1985

Section A
85.1
If an increase in the price of cinema tickets leads to a decrease in total dollar sales., then the
demand
A.
is inelastic.
B.
is unit elastic.
C.
is elastic.
D.
has decreased.
85.2

A chemical factory dumps waste into a farmers water supply, causing significant damage to
the farmer. The farmer cannot legally ask for compensation from the chemical company. In
view of this situation
A.
an output tax should be imposed on the chemical company because of the implied
inefficiency.
B.
it is in the farmers interest to pay the chemical company to reduce waste dumping.
C.
the law should be changed to allow the farmer to demand compensation from the
chemical company.
D.
the chemical company should be relocated elsewhere.

85.3

(Deleted)
Efficiency in production means
A.
price is at least as great as cost.
B.
the producer makes only a normal profit.
C.
marginal revenue equals marginal cost.
D.
the marginal value of the product to society equals its marginal cost.

85.4

Efficiency in society
A.
is a good thing because people enjoy a higher standard of living.
B.
improves welfare in the sense that efficiency is a measure of welfare.
C.
benefits everyone because there are more goods to share.
D.
means that it is not possible to reallocate resources to make all people gain.

85.5

Assume the relative prices of all goods are constant. If an apple today can be exchanged for
the right to one and one-half apples a year from today, we can infer that
A.
an exceptionally good apple harvest is expected for next year.
B.
market preference for apples is shifting.
C.
the annual rate of interest is 50%
D.
there has been a technological breakthrough in apple farming.

85.6

In grocery stores, wine of types A and B are priced at $60 and $90 respectively. The same
wines sell for $90 and $120 in restaurants. If grocery stores sell equal quantities of each, then
restaurants will
A.
also sell equal quantities of each.
B.
sell more of type A than type B.
C.
sell more of type B than type A.
D.
sell only one type of wine.

85.7

Which of the following statements about cost is FALSE?

A.
Individual A finished construction of a house in 2 years while individual B did the
same job in 3 years, so B must have built the house at a higher cost.
B.
Profits, when total unexpected, are not costs.
C.
it is not possible for any country to produce all things at a lower costs than any other
country.
D.
Economic rent is part of cost because an outright sale of a business is an option.

85.8

The cost of any event is the

A.
highest value one is willing to pay to achieve that event.
B.
highest valued option necessarily forsaken to achieve that event.

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C.
D.

suffering which one must incur to achieve that event.

present value of the income generated by the event.

85.9

The seller of a certain product is a price searcher (i.e. one who has to determine the price) if
A.
market demand is inelastic.
B.
there are only several sellers in the market.
C.
the demand curve facing the seller is downward sloping.
D.
the average cost curve is U-shaped.

85.10

A public good
A.
a good produced by the government and made available to the public.
B.
a good which the private sector is not able to produce profitably.
C.
a good that is not scarce.
D.
a good that can be consumed by many individuals at the same time.

85.11

The convexity of an indifference curve means

A.
at constant utility, the more of a good a person gets, the less this person is willing to
sacrifice to get more of this good.
B.
if the price of a good is reduced, a larger quantity of that good is demanded.
C.
people tend to specialize in the consumption of one good.
D.
consumers are behaving rationally.

85.12

If the long-run average cost curve of each and every firm in a competitive industry shows
increasing returns to scale in the first small range of output, constant returns to scale in the
ensuing large range of output, and decreasing returns to scale thereafter, then
A.
only small firms exist in the industry.
B.
only large firms exist in the industry.
C.
the number of firms is indeterminate.
D.
only medium-size firms exist in the industry.

85.13

If the price elasticity of demand for X is 1 at all prices, then a decrease in the price of X will
cause no change in
A.
quantity demanded.
B.
the consumers real income.
C.
resource use.
D.
total revenue.

85.14

A consumer will always buy

A.
the product sold at the lowest price.
B.
the product he prefers more than other comparable products.
C.
the product sold without the services of a middleman.
D.
the product that yields the highest use value per dollar.

85.15

A capital asset is any asset

A.
that is capable of generating income.
B.
except land and labour.
C.
except labour.
D.
except untrained labour.

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85.16

The existence of a Giffen good

A.
cannot be conceived.
B.
is consistent with the law of demand.
C.
is supported by evidence.
D.
would reject the law of demand.

85.17

The law of demand

A.
is derived from the indifference curves.
B.
states that quantity demanded and price are negatively related.
C.
states that quantity demanded and income are positively related.
D.
states that without a change in price, demand will not change.

85.18

Under which of the following conditions will consumers bear the largest tax burden as a result
of a unit tax?
A.
an elastic market demand and an inelastic supply.
B.
an elastic market demand and an elastic supply.
C.
an inelastic market demand and an inelastic supply.
D.
an inelastic market demand and an elastic supply.

85.19

Assume the annual rate of interest rate is 12%. If the cost of operating a taxi is $200 000 a
year, gross business income is $350 000 a year, and the tax rate is 20% of net income, the
market value of a taxi licence will be approximately
A.
$500 000
B.
$1 000 000
C.
$1 200 000
D.
$2 000 000

85.20

The short-run supply curve of an industry is obtained by adding the marginal cost curves of
the individual firms concerned. This requires that
A.
factor prices are constant.
B.
the marginal cost curves of individual firms are identical.
C.
the firms make no profits.
D.
the average cost curves of individual firms are identical.

85.21

Price discrimination does NOT require

A.
different markets or different customers to be separated.
B.
the price elasticities of demand to be different.
C.
the seller to be able to distinguish between rich and poor customers.
D.
the good to be the same in all markets and produced at the same cost.

