NSS EXPLORING ECONOMICS
HONG KONG DIPLOMA OF SECONDARY EDUCATION EXAMINATION
MOCK PAPER (2013 February)
ECONOMICS PAPER 2
Time allowed: 2 hours
This paper must be answered in English.
INSTRUCTIONS
1. This paper consists of three sections, A, B and C. Answer ALL questions in Sections A and B. Attempt any ONE question in Section C.
2. Write your answers in the spaces provided. DO NOT write in the margins. Answers written in the margins will not be marked.
Section A (50 marks)
1. Samuel has the following three job offers (ranked according to his order of preference):
I. Teacher, with a monthly salary of $21,000
II. Accountant, with a monthly salary of $23,000
III. Clerk, with a monthly salary of $11,000
a. What is Samuel’s cost of being an accountant? (2 marks)
b. If students are more obedient than expected, explain how Samuel’s cost of being an accountant is affected. (2 marks)
c. To prepare for his new job, Samuel buys clothes and pays for them with his credit card. He repays the debt two months later with interest.
Explain why interest is a cost in this case. (2 marks)
2. ABC Restaurant is a Chinese restaurant in Hong Kong.
a. Determine whether the following are labour, capital, or land for ABC Restaurant.
i. Tables (1 mark)
ii. Fish (1 mark)
iii. Waiter (1 mark)
b. ABC Restaurant’s average production cost increases after it expands its scale of production. Give TWO possible reasons. (4 marks)
c. State TWO features of the market structure of Chinese restaurants in Hong Kong.
(2 marks)
3. The following table shows Factory A’s toy output. Only two inputs are required in the production process.
1 / 10 / 100
2 / 10 / 210
3 / 10 / 325
4 / 10 / 425
State the law of diminishing marginal returns and explain whether the above data illustrate the law. (5 marks)
4. Country A imposes a per-unit sales tax on memory cards. Explain with a well-labelled diagram how this affects the producer surplus in the digital camera market. (7 marks)
5. Some MTR stations in the northern New Territories are crowded during the daytime. People have claimed that parallel traders (水貨客), who usually gather at the stations to divide up and distribute their goods, are responsible for this situation. Explain why this is an example of a divergence between private and social cost. (4 marks)
6. GDP and the unemployment rate are commonly used economic indicators.
a. List TWO uses of GDP. (2 marks)
b. State TWO costs of unemployment to the unemployed. (2 marks)
c. In what phase of a business cycle will the growth rate of real GDP most likely increase and the unemployment rate decrease? (1 mark)
7. The following table shows a country’s gross domestic product data.
Private consumption expenditure / 200
Government consumption expenditure / 100
Net domestic capital formation / 50
Changes in inventories / 30
Depreciation / 12
Exports of goods / 20
Exports of services / 15
Net imports / 5
Net income from abroad / 8
Indirect taxes less subsidies / 2
a. Calculate GNP at market prices. (3 marks)
b. Eddie is the owner of supermarket chains which earned $10 billion in revenue this year. Give ONE possible reason to explain why the contribution of Eddie's supermarket chains to aggregate output is less than $10 billion. (2 marks)
8. Refer to the following banking system’s balance sheet. Suppose the banking system has only demand deposits and no excess reserves.
Reserves 10
Loans 90 / Deposits 100
a. What is the required reserve ratio? Show your calculations. (2 marks)
b. Suppose the public does not hold any cash and a new $20 banknote is issued.
i. What is the maximum change in money supply? (2 marks)
ii. According to the quantity theory of money, what will the percentage change in nominal GDP be? Briefly explain your answer. (3 marks)
c. Besides printing money, list TWO other monetary policies whose effects are similar to issuing money. (2 marks)
END OF SECTION A
Section B (54 marks)
9. Beauty K Ltd is a beauty care company. Some customers contracted a deadly disease after receiving beauty care treatments at Beauty K Ltd.
a. Discuss the features of a limited company in terms of liability responsibility, legal status, and management. (6 marks)
b. Beauty K Ltd employs doctors, beauty consultants and receptionists.
