KOWLOON TRUE LIGHT SCHOOL

First Term Examination (2022 - 2023)

S5 ECONOMICS
Suggested Answers
Paper 1 (45 marks)
1. C 2. B 3. B 4. B 5. D 6. C 7. D 8. D 9. D 10. C

11. A 12. A 13. B 14. D 15. C 16. A 17. C 18. A 19. D 20. C

21. D 22. D 23. A 24. C 25. C 26. C 27. A 28. C 29. C 30. A

31. B 32. B 33. A 34. C 35. D 36. C 37. B 38. C 39. C 40. B

41. B 42. C 43. B 44. B 45. B

Paper 2 (75 marks)

1. “Government interventions always lead to inefficiency.” Explain why this statement is incorrect.
(3 marks)
Answer
 Incorrect
 If there are externalities, the market equilibrium is inefficient. Government interventions can
correct the market and improve inefficiency. (3)

2. Tommy withdrew $6,000 cash from his bank account. Then he bought a new mobile phone for $5,500
from a retailer. Unluckily, he dropped his phone on the floor right away and he took it to the repairer.
Tommy paid $400 to get it fixed before selling it to his friend for $3,000.

Find the change in GDP caused by the above events. (For simplicity, the mobile phone is assumed to be
locally produced) (3 marks)

Answer
 Change in GDP = 5500 + 400 = $5,900 (3)

2022-23 / First Term Examination / S5 / ECON / Suggested Answers Page 1 of 8

3. Below is a production chain in Hong Kong.

(a) Using expenditure approach, calculate the above production chain’s contribution to Hong Kong’s GDP
at market prices. Show your working. (2 marks)
(b) Calculate the mobile phone manufacturer’s contribution to Hong Kong’s GDP at factor costs. Show
your working. (2 marks)

Answer
(a) GDP at market prices = (2,100,000 + 1,780,000) – 720,000
= $3,160,000 (2)

(b) The manufacturer’s contribution

= (1,380,000 + 1,230,000) – (500,000 + 720,000) + 500,000
= $1,890,000 (2)
4. Derek is an English teacher from Canada who has been working at an international school in Hong Kong
for 3 months.
(a) Explain whether Derek’s income should be included in Hong Kong’s
(i) GDP. (3 marks)
(ii) GNI. (2 marks)

(b) Derek has just spent $150,000 on buying a first-hand private car. Give TWO reasons to explain why
that caused a less-than-$150,000 increase in Hong Kong’s GDP. (4 marks)

Answer
(a)
(i) Yes, because Derek is employed a resident producing unit of Hong Kong (2)
His income is a payment for his service (1)

(ii) No (1)
Because Derek has lived in Hong Kong for 3 months only (less than a year), he is not a
resident of Hong Kong (1)

(b) Part of raw materials did not originate in Hong Kong (1)
The value of imports is excluded from Hong Kong’s GDP (1)

Part of the sales were not produced in the current year (1)
The value of past inventories is excluded from Hong Kong’s GDP (1)

2022-23 / First Term Examination / S5 / ECON / Suggested Answers Page 2 of 8

5. Suppose the Hong Kong government is considering the following uses of fiscal surplus (財政盈餘).

Proposal 1: Provide more subsidised university study places.

Proposal 2: Increase the amount of monthly CSSA (a kind of social allowance) payment.

Explain how the above proposals would affect Hong Kong’s equity respectively. (5 marks)

Answer

Proposal 1
• It would improve opportunity equality (1)
• More students can receive higher education regardless of their family / economic backgrounds
(1)
• It can improve the underprivileged students’ competitiveness and hence increase their future income
(1)
Proposal 2
• It can improve income equality (1)
• The increase in CSSA will exclusively increase the income of low-income group (1)

2022-23 / First Term Examination / S5 / ECON / Suggested Answers Page 3 of 8

6. Read the following data of Country H.
Nominal GDP ($ million) CPI
Year 1 1,320,000 135
Year 2 1,395,000 138

(a) Based on the above information, can we conclude that all goods and services have become more
expensive in Year 2? Explain. (3 marks)
(b) Explain whether Country H’s real GDP has increased in Year 2. (3 marks)
(c) Explain under what condition the real per capita GDP of Country H would have increased in Year 2.
(3 marks)

Answer
(a) No (1)
The increase in CPI only implied that the general price level has increased, but it is possible that the
prices of some goods and services have actually decreased (2)

Remarks
Common mistake: “A higher CPI only means the goods and service in the basket have become
more expensive”

(b) Real GDP in year 1

 1,320,000 ÷ 1.35 = $977,778 (1)

Real GDP in year 2

 1,395,000 ÷1.38 = $1,010,870 (1)

Therefore, yes, the real GDP has increased in year 2 (1)

(c) Growth rate in real GDP = (1,010,870 – 977,778) / 977,778 = 3.38% (1)
If the population growth rate is smaller than 3.38%, the real per capita GDP would have increased
(2)
Remarks
%∆Real per capita GDP = %∆Nominal GDP - %∆Price level - %∆Population

 Common mistake 1:
“If the sum of %change in Price level and Population is smaller than the %change in
nominal GDP, real per capita GDP would increase.”

 Common mistake 2:
“If the change in population is smaller than the change in real GDP, real per capita GDP
would increase.”

2022-23 / First Term Examination / S5 / ECON / Suggested Answers Page 4 of 8

7. Food delivery has become more popular in Hong Kong lately. Customers can pay a delivery fee and wait
for their meals at their home/office.