85.22

Consumer surplus is the

A.
excess quantity of a good which the consumer cannot consume.
B.
quantity of a good which the consumer chooses not to consume.
C.
extra satisfaction which the consumer enjoys in the purchase of a good.
D.
extra amount the consumer is willing to pay over and above what he actually pays.

85.23

A divergence between private cost and social cost means

A.
the market fails to maximize welfare.
B.
income distribution requires improvement.
C.
resource allocation requires improvement.
D.
the cost to an individual of an action differs from the cost to society.

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85.24

Profits arise as a result of

A.
an unanticipated increase in demand.
B.
an increase in monopoly power as a result of patent protection.
C.
producers having unusually good foresight.
D.
an anticipated fall in interest rates.

85.25

Which of the following will NOT affect the demand for good X?
A.
an increase in income.
B.
a change in the price of a close substitute.
C.
a change in weather.
D.
a change in the price of X.

85.26

Which of the following is an example of price discrimination?

A.
land with a view being more expensive than land without a view.
B.
workers demanding higher wages on holidays.
C.
a theatre charging lower prices for students.
D.
life insurance companies charging higher premiums for older people.

85.27

A monopolists demand for a factor of production is

A.
the value of marginal product.
B.
marginal value of social product.
C.
marginal revenue product.
D.
marginal product.

85.28

Which of the following groups would most likely be harmed by a minimum wage law?
A.
teenagers with low productivities.
B.
salesmen who are paid by commission.
C.
waiters who are paid mainly by tips.
D.
technicians skilled in specialized techniques.

85.29

Suppose the airport tax per passenger leaving Hong Kong is increased from $100 to $250.
Which of the following is FALSE?
A.
The average length of airplane journeys tends to rise.
B.
The number of travellers will fall.
C.
The ticket prices of shorter flights will fall.
D.
The ticket prices of longer flights will rise.

85.30

In a simple monopoly model, wealth maximization implies

A.
average cost is at a minimum.
B.
marginal revenue is zero.
C.
the marginal value of the good to consumers exceeds the marginal cost.
D.
the monopolist earns a return on his capital at a rate higher than the rate of interest.

85.31

To say that a person has a comparative advantage in producing good X means that
A.
his cost of producing X is reduced.
B.
his cost of producing X is less than that of someone who is producing Y.
C.
his cost of producing X is less than that of all other people.
D.
given the same labour input he can produce more X than Y.

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Section B1
85.1
What is utility?
85.2

Whereas the demand curve may be derived from the indifference curves, the law of demand
CANNOT be so derived. Explain.

85.3

What is interest? Can interest exist without money?

SECTION B2
85.4
What is the relationship between wealth and income?
85.5

State the law of diminishing marginal productivity. Explain how this law helps to determine
the value of any productive asset.

85.6

Why is historical cost NOT a cost?

SECTION C
85.7
Education benefits society, therefore it the government subsidizes education, the society will
benefit more.
(a)
Critically evaluate this statement. (It is essential to remember that the production of
goods also benefits society.)
(b)
It is sometimes argued that if more people are educated, then in daily social contacts
the uneducated may learn from the educated free of charge. For the sake of argument,
defend government subsidization under this condition.
85.8
In mid 1983, when the housing market in Hong Kong was deeply depressed, some developers
offered to sell flats with loans at a fixed, long-term (ten years) interest rate of 10% per year.
At the same time, the rate of interest offered by banks for mortgage loans was 14%.
(a)
Suppose the 14% rate offered by banks were also fixed for ten years. Then
borrowing through banks would cost 4 percentage points more than borrowing
through developers. Explain why a buyer would NOT gain from the developers
special offer. (Hint: The price of a flat is a present value.)
(b)
Suppose now the government were to impose a duty of 5% on the price of property
sold, payable by the buyer. How would this duty affect the choice between the two
fixed rates of 14% and 10%?
(c)
Suppose now the bank rate of 14% were subject to change from time to time,
whereas the developers offer of 10% remained fixed. Explain why a buyer might
gain or lose if he took the 10% offer.
85.9

Suppose that at 70 kilometers per hour, gasoline consumption of cars per kilometer is the
lowest. At both faster and slower speeds, gasoline consumption rises. Both gasoline and time
are costly items.
(a)

Suppose there is no traffic congestion, that speeding is legal, and that accidents will
not occur. In equilibrium, how will driving speed be determined? Will all drivers
choose the same speed? Will all drivers exceed 70 kilometers per hour?

(b)

Suppose drivers can take a number of different roads of unequal length between two
towns. Suppose also that some of these roads are congested and others are not. What
are the factors which will determine a drivers choice of routes? What is the
equilibrium condition?

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85.10

The present practice of the MTR is that students are charged a lower fare than non-students.
(a)
Assume there is always excess capacity in the MTR. If the student fare is raised to
the non-student level, under what conditions will the operating income of the MTR
decrease?
(b)
Suppose now the MTR has no excess capacity. Under what condition would you
recommend the MTR to raise the student fare to the level of non-students?
(Hint: at full capacity, charging different rates to different passengers represents a
standard case of price discrimination.)

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Solution
SECTION A
1C

16 D

2B

17 B
18 D

3C
4D
5C
6C
7A
8B
9C
10 D
11 A
12 C
13 D
14 D
15 A

31C

19 B
20 A
21 C
22 D
23 D
24 A
25 D
26 C
27 C
28 A
29 D
30 C

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