Hkcee Econ 2000 Paper 1

2000-CE ECON
PAPER 1

HONG KONG EXAMINATIONS AUTHORITY 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. 2.

This paper consists of two sections, A and B. Section A contains eight questions. Attempt ALL questions. The whole section carries 38 marks for content and 2 marks for effective communication. Section B contains three questions. Attempt any TWO questions. Each question carries 23 marks for content and 2 marks for effective communication.

3.

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Hong Kong Examinations Authority All Rights Reserved 2000

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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 incinerator

is a capital.

(2 marks)

4.

The table below shows the production of a firm. Machinery (units) 10 10 10 10 10 Labour (units) 7 8 9 10 11 Average output of labour (units) 30 34 37 39 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 for some of your vegetables.

But what I want now is some wood.

Barbarian A

Barbarian B

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

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6.

Study the following data about Hong Kong. Year on year % change Unemployment Composite consumer in real gross domestic rate (%) price index product (GDP) - 5.1 - 6.8 - 5.7 - 3.4 4.4 5.0 5.7 6.2 119.2 118.6 116.1 115.6

Year 1998

Quarter 2nd 3rd 4th 1st

1999

(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 lowincome group and the high-income group. (4 marks)

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Section B

(50 marks)

Attempt any TWO questions. 9. Study the following information.

Gasoline Bill Quantity sold : Price per liter : Government tax : Sales total : 50 L (liter) 3.780 $/L 6.060 $/L $ 189 $ 303 $ 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) Cash reserves Loans 200 800 Liabilities ($mn) Deposits 1000

(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)

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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) Country A Country B 1200 400 Clothing (units) 900 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)

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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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