Mock Test 7 Paper 2

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ECONOMICS INQUIRY FOR HKDSE

Candidate Number
HONG KONG DIPLOMA OF SECONDARY EDUCATION EXAMINATION
ECONOMICS PAPER 2
(Mock Test 7)
Question-Answer Book Marker’s
Use Only
Examiner’s
Use Only
Marker No. Examiner No.
Time allowed: 2 hours

This paper must be answered in English Question
Marks Marks
No.
INSTRUCTIONS 3
(1) After the announcement of the start of the examination, you 4

should first write your Candidate Number in the space
5
provided on Page 1 and stick barcode labels in the spaces
provided on Pages 1, 3, 5, 7, 9 and 11. 6
(2) This paper consists of three sections, A, B and C. Answer 7

ALL questions in sections A and B. Attempt any ONE
question in section C. 8
(3) Write your answers in the space provided in this 9

Question-Answer Book. Do not write in the margins.
Answers written in the margins will not be marked. 10
(4) Supplementary answer sheets will be supplied on request. 11

Write your candidate number, mark the question number
box and stick a barcode label on each sheet, and fasten 12
them with string INSIDE this book.
13
(5) No extra time will be given to candidates for sticking on
the barcode labels or filling in the question number boxes 14
after the ‘Time is up’ announcement.
15
Total
HKDSE-ECON 2-1 (Mock Test 7) © 2012 Aristo Educational Press Ltd.

Section A (50 marks)
1. The Leisure and Cultural Services Department held “Sport For All Day 2012” on 5 August 2012. The public
could use most of its fee-charging recreation and sports facilities free of charge. Are these facilities free
goods on that day? Explain. (3 marks)
2. The table below shows the input-output relationship of a firm.
Labour (units) Machine (units) Average output (units)

5 3 3
6 3 5
7 3 7
8 3 8
Answers written in the margins will not be marked.

9 3 8
State the law of diminishing marginal returns. Does the above data illustrate the law? Explain. (5 marks)

3. A cinema chain opens a film production company.
(a) What type of expansion is this? Explain. (2 marks)
(b) State THREE possible motives for the above expansion. (3 marks)

4. The table below shows the Gini coefficients of Country X and Country Y in a certain year.
Country X Country Y
Gini coefficient 0.32 0.49
(a) Which country has a Lorenz curve further away from the line of perfect income equality? (1 mark)
(b) Suppose the government of Country Y cuts the social security assistance. Explain how this will affect
the post-tax post-social transfer Gini coefficient of Country Y. (3 marks)

5. The government of Country X has imposed an effective price floor on an agricultural product.
(a) Suppose all illegal transactions of the agricultural product in Country X are eliminated. Does the
imposition of the price floor guarantee that all producers of the agricultural product benefit by selling
their products at a higher price? Explain. (4 marks)
(b) After imposing the price floor, people switch to buy similar products imported from other countries.
Explain how this will affect the current account balance of Country X. (3 marks)

(c) Suppose the government raises the price floor further. Explain how this will affect economic efficiency
with the aid of a diagram. (4 marks)



6. Economy A is at trough. Its unemployment reaches the highest level in history.
(a) Other than high unemployment rate, list TWO other economic phenomena that would occur when an
economy is at trough. (2 marks)
(b) State ONE loss to unemployed people and ONE loss to society caused by unemployment. (2 marks)

7. “When using as money, diamonds are preferred to wheat.” Give TWO reasons to support this statement.
(4 marks)

8. Country A’s currency appreciates against its trading partner’s currency. With the aid of the diagram below,
explain under what condition this would lead to a fall in the expenditure of Country A’s trading partner on
imports from Country A (in terms of foreign currency). (7 marks)
Price
(in terms of foreign currency)

0 Quantity of imports

9. The table below shows the amount of good X and good Y that Country A and Country B can produce with
all of their resources.
Good X (units) Good Y (units)

Country A 20 OR 60
Country B 16 OR 24
(a) State the principle of comparative advantage. (2 marks)
(b) According to the principle of comparative advantage, explain which country will export good Y.
(3 marks)
(c) Suppose 1 unit of good X is traded for 2 units of good Y between the two countries. Calculate Country
A’s gain from trade per unit of export. (2 marks)
END OF SECTION A

