of
production of Good X.

Option D: The demand will increase when there is an increase in population.

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10. Which of the following is INCONSISTENT with the law of demand?

A. An increase in the lump sum storage cost of a good leads to a higher

proportion of high-quality products sold.
B. Tourists from the US tend to stay in more expensive hotels in Hong
Kong than that from the Mainland China.
C. The government increases the study places of tertiary education and
the average quality of tertiary graduates decreases.
D. None of the above.

Option A: The increase in the lump sum storage cost will decrease the relative price
of the high-quality product and thus the proportion of high-quality products sold will
increase

Option B: The transportation cost of the US tourists should be higher. It will make the
decrease in relative price of the more-expensive hotels more significant for US
Tourists. Therefore, US tourists tend to stay in more expensive hotels in Hong Kong
than that from the Mainland China.

Option C: Some students are not qualified to study in tertiary education but now they
can receive tertiary education due to the expansion of tertiary education. Of course,
the average quality of tertiary graduates should decrease.

NO options above are inconsistent with the law of demand.

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11. Addressing the potential threat brought about by the trends of the birth rate and
old dependency ratio in China, Chinese government officials have relaxed the
one-child policy in an effort to boost the birth rate.

(1) The demand for baby products would increase in the future.
(2) The total expenditure on baby products would increase in the future only
if the demand is elastic.
(3) The quantity supplied of baby products would increase in the future.

A. (1) and (2) only

B. (1) and (3) only
C. (2) and (3) only
D. (1), (2) and (3)

Option (1): The policy will increase the number of births in the future and thus the
demand for baby products will increase in the future.

Option (2): Because the demand increases, both the price and quantity transacted will
increase. Therefore the total expenditure on baby products will necessarily increase. It
is not required to consider the price elasticity of demand. You have to consider the
price elasticity of demand only when the price and the quantity changes in opposite
directions.

Option (3): The increase in demand will increase the market price and hence the
quantity supplied will increase according to the law of supply.

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12. Refer to the following conversation between Mandy and Shirley.

Mandy: I like coffee very much! No matter how its price changes, I
always buy the same amount of coffee every week!
Shirley: I like coffee very much too! No matter how its price changes, I
always spend the same amount of money on coffee every week!

Based on their conversation, Mandy's demand for coffee is ________________

and Shirley's demand for coffee is __________________ .

A. perfectly inelastic ...... perfectly inelastic

B. perfectly inelastic ...... unitarily elastic
C. unitarily elastic ...... perfectly inelastic
D. unitarily elastic ...... unitarily elastic

No matter how the price change, there is no change in quantity demanded

 Perfectly inelastic demand

No matter how the price change, there is no change in total expenditure

 Unitarily elastic demand

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13. The government has imposed a fee for using the emergency services provided
by public hospitals. As a result, patients’ total expenditure on private medical
services

A. will decrease.
B. will increase.
C. will remain unchanged.
D. may increase or decrease.

Look at the question carefully.

The government has imposed a fee for using the emergency services provided by
public hospitals. As a result, patients’ total expenditure on private medical services

Public and private medical services are substitutes. When the government has
imposed a fee for using public medical services, the demand for private medical
services will increase. The price and quantity transacted of private hospital services
will increase, hence the total expenditure on private hospital will increase.

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14. A typhoon greatly damaged the farms of an economy. As a result,

(1) The price of agricultural product would increase.

(2) The total market value of agricultural product would increase if the
demand is inelastic.
(3) The demand for farmers would decrease.

A. (1) and (2) only

B. (1) and (3) only
C. (2) and (3) only
D. (1), (2) and (3)

The typhoon will decrease the supply of agricultural product.

Option (1): A decrease in supply will increase the price of the product.

Option (2): if the demand is inelastic, the percentage increase in price is greater than
the percentage decrease in quantity, the total market value will increase.

Option (3): Because the production volume will drop when the farms are destructed.
The demand for farmers will decrease.

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15. After the launching of an advertising campaign, both the price and the quantity
sold of a product increase. Which of the following statements can explain this?

A. The demand for the product is inelastic.

B. The supply of the product is elastic.
C. The demand for the product increases.
D. The supply of the product decreases.

The demand for the product increase and the price and the quantity sold increase.

Option A: No information is given to reveal the price elasticity of demand.

Option B: No information is given to reveal the price elasticity of supply.

Option D: There is no change in supply.

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16. The table below shows the relationship between the price of Good X and its
sales revenue.

Price ($) 10 20 30
Sales revenue ($) 1000 1500 2000

Within the above price range, the elasticity of demand for Good X is

A. equal to zero.
B. greater than zero and smaller than one.
C. equal to one.
D. greater than one.

An increase in price leads to an increase in total sales revenue. The demand should be
inelastic, the percentage increase in price is greater than the percentage decrease in
quantity.

Remark: When the price increases, the quantity decreases. Therefore, the demand is
not perfectly inelastic, it is only inelastic.

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17. The local property market is considered to be overheated. The government has
decided to increase the supply of Home Ownership Scheme housing. Which of
the following statements are correct?

(1) Home Ownership Scheme housing and private housing are in competitive
supply.
(2) The market price of the private housing would decrease.
(3) The total sales revenue of private housing would decrease.

A. (1) and (2) only

B. (1) and (3) only
C. (2) and (3) only
D. (1), (2) and (3)

Option (1): Home Ownership Scheme housing and private housing are in competitive
supply because they require similar factors of production such as construction
materials, workers and land.

Option (2): Home Ownership Scheme housing and private housing are substitutes.
When the government has decided to increase the supply of Home Ownership Scheme
housing, the demand for private housing will decrease.

