S.K.H. Leung Kwai Yee Secondary School

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S.K.H. Leung Kwai Yee Secondary School

• 2006-07 First Term Examination
• F. 5 Economics
• Paper 1

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1.As we all know that Mr. Lee Ka Shing is one of
the wealthiest people in Hong Kong. He is so
rich that he is able to buy most of the things he
wants.(a.)An economic student said that since
Mr. Lee is so rich, he does not face the problem
of scarcity. Do you agree with that economic
student? Explain. (3 marks)

• No. (1)
• scarcity is a situation where the availability of
  resources is insufficient to satisfy all wants.
  (1)
• although Mr. Lee is very rich, he may still have
  some wants, such as better health or love from
  others, cannot be satisfied by his wealth. (1)

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(b.) Because he is so wealthy, Mr. Lee is able to
buy a multiple-way round the world air ticket and
travel any place he wants. If finally Mr. Lee
decides to go visit Canada in the coming summer
holidays, explain whether his opportunity cost of
traveling Canada is zero. (3 marks)
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(b.) Because he is so wealthy, Mr. Lee is able to
buy a multiple-way round the world air ticket and
travel any place he wants. If finally Mr. Lee
decides to go visit Canada in the coming summer
holidays, explain whether his opportunity cost of
traveling Canada is zero. (3 marks)

• No. (1)
• opportunity cost is the highest-value option
  forgone. (1)
• although Mr. Lee can travel any place he wants,
  as long as he needs to give-up any other option,
  such as going to other places or doing other
  things, in order to go visit Canada in the coming
  summer holidays, his cost to Canada is not zero.
  (1)

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2. The table below shows the input-output relationship of a firm. 2. The table below shows the input-output relationship of a firm. 2. The table below shows the input-output relationship of a firm.
Labour (units) Machine (units) Total output of labour (units)
3 4 5 6 7 8 2 2 2 2 2 2 30 100 180 250 310 360
State the law of diminishing marginal returns and explain whether the above data illustrate the law. (6 marks) State the law of diminishing marginal returns and explain whether the above data illustrate the law. (6 marks) State the law of diminishing marginal returns and explain whether the above data illustrate the law. (6 marks)
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2. The table below shows the input-output relationship of a firm. 2. The table below shows the input-output relationship of a firm. 2. The table below shows the input-output relationship of a firm.
Labour (units) Machine (units) Total output of labour (units)
3 4 5 6 7 8 2 2 2 2 2 2 30 100 180 250 310 360
State the law of diminishing marginal returns and explain whether the above data illustrate the law. (6 marks) State the law of diminishing marginal returns and explain whether the above data illustrate the law. (6 marks) State the law of diminishing marginal returns and explain whether the above data illustrate the law. (6 marks)
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2. Labour (units) Total output of labour (units) Marginal product (units) 2
3 4 5 6 7 8 30 100 180 250 310 360 -- 70 80 70 60 50
The law of diminishing marginal returns states that when there is a variable factor added to a fixed amount of fixed factor continuously, the marginal product will eventually decrease, holding all other factors (including technology) constant. Yes, the above data has illustrated the law of diminishing marginal returns as the marginal product decrease when the 6th unit of labour has been employed. The law of diminishing marginal returns states that when there is a variable factor added to a fixed amount of fixed factor continuously, the marginal product will eventually decrease, holding all other factors (including technology) constant. Yes, the above data has illustrated the law of diminishing marginal returns as the marginal product decrease when the 6th unit of labour has been employed. The law of diminishing marginal returns states that when there is a variable factor added to a fixed amount of fixed factor continuously, the marginal product will eventually decrease, holding all other factors (including technology) constant. Yes, the above data has illustrated the law of diminishing marginal returns as the marginal product decrease when the 6th unit of labour has been employed. 2 1 1