Section B (54 marks)
10. In July 2012, the Chief Executive announced a series of new policies.
(a) Among the new policies, the Old Age Living Allowance Scheme is considered the most important one.
Under the scheme, 400,000 eligible elders will receive $2,200 a month, doubling that under the
existing Old Age Allowance. It is expected to be launched in early 2013.
(i) Should the amount of allowance given to elders under the Old Age Living Allowance Scheme be
included in the calculation of Hong Kong’s Gross Domestic Product in 2013? Explain. (2 marks)
(ii) Do you think that the Old Age Living Allowance Scheme can improve equity in the Hong Kong
society? Explain. (4 marks)
(iii) Mrs. Lee is one of the eligible elders who will receive $2,200 a month under the new scheme.
She wants to invest the money in either shares or bonds issued by a listed company. Suggest
TWO reasons to explain why bonds could be a better choice than shares for Mrs. Lee. (4 marks)

(b) On the other hand, a Social Enterprises Development Fund will be set up to provide loans to social
enterprises, aiming at encouraging starting up of new businesses. With the aid of a diagram, explain
how the fund would affect the price level and output level of Hong Kong in the short run. (8 marks)



11. According to the figures of the Census and Statistics Department, Hong Kong’s inflation rate is increasing at
a slower rate in the first half of 2012.
(a) What is inflation? (2 marks)
(b) Mr. Wong receives a fixed amount of monthly pension after retirement. Do you agree that he will be
better off under a lower inflation rate? Explain. (2 marks)
(c) The Statutory Minimum Wage effective from 1 May 2011 is believed to be one of the factors that leads
to inflation.
(i) What is meant by equalising outcome? What is meant by equalising opportunity? (2 marks)
(ii) Does the Statutory Minimum Wage aim at equalising outcome or opportunity? Explain.
(3 marks)


12. In Hong Kong, there are a few major textbook publishers selling secondary school textbooks.
(a) State the market structure of textbook publishing and list TWO features of such kind of market
structure. (3 marks)
(b) These textbook publishers are private limited companies. State TWO features of this kind of ownership
of firms. (2 marks)
(c) There are opinions that the selling prices of textbooks are too high. The Educational Bureau launches
the “E-textbook Market Development Scheme” (EMADS), which aims at introducing competition to
the market by facilitating and encouraging potential e-textbook developers to enter the market. It is
believed that there will be more new e-textbook developers entering the market.
(i) With the aid of a diagram, explain how the scheme can help lower the selling prices of
textbooks. (5 marks)
(ii) Textbook publishers claim that the higher selling price of textbooks is due to a sharp increase in
the price of printing paper. With the aid of a diagram, explain how an increase in the price of
printing paper would lead to an increase in the selling price of textbooks.
(5 marks)


13. The following table shows the balance sheet of the banking system of an economy.
Assets ($) Liabilities ($)

Reserves 2,500 Deposits 7,500
Loans 5,000
Suppose the required reserve ratio is 25%, and the public initially holds $500 cash.
(a) Calculate the excess reserves in the banking system. Show your working. (2 marks)
(b) List TWO reasons to explain why there are excess reserves in the banking system. (2 marks)
(c) The public deposits 60% of the cash they hold into the banking system. If the banks lend out all of their
excess reserves, what will the amount of money supply be in the economy? Show your working.
(4 marks)
(d) Based on the quantity theory of money, predict the effect of the event in (c) on the price level in the
long run. (4 marks)

END OF SECTION B

Section C (16 marks) Answer any ONE question.
14. Budget airlines are becoming more common among travellers. As compared with traditional airlines, the
fares of budget airlines are generally lower, but many traditional passenger services are not provided. Budget
airline may charge for extras like food, seat allocation, baggage handling, etc.
(a) Airline companies are often alleged to practise price discrimination.
(i) What is price discrimination? (2 marks)
(ii) State TWO conditions for practising price discrimination. (2 marks)
(b) Do the following pricing arrangements of budget airlines constitute price discrimination? Explain.
(i) With the same departure and arrival destinations, the fares of budget airlines can be much lower
than those of traditional airlines.
(ii) For the same flight, customers pay a lower fare for the same class if they book the tickets earlier.
(6 marks)
(c) Are the following business practices of budget airlines anti-competitive? Explain.
(i) Customers can only buy the tickets of budget airline Company A from a designated travel
agency.