Option (3): When the demand for private housing decreases, both the price and
quantity transacted will decrease. Therefore, the total sales revenue will decrease.

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18. There would be NO ____________ if there were NO ______________.

A. shortage … scarcity
B. scarcity … shortage
C. market … shortage
D. scarcity … market

If there were NO scarcity, all wants are satisfied. Therefore, there would be no market
nor market price, shortage would not exist.

Option B: Scarcity still exists when there is no shortage, say, the price is at the
equilibrium or above the equilibrium.

Option C: Market still exists even there is no shortage. The market may be at
equilibrium.

Option D: Scarcity still exists even there is no market. For example, there is no
market in a one-man economy, but scarcity still exists.

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Section B (42 marks)

1. Suppose the government subsidizes the low-income family to buy computer and
more computers retailers enter the industry. With the aid of a diagram, explain
under what condition the price of computer would increase. (7 marks)

Verbal elaboration
- More computers retailers enter the industry, it will increase the supply of
computers. (1)
- The demand for computers will increase because the government
subsidizes the low-income family to buy computer. (1)
- The price would increase if the increase in demand is greater than the
increase in supply. (2)

Price
S1 S2

P2
P1

D2
D1
Quantity
Q1 Q2

Indicate in the diagram

- Demand curve shifts to the right (1)
- Supply curve shifts to the right (1)
- Price increases (1)

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2. The prices of cotton have increased in recent years. With the aid of a diagram,
explain under what condition the total revenue from the sale of cotton-made
clothing would increase. (8 marks)

Verbal elaboration
- The cost of production increases, therefore the supply will decrease. (1)
- The demand is inelastic. (1)
- The percentage increase in price is greater than the percentage decrease
in quantity. (2)

Price
S2
S1

P2
(+)
P1

(–)
D1
Quantity
Q2 Q1

Indicate in the diagram

- Supply curve shifts to the left (1)
- Price increases and quantity decreases (1)
- Correct position of increase in total revenue and decrease in total
revenue (1)
- Increase in total revenue > decrease in total revenue (1)

3. (a) State the law of demand. (2 marks)

(b) Explain what would be the change in the average quality of new motor
vehicles sold when the government increases the first registration fee of
new imported motor vehicles using the law of demand. (3 marks)

(a) The law of demand states that when the price of a good increases, the
quantity demanded will decrease, other things being constant. (2)

(b) The average quality of new motor vehicles will increase if the increases in
the first registration fee of new imported motor vehicles are the same for
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all market values of motor vehicles. (1)
The increase in the first registration fee will decrease the relative price of
higher-price-motor-vehicles in terms of lower-price-motor-vehicles, thus
people will buy relatively more higher-price-motor-vehicles. (2)

Remark:
The above analysis assumes that the increase in first registration fee is the
same for all types of motor vehicles for simplicity. In S5, you will study
more about first registration fee and then you will realize that the analysis
is not as simple as the above answer.

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4. When the price of iphones decreases from $10,000 to $9,000, the quantity
demanded increases from 700 to 900 units.

(a) What is the arc elasticity of demand for iphones within the above price
range? Show your workings. (3 marks)

(b) “The demand for iphones is very elastic because the quantity demanded
increases a lot.”
Explain whether you agree with the above statement. (2 marks)

4. (a) The arc elasticity of demand = % change in quantity demanded

% change in price

The arc elasticity of demand = (900 – 700) / 800

(9000 – 10000) / 9500

The arc elasticity of demand = 2.375

(Workings: 1 mark, answer: 2 marks)

(b) No. (1)

The demand is elastic because the percentage increase in quantity
demanded is larger than the percentage decrease in price. (1)

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5. Due to the outbreak of COVID-19, many hotels have a lot of vacant rooms.

(a) With the aid of diagram, explain why there are a lot of vacant rooms under
COVID-19 pandemic. (3 marks)

(b) Suppose the hotels offer higher quality of buffet breakfast to attract more
customers but keep the hotel room rental unchanged. With the aid of the
diagram in (a), explain how it would affect the total revenue earned by the
hotels. (6 marks)

(a) Verbal elaboration

- The price is above the equilibrium price, there is a surplus in the
market. (1)

Price S
ab: surplus

P a b

D1
Quantity
Indicate in the diagram
- Price is above the equilibrium price (1)
- Surplus (1)

(b) Verbal elaboration

- The demand will increase. (1)
- Price remains unchanged but quantity increases. (1)
- Total revenue will increase. (1)

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 Price S
ab: surplus

P a b

(+)

D2
D1
Quantity
Q1 Q2

Indicate in the diagram

- Demand curve shifts to the right (1)
- Price remains unchanged and quantity increases (1)
- increase in total revenue (1)

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6. During summer, a large number of graduates enter the job market.

(a) With the aid of a diagram, explain the effect of the increase in the number
of graduates on the equilibrium wage rate of existing workers in the job
market. (4 marks)

(b) Explain how the following employments would change

(i) employment of all workers in the job market.

(ii) employment of workers (excluding the graduates) in the job market.

(4 marks)

6. (a) Verbal elaboration

- The graduates will increase the supply of workers. (1)
- The equilibrium wage rate will decrease. (1)

Wage rate

S1 S2

W1
W2

Quantity of labour
L3 L1 L2

Indicate in the diagram

- Supply curve shifts to the right (1)
- Wage rate decreases (1)

(b) (i) Quantity of all labour employed will increase from L1 to L2 due to a
fall in wage rate. (2)
(ii) A decrease in wage rate will decrease the quantity supplied of local
labour and thus the quantity of labour employed decreases from L1 to
L3. (2)

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