1991

Section A
91.1.
A divergence between private and social costs
A.
occurs when one persons action inflicts damage on another person.
B.
cannot be resolved without government intervention.
C.
may be eliminated by market transactions if the action that causes the damage is a
private property right.
D.
means inefficient allocation of resources.
91.2.

The Pareto condition states that

A.
all marginal values are equalized.
B.
resource reallocation cannot make someone gain without making someone else lose.
C.
there is no divergence between private and social costs.
D.
the distribution of wealth satisfies each person in the economy.

91.3.

Investment takes place when

A.
young people play more and study less.
B.
people produce fewer perishable goods and more durable goods.
C.
companies issue new bonds.
D.
the interest rate falls.

91.4.

The sharp increase in car thefts in Hong Kong suggests that

A.
there is too much freedom in Hong Kong.
B.
the Coase Theorem is rejected.
C.
the market has failed to solve social issues.
D.
insurance premiums will rise.

91.5

A communist state may be regarded as a super firm because

A.
the use of resources is directed by central authorities, not be market prices.
B.
its productivity is low compared to that of a capitalist economy.
C.
private property rights do not exist.
D.
the markets there are imperfect.

91.6.

In a price-takers market,
A.
a firm will produce at an output level when its marginal revenue is greater than its
price.
B.
a firm faces a perfectly elastic demand curve at a price determined in the market.
C.
the wealth maximizing output for a firm occurs when the total revenue and total cost
curves intersect.
D.
all firms are selling homogeneous products.

91.7 If an individual regards each of the following combinations as equally preferable:

Options

A.
B.
C.
D.

91.8.

Goods
X
Y
A
100
and
70
B
105
and
69
C
110
and
68
D
115
and
67
he denies all the postulates of economic theory.
he denies that the goods are scarce.
he denies that he seeks a multitude of goods.
he denies that the more one has of any good, the lower his personal marginal
valuation of it is.

Which of the following statements about use value is true?

A.
When a good has a use value, it must have an exchange value.
B.
A good has a high exchange value if it has a high use value.

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C.
D.

The total use value of a good is the intrinsic value of that good.
The marginal use value of a good to a person depends on the quantity of that good
which he already possesses.

91.9.

If you can exchange 2 bushels of wheat today for the right to receive 2.3 bushels of wheat a
year from today,
A.
the rate of interest is 0.3.
B.
the rate of profit is 0.3.
C.
the rate of interest is 0.15.
D.
the rate of profit is 0.15.

91.10.

Under which of the following condition will consumers bear the smallest tax burden as a
result of a unit tax?
A.
an elastic demand curve and an inelastic supply curve
B.
an elastic demand curve and an elastic supply curve
C.
an inelastic demand curve and an inelastic supply curve
D.
an inelastic demand curve and an elastic supply curve

91.11.

A government official said, Our unemployment problem will be solved if the unemployed
find jobs. The above statement
A.
is a definitional identity.
B.
tells us nothing about the real world.
C.
is a tautology.
D.
All of the above.
Workers in Hong Kong earn higher wages than those in the Philippines because
A.
there is a smaller labour supply in Hong Kong.
B.
the labour unions in Hong Kong are stronger.
C.
the workers in Hong Kong are more productive than those in the Philippines.
D.
the living standard in Hong Kong is higher.

91.12.

91.13

If all firms in an industry are price takers in the market for factor A, then
A.
change in industry output will not affect the price of factor A.
B.
the marginal product of the last unit of factor A will be the same in all firms.
C.
the marginal cost of factor A to firms will be higher than the price of factor A.
D.
the demand curve for factor A is horizontal.

91.14.

A rise in interest rates will result in

A.
a rise in the price of longer-life light bulbs relative to shorter-life ones.
B.
a rise in the price of all light bulbs.
C.
a fall in the price of longer-life light bulbs relative to shorter-life ones.
D.
a fall in the price of shorter-life light bulbs only.

91.15.

If the marginal use valuation schedules of two persons are identical,

A.
their wealth must be the same.
B.
there cannot be mutually beneficial exchange between them.
C.
exchange will occur between them if their initial endowments are different.
D.
None of the above.

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91.16.

Goods X and Y are substitutes. A decrease in the price of X relative to the price of Y will lead
to
A.
an increase in demand for X but a decrease in demand for Y.
B.
an increase in the total revenue of X but a decrease in the total revenue of Y.
C.
a decrease in the total revenue of Y but the change in the total revenue for X is
uncertain.
D.
an increase in demand for X but the change in demand for Y is uncertain.