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2. Labour (units) Total output of labour (units) Marginal product (units) 2
3 4 5 6 7 8 30 100 180 250 310 360 -- 70 80 70 60 50
The law of diminishing marginal returns states that when there is a variable factor added to a fixed amount of fixed factor continuously, the marginal product will eventually decrease, holding all other factors (including technology) constant. Yes, the above data has illustrated the law of diminishing marginal returns as the marginal product decrease when the 6th unit of labour has been employed. The law of diminishing marginal returns states that when there is a variable factor added to a fixed amount of fixed factor continuously, the marginal product will eventually decrease, holding all other factors (including technology) constant. Yes, the above data has illustrated the law of diminishing marginal returns as the marginal product decrease when the 6th unit of labour has been employed. The law of diminishing marginal returns states that when there is a variable factor added to a fixed amount of fixed factor continuously, the marginal product will eventually decrease, holding all other factors (including technology) constant. Yes, the above data has illustrated the law of diminishing marginal returns as the marginal product decrease when the 6th unit of labour has been employed. 2 1 1
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3. When it started, the Walt Disney Company produced cartoon movies only. Later it expanded its business to owning and operating Disneyland theme parks and hotels. Explain what type of expansion this is and state TWO possible motives for such a type of expansion. (4 marks)
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3. When it started, the Walt Disney Company produced cartoon movies only. Later it expanded its business to owning and operating Disneyland theme parks and hotels. Explain what type of expansion this is and state TWO possible motives for such a type of expansion. (4 marks)
Conglomerate expansion because movie production and hotel business are two different lines of production. OR Lateral expansion because the products are related but not competitive. 11
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3. When it started, the Walt Disney Company produced cartoon movies only. Later it expanded its business to owning and operating Disneyland theme parks and hotels. Explain what type of expansion this is and state TWO possible motives for such a type of expansion. (4 marks)
Possible motives of conglomerate expansion or lateral expansion product diversification to spread risk making use of brand name to sell another product / promoting goodwill more flexible use of resources to benefit from economies of scale any other relevant point Mark the FIRST TWO points only. 1_at_, max 2
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4. The following diagram shows the production chain of computers in Country A. Its computer factories import 50 million worth of raw materials.
Other Countries
60 million
Local Computers Factories
Local Wholesalers
50 million
70 million
Local Consumers
55 million (2.5 million sales tax inclusive)
Calculate the contribution of the above production chain to Country As Calculate the contribution of the above production chain to Country As
(a.) Gross domestic product (GDP) at factor cost using the expenditure approach. (3 marks)
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4. The following diagram shows the production chain of computers in Country A. Its computer factories import 50 million worth of raw materials.
Other Countries
60 million
Local Computers Factories
Local Wholesalers
50 million
70 million
Local Consumers
55 million (2.5 million sales tax inclusive)
Calculate the contribution of the above production chain to Country As Calculate the contribution of the above production chain to Country As
(a.) Gross domestic product (GDP) at factor cost using the expenditure approach. (3 marks)
(6055-50) - 2.5 62.5 million 1 2
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4. The following diagram shows the production chain of computers in Country A. Its computer factories import 50 million worth of raw materials.
Other Countries
60 million
Local Computers Factories
Local Wholesalers
50 million
70 million
Local Consumers
55 million (2.5 million sales tax inclusive)
Calculate the contribution of the above production chain to Country As Calculate the contribution of the above production chain to Country As
(b.) GDP at market prices using the value-added approach. (3 marks)