i. What economic principle does this illustrate? (1 mark)
ii. Explain TWO possible reasons why the application of this principle can increase labour productivity. (4 marks)
c. After the incident, Beauty K Ltd went bankrupt. Some of its clients prepaid three months in advance (the valid date is within this year) for its beauty services and received no refund. Explain if the prepayment should be counted in GDP. (3 marks)
10. Income inequality is a serious problem in Hong Kong. To deal with this problem, the Hong Kong government has decided to put more effort into improving living standards for the poor. The Chief Executive plans to set a poverty line in accordance with the practice of the European Union (歐洲聯盟) and the Organization for Economic Cooperation and Development (經濟合作與發展組織). A poverty line refers to a level of household income below which a household is considered to be living in poverty.
a. Name TWO ways of measuring income distribution. (2 marks)
b. Explain TWO sources of income inequality. (4 marks)
c. Some politicians suggest providing basic economic security to households living below the poverty line in order to reduce income inequality in Hong Kong.
i. Determine whether the suggestion is aimed at equalising income or opportunities.
(1 mark)
ii. Briefly explain TWO policy concerns regarding the proposal of providing basic economic security. (4 marks)
11. QE3 (Quantitative Easing 3) was launched by the US Federal Reserve (the central bank of the US) in 2012. Under QE3, the Federal Reserve purchases US$40 billion in securities from banks per month.
a. With the aid of a diagram, briefly explain how QE3 affects the money market in the US. (6 marks)
b. After the launch of QE3, the US dollar depreciates against other major currencies in the world.
i. With the aid of an AS-AD diagram, explain how this affects Hong Kong’s real GDP and price level in the short run. (8 marks)
ii. Briefly explain how this affects the value of Hong Kong’s imports (in terms of Hong Kong dollars). (4 marks)
12. Country X and Country Y produce only two goods: bread and candy. The following table shows the resources required to produce one unit of each good in the two countries:
Country X / 5 units of resources / 10 units of resources
Country Y / 8 units of resources / 12 units of resources
a. i. Calculate the cost of producing 1 unit of bread for Country X and Country Y, respectively. (4 marks)
ii. According to the principle of comparative advantage, which country will import bread? Explain. (2 marks)
b. When Country X and Country Y start trading, Country Z, which is located between the two countries, charges a passage fee (in terms of candies) for each unit of bread transported through the country. Assume that the bread trade involves no other costs.
i. What is the range of the passage fee that will enable both Country X and Country Y to benefit from the trade? (2 marks)
ii. Explain the effect of the passage fee on the quality of the goods traded. (3 marks)
END OF SECTION B
Section C (16 marks) Answer any ONE question.
13. Refer to the following information that applies to both a perfectly competitive market and a monopoly.
Price ($) / Output / Quantity demanded per day (units) / Marginal cost ($)20 / 1 / 16
19 / 2 / 16
18 / 3 / 16
17 / 4 / 16
16 / 5 / 16
15 / 6 / 16
a. Calculate the price and output in the perfectly competitive market and the monopoly (with simple monopoly pricing), respectively. (6 marks)
b. Use the above data to explain why the profit-maximising output level in the monopoly is NOT efficient. (2 marks)
c. The monopolist makes the following announcement:
‘Once you have spent more than $180 on our products in a year, you can apply for our one-year VIP membership! Join us and enjoy an exclusive 30% discount on further purchases!’
Does the VIP arrangement constitute price discrimination? Explain. (4 marks)
d. List TWO types of vertical agreements that restrict competition. (2 marks)
e. Give ONE argument against the introduction of a competition policy. Explain briefly.
(2 marks)
14. Refer to the following production possibilities frontiers (PPF) for Countries A and B. Suppose both Countries A and B have only 10 units of resources.
a. i. Which country has an absolute advantage in producing clothing? Explain.
(3 marks)
ii. Which country has a comparative advantage in producing clothing? Explain.
(3 marks)
b. Suppose the terms of trade is 1 unit of food = 1 unit of clothing. Country A and Country B practise complete specialisation based on their comparative advantage. Explain if Point G (10 units of clothing, 10 units of food) is available for Country A’s consumption
i. before trade; (2 marks)
ii. after trade. (3 marks)
c. i. State THREE factors that affect economic growth. (3 marks)
ii. State TWO costs of economic growth. (2 marks)
END OF SECTION C
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