91.17.

Which of the following about price is correct?

A.
Price is the maximum the consumer is willing to pay at the margin.
B.
Price does not exist without money.
C.
Price is the fairest allocative device.
D.
Price is a measure of consumer satisfaction.

91.18.

The imposition of a lump-sum tax on a firm will

A.
decrease the wealth of the firm.
B.
decrease the output level.
C.
increase the selling price of the good.
D.
None of the above.

91.19.

If the marginal cost of production is zero, the producer of a good will

A.
sell at the highest possible price.
B.
produce the largest possible quantity.
C.
sell at the price where the elasticity of demand equals one.
D.
sell at the price where the elasticity of demand is greater than one.

91.20.

Consider two persons, X and Y, each of whom could produce two goods: fish and rice. When
we say Mr X has an absolute advantage over Mr Y in producing fish, we mean
A.
the marginal cost of producing fish is lower for Mr X than for Mr Y.
B.
Mr Xs maximum alternative sacrifice to produce one fish is less than that of Mr Y.
C.
Mr Xs fish/rice output ratio is higher than that of Mr Y.
D.
by putting in the same amount of work, Mr X could produce more fish than Mr Y.

91.21.
Y

U3
U 3 > U 2> U

U2

U1
X

From the above preference map for X and Y, we can deduce that:
A.
X is initially a good and then a bad; Y is a bad.
B.
X is initially a bad and then a good; Y is a good.
C.
Y is initially a good and then a bad; X is a bad.
D.
Y is initially a bad and then a good; X is a good.
91.22.

91.23.

Utility
A.
B.
C.
D.

is a measure of social welfare.

is a number assigned to rank options.
measures the satisfaction derived from consuming goods and services.
must be a negative number if we are consuming a bad.

One photographic studio makes money and its owner considers it a business; another studio

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loses money but its owner regards it as a hobby or consumption. This example shows that
A.
the one who loses is irrational.
B.
the photography industry may be sick and government actions should be in order.
C.
when non-pecuniary benefits exist, a firm may survive though losing money.
D.
human behaviour is unpredictable.
91.24.

God may have started out to create all men equal, but our parents intervened. Natural
differences in abilities, attributes and tastes go far to explain wage differences. Economics
tells us that
A.
the government should therefore set things right, and a socialist state is therefore
preferable.
B.
the best condition is from whom according to ability and to whom according to
needs.
C.
with equal education, people will have equal ability.
D.
with private property rights, the more productive your labour and the grater the
demand for your service relative to its supply, the higher your wage rate.

91.25.

If the law of diminishing marginal productivity did not hold, which of the following would be
true?
A.
With a small rose garden one could add successive increments of fertilizer to
produce enough roses for the world.
B.
One could produce everything at zero cost.
C.
By doubling the inputs one would get more than double the outputs.
D.
People would spend money carelessly.

91.26.

Which of the following about the market value of a piece of machinery is FALSE?
A.
It will increase if the scrap value is expected to rise.
B.
It will increase if the annual income generated by the machinery increases.
C.
It will increase if the rate of interest rises.
D.
It will increase if the cost of maintaining the machinery falls.

91.27.

Which of the following statements about costs is FALSE?

A.
Cost changes if and when the highest-valued alternative changes.
B.
When cost changes, the individuals behaviour changes.
C.
The cost of buying a car rises when the road conditions are such as to make driving
unpleasant.
D.
The more methods of production there are to choose from, the lower the unit cost of
production tends to be.

91.28

Which of the following is NOT an example of price discrimination?

A.
The Mass Transit Railway in Hong Kong charges higher fares at peak hours.
B.
For the same treatment, a doctor charges different fees for different patients.
C.
A private university in the United States grants different amounts of scholarship
funds to different students.
D.
The Kowloon-Canton Railway in Hong Kong charges lower fares for students than
for non-students.

91.29.

When piece rates instead of time rates are paid to workers, which of the following will be
FALSE?
A.
The factor market replaces the product market.
B.
The cost of checking idleness is lower with piece rates than with time rates.
C.
The cost of quality control is higher with piece rates than with time rates.
D.
Worker on piece rates tend to use their assigned machinery more intensively.

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91.30.

Which of the following statements about the firms is INCORRECT?

A.
Firms exist when more than one factor input is required to produce a given good.
B.
Firms emerge to reduce the number of market transactions.
C.
A firm ceases to expand when the cost of managerial coordination outweighs that of
market coordination.
D.
Within a firm, the determination of the highest-valued uses of factors is less
dependent on pricing.