(a) State the market structure of food delivery platform in Hong Kong and explain TWO differences from
a monopolistic competition. (5 marks)

(b) Suppose a food delivery platform raises the delivery fee from $20 to $30. Using the concept of the
Law of Demand, explain the change in the average quality of the food being ordered. (4 marks)

Answer

(a)
 Oligopoly (1)

 In an oligopoly, there are a few dominant sellers, but there are no dominant sellers in a
monopolistic competition (2)

“while there are a lot of sellers in monopolistic competition”  XXXX

 In an oligopoly, the sellers may sell homogeneous or heterogeneous products, but sellers in a
monopolistic competition only sell heterogeneous products (2)

(b)
 The delivery fee for all orders increases by the same amount ($10) (1)
 The percentage increase in the total cost for ordering high-quality food is smaller than that of
low-quality food (1)
 A higher proportion of customers would order high-quality food (1)
 The average quality of food improves (1)

2022-23 / First Term Examination / S5 / ECON / Suggested Answers Page 5 of 8

8. Traffic congestion always occurs at the Cross-Harbour Tunnel (紅隧). To improve the traffic congestion
problem, the Transport Authorities proposed the following measures on 30 Nov 2022:

Measure 1: Raise the toll fee of Cross-Harbour Tunnel.

Measure 2: Lower the toll fee of Eastern Harbour Tunnel (東隧) and Western Harbour Tunnel (西隧).

(a) With the aid of Figure 1, explain how the above measures shorten the queues of vehicles at the Cross-
Habour Tunnel. (7 marks)
(b) WITHOUT the aid of the diagram, suggest and explain ANOTHER demand-side measure to improve
the problem of traffic congestions at Cross-Harbour Tunnel. (3 marks)

Answer
(a) Graphical illustration:

 Price increases (P1 → P2) (1)

 Demand curve shifts leftwards (D1 → D2) (1)
 Indication of smaller shortage (1)

Verbal elaboration:
 The original toll fee was set below the equilibrium, toll fee increases (1)
 The other two harbour tunnels are substitutes of the Cross-Harbour Tunnel (1)
 therefore, the demand for Cross-Harbour Tunnel decreases (1)
 Shortage becomes smaller, the queue of vehicles would be shortened (1)

Remarks
Quantity demanded VS Demand…

(b) Increase the first-registration fee for vehicles: (1)

 That increase the cost of driving a private car (1)
 The demand for Cross-Harbour Tunnel would decrease (1)
 Traffic congestion will be alleviated

Provide more subsidies on taking public transports: (1)

 That lower the cost of taking public transports, substitutes of driving a private car (1)
 The demand for Cross-Harbour Tunnel would decrease (1)
 Traffic congestion will be alleviated

2022-23 / First Term Examination / S5 / ECON / Suggested Answers Page 6 of 8

9. To encourage organic farming, farmers are provided with subsidies to produce organic crops.
(a) With the aid of a diagram, explain under what condition the consumers would enjoy more subsidy
benefit than the farmers. (6 marks)
(b) Suppose the government decide to increase the amount of the per-unit subsidies, with the aid of the
diagram in part (a), explain the impact on economic efficiency. (4 marks)

Answer
(a) Graphical illustration:

 Supply curve shifts rightwards (S1 → S2) (1)

 Correct indication of CB and PB (2)

Verbal elaboration:
 Supply of organic crops increases due to the subsidy (1)
 Price decreases and quantity transacted increases (1)
 If the demand is less elastic than the supply, consumers would enjoy more subsidy benefit than
the farmers (1)

(b) Graphical illustration:

 Supply curve shifts rightwards (S2 → S3) (1)
 Indication of greater DWL (abd → aef) (1)

Verbal elaboration:
 Economic efficiency will be worsened (1)
 The gap between marginal benefit and marginal cost widens (1)
 Deadweight loss increases

2022-23 / First Term Examination / S5 / ECON / Suggested Answers Page 7 of 8

10. Watsons is a chain store selling healthcare products. In recent years, Watsons expanded its business in
the following ways:

➢ Opened a new line of shops, watsonsbaby, which focuses on selling infant-related products.
➢ Developed its own brands of skincare products called NATURALS.

(a) Name the type(s) of expansion adopted by Watsons and explain ONE common motive behind the
expansion. (4 marks)
(b) Suppose a bottle of shampoo is more expensive at Watsons than at an online shop. Give TWO possible
reasons to explain why consumers may still buy the shampoo at Watsons. (4 marks)

Public awareness about the use of plastic packaging has been raised in recent years. Some
environmentalists suggested the imposition of taxes on buying products with plastic packaging.

(c) Using the concept of externality, explain how the tax may improve economic efficiency. (5 marks)

Answer
(a)
 Lateral expansion and vertical backward expansion (1)

 Motives:
 To enjoy economies of scale (1)
 Resources can be utilised more efficiently when the production scale increases
(1)
 To diversify business risk (1)
 The company’s profit relies less on one particular type of business. (1)

(b)
 Imperfect information (1)
 The information in the healthcare products market is imperfect (1)
 Heterogeneous products (1)
 The products sold at Watsons are with higher quality / Watsons provide better service
(e.g. customer consultation) (1)

(c)
 Consumers buying products with plastic packaging may harm the environment without
compensation (1)
 Marginal social cost is greater than the marginal private cost
 Negative externality exists (1)
 The number of plastic packaging used is greater than the efficient level (1)
 When a tax is imposed, the marginal private cost of using plastic packaging increases
(1)
 The use of plastic packaging will be reduced towards the efficient level (1)

END OF SUGGESTED ANSWERS

2022-23 / First Term Examination / S5 / ECON / Suggested Answers Page 8 of 8