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4. The following diagram shows the production chain of computers in Country A. Its computer factories import 50 million worth of raw materials.
Other Countries
60 million
Local Computers Factories
Local Wholesalers
50 million
70 million
Local Consumers
55 million (2.5 million sales tax inclusive)
Calculate the contribution of the above production chain to Country As Calculate the contribution of the above production chain to Country As
(b.) GDP at market prices using the value-added approach. (3 marks)
(70-50) (6055-70) 65 million 1 2
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5. Recently, there were news reporting that the eggs from Mainland China might contain some carcinogenic substances (????) . Explain with the aid of a diagram how this rumour would affect the equilibrium price and quantity of eggs in Hong Kong. (4 marks)
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5. Recently, there were news reporting that the eggs from Mainland China might contain some carcinogenic substances (????) . Explain with the aid of a diagram how this rumour would affect the equilibrium price and quantity of eggs in Hong Kong. (4 marks)
Verbal Elaboration the rumour will lead to a decrease in the demand for eggs from Mainland China. as a result, both equilibrium price and qauntity will decrease 1 1
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5. Diagram demand curve shifts to the left indicate both equilibrium price and quantity decrease 1 1
Price ()
S
P1
P2
D1
D2
Quantity (units)
0
Q2
Q1
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6. (a.) State the law of demand. (2 marks)
(b.) Suppose the government raises the fine for buying pirate DVDs in Hong Kong. Explain in terms of the law of demand why there are less people buying the priate DVD after the increase in fine. (2 marks)
(a.) The law of demand states that within a period of time, an increase in price of a certain good will lead to a decrease in its quantity demand or vice versa, ceteris paribus. 2
(b.) As the government raises the fine for buying pirate DVDs in Hong Kong, the price (or the cost) of buying pirate DVDs also increases. According to the law of demand, when the price of buying pirate DVDs increases, its quantity demanded will decreases (i.e. less people buying pirate DVDs), holding all other factors constant. 2
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7. There are more and more television broadcasting companies, such as TVB, ATV, Cable TV, Now.Com, Star Cable, etc, in Hong Kong nowadays. There are more and more television broadcasting companies, such as TVB, ATV, Cable TV, Now.Com, Star Cable, etc, in Hong Kong nowadays.
(a.) Explain which type of market structure that television broadcasting service belong to. (2 marks)
(b.) State TWO characteristics of the above market structure. (2 marks)
(a.) Oligopoly because there are a few dominant sellers, such as TVB, TVB or Cable TV, in the market. 1 1
(b.) TWO characteristics of oligopoly are -a few dominant sellers dominate the market firms produce similar but differentiated products / heterogeneous products restricted entry due to government regulation or hugh capital / technological requirement. imperfect market information interdependence amongs sellers any other relevant point Mark the FIRST TWO points only. 1_at_, max 2
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8. Suppose there are two workers, Peter and John. Peter, who lives in Yuen Long, is working as a clerk in school. However, John is a lawer who lives in Wan Chai. Based on the information above, explain who has higher occupational mobility and who has higher geographical mobility respectively. (4 marks)
Peter has higher occupational mobility because his cost of changing job is lower than Peter. John has higher geographical mobility because the transportation is more convenient and less costly for John. 1 1 1 1
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9. The HKSAR government has decided to start selling the residential flats at Ngau Tau Kok (???) under the Home Ownership in January, 2007.
(a.) Explain with the aid of a diagram how it would affect the equilibrium price and quantity of the private housing nearby next year. (4 marks)
As both private housing and housing under the Home Ownership Scheme are substitutes, the demand for private housing nearby Ngau Tau Kok will decreases. Hence, the equilibrium price and quantity will both decrease. 1 1
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9. Diagram demand curve shifts to the left indicate both equilibrium price and quantity decrease 1 1
Price ()
S
P1
P2
D1
D2
Quantity (units)
0
Q2
Q1
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9. The HKSAR government has decided to start selling the residential flats at Ngau Tau Kok (???) under the Home Ownership in January, 2007.
(b.) Due to the downturn of the private housing market since the late 1990s, although many flats have been built, the HKSAR government has suspended the HOS (Home Ownership Scheme) for many years. Suppose Mr. Chan will spend HK1.2 million on buying a flat under the HMO in January 2007. Give TWO reasons to explain why the above transaction will contribute much less than HK1.2 million to Hong Kong's GDP in the fiscal year of 2006-07. (4 marks) Remark The fiscal year of 2006-07 starts from 1st April 2006 to 31st March,2007
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9. The HKSAR government has decided to start selling the residential flats at Ngau Tau Kok (???) under the Home Ownership in January, 2007.
(b.) Due to the downturn of the private housing market since the late 1990s, although many flats have been built, the HKSAR government has suspended the HOS (Home Ownership Scheme) for many years. Suppose Mr. Chan will spend HK1.2 million on buying a flat under the HMO in January 2007. Give TWO reasons to explain why the above transaction will contribute much less than HK1.2 million to Hong Kong's GDP in the fiscal year of 2006-07. (4 marks) Remark The fiscal year of 2006-07 starts from 1st April 2006 to 31st March,2007
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9. The HKSAR government has decided to start selling the residential flats at Ngau Tau Kok (???) under the Home Ownership in January, 2007.
TWO reasons are -the HMO housings at Ngau Tau Kok were not built in the fiscal year of 2006-07 some of the materials used in building the HMO housing were imports from other countries. any other relevant point Mark the FIRST TWO points only. 2_at_ max 4