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Section B
91.1.
What is the postulate of diminishing marginal rate of substitution? What would we observe in
the real world if this postulate does not hold, i.e., if the marginal rate of substitution is
increasing?
(10 marks)
91.2.
What is the main difference between profits and rents? Give two examples (one example
each) to illustrate this difference.
(10 marks)
91.3.
Whenever there is scarcity, there is competition. Defend this statement. Whenever there is
competition, there is discrimination. Defend this statement also.
(10 marks)
91.4.
It is often said that monopoly pricing leads to inefficiency in production. Why is this so? It is
also argued that monopoly pricing would be efficient if the cost of pricing (transacting) is zero.
Do you agree? Explain.
(10
marks)
91.5
Agricultural lands has different levels of fertility, i.e., given the same non-land inputs their
productivities are not the same. Why do farmers cultivate both superior and inferior land,
i.e., why do they not cultivate only superior land?
(10 marks)
Section C
91.6
What will be the effects of the following changes upon price? Explain your answers.

91.7.

91.8

(a)

If the price of gasoline rises sharply, what effect do you expect this increase to have
upon the prices of large versus small automobiles? And what would be effect be
upon the price of automobiles in general
(9 marks)

(b)

Satellite dishes have been introduced in some buildings in Hong Kong to help
receive foreign TV channels. Suppose the price of this satellite service is very high.
Would you expect the value of flats in buildings which offer the option of the
satellite service to be higher or lower , compared with similar flats in buildings which
do not offer this service?
(8 marks)

(c)

A price ceiling is imposed by the government on butter; i.e., the price of butter is
forcibly controlled to a level significantly below its market price. What would you
expect the effect to be upon the price of margarine?
(8 marks)

Gold was found in California in 1848, and the famous gold rush was on. It was reported that
gold miners thought that they would become very rich in the future, although the actual
incomes they earned were, at least in the beginning, very small. California at that time was
isolated from the east coast of the United States because the transcontinental railroad was not
yet built.
(a)

What would you expect the effects to be upon the real rate of interest when the bold
rush began? Explain.
(9 marks)

(b)

What would the effects of the change in interest rate be upon the consumption
behaviour of the gold miners and other citizens in California? Explain. (8 marks)

(c)

What would the effects be upon the interest rate and consumption pattern in
California after the transcontinental railroad was built a few years later? Explain.
(8 marks)

For each of the following, say whether it is True, False, or Uncertain. You
must explain your choice, otherwise you will receive no mark at all.
(a)

If a monopolist produces a smaller quantity of a product than a competitive industry

would, then by the same logic the monopolist would lend to produce a product of
lower quality.
(8 marks)

(b)

If at a prevailing equilibrium price every firm in a competitive industry is earning

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zero profit, then a fall of this price means that all firms will go out of business.
(8 marks)
(c)

91.9

Because of the difficulty of collecting payments from consumers, a public good (i.e.,
a good that can be consumed by many individuals at the same time) cannot be
produced by a private enterprise.
(8 marks)

In Hong Kong, taxi drivers typically rent taxis from taxi owners. In the 1960s, the taxi rental
arrangements were routinely on a share basis; for example, the taxi owner took 55 percent of
the daily gross income while the driver took the remaining 45 percent. However, since the
mid-1971s until the present day, taxi rental has typically been on a fixed rent basis, i.e., the
driver pays the owner a fixed sum of rent per day, and the driver keeps the difference between
the gross income and the fixed rent.
Under the earlier share-rent arrangement, the taxi owner paid for the cost of fuel; under the
present fixed-rent arrangement, the driver pays for the cost of fuel. In either case, maintenance
expenses are paid by the taxi owner.
(a)

Why was the fuel cost paid by the owner under the share-rent arrangement, but it is
now paid by the leasing driver under the fixed-rent arrangement? (Hint: the taxi
driver would often have to drive around in an empty taxi looking for customers.)
(9 marks)

(b)

The cost of fuel rose sharply after 1973. Could this explain the change in taxi rentals
from a share-rent basis to a fixed-rent basis? Explain.
(8 marks)

(c)

Why are maintenance expenses paid by the taxi owners and not by the leasing drivers?
(8 marks)

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Solution
SECTION A
1C

16 C

2B

17 A
18 A

3B
4D
5A
6B
7D
8D
9C
10 A
11 D
12 C
13 B
14 C
15 C

19 C
20 D
21 B
22 B
23 C
24 D
25 A
26 C
27 C
28 A
29 A
30 A

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