(ii) Passengers of budget airline Company B can purchase the admission ticket of the Hong Kong
Disneyland with a 30% discount.
(4 marks)
(d) List TWO negative impacts of anti-competitive behaviours on consumers. (2 marks)


15. Refer to the diagram. AB and AC are the production possibility frontiers of Country X and Country Y
respectively.
Food (units)
A
60
B C
Clothing (units)
0 20 60
(a) (i) Which country has an absolute advantage in producing clothing? Explain. (2 marks)
(ii) Which country has a comparative advantage in producing food? Explain. (2 marks)

(iii) Is mutually beneficial trade possible between the two countries? Explain. (2 marks)
(b) Suppose the terms of trade is 1 units of clothing in exchange for 2 units of food.
(i) Calculate the gain from trade per unit of clothing traded for each country. (4 marks)
(ii) How will the gain from trade for each country change if Country X can produce more food after
practising crop rotation? (2 marks)
(c) Both countries’ per capita real GDP in purchasing power parity (PPP) terms in US dollar increases
after trade.
(i) What does Human Development Index (HDI) measure? (2 marks)
(ii) Other things being constant, how will the HDI of both countries be affected after trade? Explain.
(2 marks)

END OF PAPER

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Please stick the barcode label here.

ECONOMICS INQUIRY FOR HKDSE

Marker No. Examiner No.

Time allowed: 2 hours

(1) After the announcement of the start of the examination, you 4

(2) This paper consists of three sections, A, B and C. Answer 7

(3) Write your answers in the space provided in this 9

(4) Supplementary answer sheets will be supplied on request. 11

HKDSE-ECON 2-1 (Mock Test 7) © 2012 Aristo Educational Press Ltd.

2. The table below shows the input-output relationship of a firm.

Labour (units) Machine (units) Average output (units)

Answers written in the margins will not be marked.

Answers written in the margins will not be marked.

HKDSE-ECON 2-2 (Mock Test 7) © 2012 Aristo Educational Press Ltd.

3. A cinema chain opens a film production company.

(a) What type of expansion is this? Explain. (2 marks)

Answers written in the margins will not be marked.

Answers written in the margins will not be marked.

HKDSE-ECON 2-3 (Mock Test 7) © 2012 Aristo Educational Press Ltd.

Answers written in the margins will not be marked.

Answers written in the margins will not be marked.

HKDSE-ECON 2-4 (Mock Test 7) © 2012 Aristo Educational Press Ltd.

Answers written in the margins will not be marked.

Answers written in the margins will not be marked.

HKDSE-ECON 2-5 (Mock Test 7) © 2012 Aristo Educational Press Ltd.

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Answers written in the margins will not be marked.

HKDSE-ECON 2-6 (Mock Test 7) © 2012 Aristo Educational Press Ltd.

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Answers written in the margins will not be marked.

HKDSE-ECON 2-7 (Mock Test 7) © 2012 Aristo Educational Press Ltd.

Good X (units) Good Y (units)

(a) State the principle of comparative advantage. (2 marks)

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HKDSE-ECON 2-8 (Mock Test 7) © 2012 Aristo Educational Press Ltd.

Section B (54 marks)

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HKDSE-ECON 2-9 (Mock Test 7) © 2012 Aristo Educational Press Ltd.

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HKDSE-ECON 2-10 (Mock Test 7) © 2012 Aristo Educational Press Ltd.

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Answers written in the margins will not be marked.

HKDSE-ECON 2-11 (Mock Test 7) © 2012 Aristo Educational Press Ltd.

(a) What is inflation? (2 marks)

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HKDSE-ECON 2-12 (Mock Test 7) © 2012 Aristo Educational Press Ltd.

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HKDSE-ECON 2-13 (Mock Test 7) © 2012 Aristo Educational Press Ltd.

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HKDSE-ECON 2-14 (Mock Test 7) © 2012 Aristo Educational Press Ltd.

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HKDSE-ECON 2-15 (Mock Test 7) © 2012 Aristo Educational Press Ltd.