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9. The HKSAR government has decided to start selling the residential flats at Ngau Tau Kok (???) under the Home Ownership in January, 2007.
(c.) Suppose before moving in, Mr. Chan hires an interior designer to design a floor plan and buys furniture directly from a furniture manufacturer in mainland China for his new flat. Explain what type of production that the interior designer and the furniture manufacturer belong to respectively. (4 marks)
The interior designer belongs to teritary production as he/she provides services to the consumers. The furniture manufacturer belongs to secondary production as it turns raw materials into semi-finished or finished goods. 11 11
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9. The HKSAR government has decided to start selling the residential flats at Ngau Tau Kok (???) under the Home Ownership in January, 2007.
(d.) Suggest TWO ways for the furniture manufacturer to improve labour productivity. (2 marks)

TWO waygs to improve labour productivity are -provide better working environment provide more rewards and benefits to employees use of divisioin of labour provide training course to employees use of machinery and more advanced technology in production any other relevant point Mark the FIRST TWO points only. 1_at_ max 2
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10. (a.) The units of labour required to produce one unit of clothing and handbags in Germany and France are as follows The units of labour required to produce one unit of clothing and handbags in Germany and France are as follows The units of labour required to produce one unit of clothing and handbags in Germany and France are as follows The units of labour required to produce one unit of clothing and handbags in Germany and France are as follows
Countries Countries Clothing (units) Handbags (units)  
Germany Germany 4 L 5 L  
France France 2 L 4 L  

(i.) Which country has an absolute advantage in producing clothing and handbags respectively? Explain. (2 marks) Which country has an absolute advantage in producing clothing and handbags respectively? Explain. (2 marks) Which country has an absolute advantage in producing clothing and handbags respectively? Explain. (2 marks)
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10. (a.) The units of labour required to produce one unit of clothing and handbags in Germany and France are as follows The units of labour required to produce one unit of clothing and handbags in Germany and France are as follows The units of labour required to produce one unit of clothing and handbags in Germany and France are as follows The units of labour required to produce one unit of clothing and handbags in Germany and France are as follows
Countries Countries Clothing (units) Handbags (units)  
Germany Germany 4 L 5 L  
France France 2 L 4 L  

(i.) Which country has an absolute advantage in producing clothing and handbags respectively? Explain. (2 marks) Which country has an absolute advantage in producing clothing and handbags respectively? Explain. (2 marks) Which country has an absolute advantage in producing clothing and handbags respectively? Explain. (2 marks)
(i.) France has the absolute aadvantage in producing clothing and handbags as it has higher productivity in producing these two goods. (i.e. it requires less labour input in order to produce the same amount of output.) 1 1
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10. (a.) The units of labour required to produce one unit of clothing and handbags in Germany and France are as follows The units of labour required to produce one unit of clothing and handbags in Germany and France are as follows The units of labour required to produce one unit of clothing and handbags in Germany and France are as follows The units of labour required to produce one unit of clothing and handbags in Germany and France are as follows
Countries Countries Clothing (units) Handbags (units)  
Germany Germany 4 L 5 L  
France France 2 L 4 L  

(ii.) Based on your answer in (a.) (i.), should the country specializes in producing the product which it has an absolute advantage? If not, which product should it choose to specialize in ? (3 marks) Based on your answer in (a.) (i.), should the country specializes in producing the product which it has an absolute advantage? If not, which product should it choose to specialize in ? (3 marks) Based on your answer in (a.) (i.), should the country specializes in producing the product which it has an absolute advantage? If not, which product should it choose to specialize in ? (3 marks)
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10. (a.) The units of labour required to produce one unit of clothing and handbags in Germany and France are as follows The units of labour required to produce one unit of clothing and handbags in Germany and France are as follows The units of labour required to produce one unit of clothing and handbags in Germany and France are as follows The units of labour required to produce one unit of clothing and handbags in Germany and France are as follows
Countries Countries Clothing (units) Handbags (units)  
Germany Germany 4 L 5 L  
France France 2 L 4 L  

(ii.) Based on your answer in (a.) (i.), should the country specializes in producing the product which it has an absolute advantage? If not, which product should it choose to specialize in ? (3 marks) Based on your answer in (a.) (i.), should the country specializes in producing the product which it has an absolute advantage? If not, which product should it choose to specialize in ? (3 marks) Based on your answer in (a.) (i.), should the country specializes in producing the product which it has an absolute advantage? If not, which product should it choose to specialize in ? (3 marks)
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10. (a.) The units of labour required to produce one unit of clothing and handbags in Germany and France are as follows The units of labour required to produce one unit of clothing and handbags in Germany and France are as follows The units of labour required to produce one unit of clothing and handbags in Germany and France are as follows
Countries Clothing (units) Handbags (units)  
Germany 4 L 5 L  
France 2 L 4 L  

No. Frances opportunity cost of producing clothing is 2/4 0.5 units of handbags. Germanys opporutnity cost of producing clothin is 4/5 0.8 units of handbags. Hence, France should specialize in producing clothing as its opportunity cost of producing clothing is lower than that of Germany. No mark will be given if there is no calculation shown in the answer. 1 1 1
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10. (a.) The units of labour required to produce one unit of clothing and handbags in Germany and France are as follows The units of labour required to produce one unit of clothing and handbags in Germany and France are as follows The units of labour required to produce one unit of clothing and handbags in Germany and France are as follows The units of labour required to produce one unit of clothing and handbags in Germany and France are as follows
Countries Countries Clothing (units) Handbags (units)  
Germany Germany 4 L 5 L  
France France 2 L 4 L  

