2000-CE

HONG KONG EXAMINATIONS AUTHORITY

ECON
PAPER 1 HONG KONG CERTIFICATE OF EDUCATION EXAMINATION 2000

ECONOMICS PAPER 1

8.30 am – 10.00 am (1½ hours)

This paper must be answered in English

1. This paper consists of two sections, A and B.

2. Section A contains eight questions. Attempt ALL questions. The

whole section carries 38 marks for content and 2 marks for effective
communication.

3. Section B contains three questions. Attempt any TWO questions.

Each question carries 23 marks for content and 2 marks for effective
communication.

ଉཽ‫ە‬ᇢ‫ݝ‬ΓΓঅఎठᦞ
Hong Kong Examinations Authority
All Rights Reserved 2000

2000-CE-ECON 1–1
Section A (40 marks)

Attempt ALL questions.

1. Statement 1 : Ice is a free good.

Statement 2 : Ice is an economic good.

Explain one situation in which statement 1 is correct and another situation in

which statement 2 is correct. (4 marks)

2. David : When the price of chocolates increases, people will buy fewer
chocolates.

Amy : No, I don’t think so. The price of chocolates has increased, but the
quantity of chocolates bought has also increased.

Explain, with the aid of separate diagrams, why both of them can be correct.
(7 marks)

3. Explain why an incineratorΰ ྡ ֏ ᣷ αis a capital. (2 marks)

4. The table below shows the production of a firm.

Machinery Labour Average output of labour

(units) (units) (units)
10 7 30
10 8 34
10 9 37
10 10 39
10 11 40

State the law of diminishing marginal returns and explain whether the above data
illustrate the law. (6 marks)

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5.

I want to exchange
some of my bananas But what I want
for some of your now is some
vegetables. wood.

Barbarian A Barbarian B

Define money and explain how money helps to solve the problem of exchange in
this case. (4 marks)

2000-CE-ECON 1–3 –2– Go on to the next page

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6. Study the following data about Hong Kong.

Year on year % change

Unemployment Composite consumer
Year Quarter in real gross domestic
rate (%) price index
product (GDP)
1998 2nd - 5.1 4.4 119.2
3rd - 6.8 5.0 118.6
4th - 5.7 5.7 116.1
1999 1st - 3.4 6.2 115.6

(a) Identify the phase of business cycle the economy was in during the above
period of time. Give the THREE economic phenomena of this phase as
indicated by the above data. (4 marks)

(b) Some workers’ salaries were frozen during this period of time. Explain how
their real income would change in this period. (3 marks)

7. A certain government announces that the unemployment rate has dropped but the
number of unemployed has increased. Explain why the number of unemployed
can increase despite a fall in the unemployment rate. (4 marks)

8. In 1999, the government refunded 10% of the salaries tax and profits tax to
taxpayers. Explain how this would affect the wealth gap between the low-
income group and the high-income group. (4 marks)

– END OF SECTION A –

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Section B (50 marks)

Attempt any TWO questions.

9. Study the following information.

Gasoline Bill

Quantity sold : 50 L (liter)

Price per liter : 3.780 $/L $ 189

Government tax : 6.060 $/L $ 303
Sales total : $ 492

(a) (i) Define regressive tax and explain whether the above gasoline tax is
progressive, proportional or regressive. (5 marks)

(ii) Give TWO economic reasons for the government to levy tax on
gasoline. (4 marks)

(b) Some petroleum companies complained that their business was affected
because some drivers bought gasoline from smugglers who evaded import
duties.

(i) With the aid of a diagram, explain how the smuggling of gasoline
would affect the sales revenue of petroleum companies. (7 marks)

(ii) Explain how the smuggling of gasoline would affect the GDP of this
economy. (4 marks)

(c) What is the market structure of petroleum companies (e.g. Shell, Mobil) in
Hong Kong ? Explain your answer. (3 marks)

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10. The balance sheet of the banking system of Economy A is shown below.
Suppose all banks do not hold excess reserves and the public holds $50 mn cash
in hand.

Assets ($mn) Liabilities ($mn)

Cash reserves 200 Deposits 1000
Loans 800

(a) Suppose the public now withdraws $10 million cash from the banks.

(i) Calculate the change in the total deposits of the banking system.
(3 marks)

(ii) Calculate with explanation the change in the money supply. (4 marks)

(b) Suppose Bank X of economy A takes over Bank Y of economy B by buying

up its controlling share worth $5 million.

(i) Explain what type of expansion the takeover belongs to and explain
THREE economies of scale that may arise from the takeover. (8 marks)

(ii) (I) Define opportunity cost. (2 marks)

(II) Assume Bank X does not know that Bank Y has a huge amount of
hidden debt. Explain whether this would affect the opportunity
cost of the takeover to Bank X. (3 marks)

(iii) Explain whether the $5 million mentioned above should be included in

the calculation of the GDP of economy B. (3 marks)

2000-CE-ECON 1–6 –5–

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11. (a) The following table shows the actual output of Country A and Country B.
Each country employs 40% of resources to produce wine and the other 60%
to produce clothing.

Wine (units) Clothing (units)

Country A 1200 900
Country B 400 2400

(i) Calculate the opportunity cost of producing one unit of wine for EACH
country and hence explain which country will export wine if they trade
with each other. (6 marks)

(ii) What is the minimum transportation cost per unit of wine (expressed in
terms of clothing) which will result in both countries NOT gaining from
trade ? Explain your answer. (4 marks)

(b) With the aid of a diagram, explain the condition under which a large
emigration of Country A’s workers to Country B would lead to a decrease in
the total income of all workers (including those immigrants) in Country B.
(8 marks)

(c) Suppose Country B has a higher average labour productivity than Country
A.

Define average labour productivity and give THREE reasons for the higher
average labour productivity of Country B. (5 marks)

END OF PAPER

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 2000 CE Economics Paper 1

Numerical Answers

10. (a) (i) −$50 mn ≤ actual change ≤ −$10 mn

(ii) −$40 mn ≤ ̫Ms ≤ −$8 mn

11. (a) (i) Country A : 0.5 units of clothing

Country B : 4 units of clothing

(ii) 3.5 units of clothing

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