(iii.) Calculate the gain from trade of both Germany and France if 30 units of clothing have been exported at an exchange rate of 1C 0.6H ? (4 marks) Calculate the gain from trade of both Germany and France if 30 units of clothing have been exported at an exchange rate of 1C 0.6H ? (4 marks) Calculate the gain from trade of both Germany and France if 30 units of clothing have been exported at an exchange rate of 1C 0.6H ? (4 marks)
Frances gain from trade (0.6 0.5) x 30 3 units of handbags Germanys gain from trade (0.8 0.6) x 30 6 units of handbags 2 2
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10. (a.) The units of labour required to produce one unit of clothing and handbags in Germany and France are as follows The units of labour required to produce one unit of clothing and handbags in Germany and France are as follows The units of labour required to produce one unit of clothing and handbags in Germany and France are as follows The units of labour required to produce one unit of clothing and handbags in Germany and France are as follows
Countries Countries Clothing (units) Handbags (units)  
Germany Germany 4 L 5 L  
France France 2 L 4 L  

(iv.) Suppose there is a transportation cost at 1C 0.5H. Explain whether there is still a mutually beneficial trade between Germany and France. (3 marks) Suppose there is a transportation cost at 1C 0.5H. Explain whether there is still a mutually beneficial trade between Germany and France. (3 marks) Suppose there is a transportation cost at 1C 0.5H. Explain whether there is still a mutually beneficial trade between Germany and France. (3 marks)
No. The total gain from trading one unit of clothing between France and Germany are 0.8 0.6 0.2 units of handbags. As the transportation cost is greater than the total gain from trade, there will be no mutually beneficial trade between the two countries. 1 1 1
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10.




(b.) Mr. Perry is a manufacturer of handbags in Germany. Previously, he was the sole owner of his business. Later he found that it would be more beneficial to invite Mr. Chan, a Hong Kong investor, to join him. Give TWO reasons for such a change in form of business ownership. (4 marks)
TWO reasons for the change in form of business ownership are more sources of capital wider scope of specialization risk-sharing amongs partners any other relevant point Mark the FIRST TWO points only. 2_at_ max4
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11. The following table shows the GDP items of Country X in 2006.
(billion)
Private consumption expenditure Government consumption expenditure Gross domestic fixed capital formation Change in inventories Transfer payment Total exports of goods Total imports of goods Total exports of services Total imports of services Net Income from abroad Indirect taxes less subsidies 469 62 285 - 15 26 1 345 1 424 203 137 10.5 63
(a.) Calculate the GDP at market price and state the approach you used. Show your working. (3 marks)
GDP (469 62 285 15 1 345 203 1 424 137)billion 788 billion. No mark will be given if there is no calculation shown in the answer. Expenditure approach. 1 1 1
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11. The following table shows the GDP items of Country X in 2006.
(billion)
Private consumption expenditure Government consumption expenditure Gross domestic fixed capital formation Change in inventories Transfer payment Total exports of goods Total imports of goods Total exports of services Total imports of services Net Income from abroad Indirect taxes less subsidies 469 62 285 - 15 26 1 345 1 424 203 137 10.5 63
(b.) Given that there are 6 million people and the price index of the current year is 98 in Country X. Find the per capita GDP at constant price of Country X in 2006. (2 marks)
Per capita GDP at constant price (788 billion x 100/98) / 6 million 134 013.60 1 1
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11.
(c.) Dr. Economics said, Country Xs GDP underestimates the amount of goods and services available for the Country X economy. Give TWO reasons to support Dr. Economics statement.(4 marks)
TWO reasons to support Dr. Economics statement are leisure raises standard of living but it is not counted inn the GDP the improve in quality of output is not couted in the GDP if there is a large part of a countrys product is for self-consumption, GDP will also underestimate the true standard of living. any other relevant point Mark the FIRST TWO points only. 2_at_ max 4
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(d.) Suppose the trading partner of Country X has imposed a quota on Country Xs exports. Explain with the aid of a diagram, under what condition that the total exports of goods contributed to Country Xs GDP will increase. (7 marks)
The quota will lead to an increase in price but decrease in quantity transaction of Country Xs exports. When the demand for Country Xs exports is inelastic, the percentage increase in price is greater than the percentage decrease in quantity demanded such that the gain in total revenue from exports is greater than the loss. Hence, the total exports of goods contributed to Country Xs GDP will increase. 1 1 2
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Price ()
Gain gt Loss
S2
S1
P2
GAIN
P1
LOSS
D
Quantity (units)
0
Q1
Q2