1987

SECTION A 87.1 Two firms X and Y have identical total variable cost functions, but the total fixed cost of X is

higher than that of Y by $25 000, then A. Xs marginal cost curve is parallel to but higher than Ys. B. Xs marginal cost curve is parallel to but lower than Ys. C. Xs and Ys marginal cost curves are not parallel. D. both X and Y have identical marginal cost curves.

87.2 The theoretical possibility of the Giffen paradox in the indifference curve analysis A. implies that the paradox exits in reality. B. means that the law of demand is asserted rather than derived. C. implies that the demand curve cannot be derived. D. none of the above

87.3 Price controls A. reduce competition. B. bring about other form of non-price competition. C. result in a more equitable distribution of income. D. help to stabilize supplies.

87.4 Profits are earned by A. an owner of a resource whose ability is superior. B. an owner of a resource the value of which has increased unexpectedly. C. a monopolist who sets a price above the marginal cost. D. a producer whose marginal is above the average cost.

87.5 When economists say that a competitive firm faces a perfectly elastic demand curve, the mean A. the firm will sell an infinite quantity of output at the going price. B. the law of demand is rejected. C. all variations in output the firm can make will leave the price unaffected. D. the good is not a necessity because the quantity demanded will be zero at a higher price.

87.6 Scarcity implies A. there is no such thing as a free good. B. competition is inevitable. C. a lack of proper planning. D. price is the only viable criterion for the allocation of resources.

87.7 If Mr A spends all his income on records no matter what the price is, then his demand for records is A. inelastic. B. perfectly inelastic. C. unitarily elastic. D. perfectly elastic.

87.8 The indifference curves of an individual do not intersect because A. that would imply inconsistency in choice making. B. they are downward sloping. C. they represent different levels of satisfaction. D. they are convex to the origin.

87.9 Utility A. is observable.

B. measures the satisfaction obtained from the consumption of goods. C. is the assignment of numbers to rank options. D. is a measure of welfare.

87.10 Which of the following statements about economic good is FALSE? A. An economic good is a good for which the amount available is less than the amount

people want at zero price. B. An economic good is a good that is subject to competition. C. An economic good is a good for which more of it is not preferred. D. None of the above.

87.11 When the interest rate increases from 10% to 15%, the owner of a perpetual bond, receiving $450 each year, will A. enjoy an increase in wealth of $1 500. B. suffer a fall in wealth of $1 500. C. enjoy an increase in wealth of $2 250. D. suffer a fall in wealth of $2 250.

87.12 Which one of the following statements about price discrimination is INCORRECT? A. Price discrimination allows a producer to capture some or all of the consumer surplus. B. A monopolist tends to produce a larger output when practising price discrimination than

that when he is using only one price. C. When the market demand facing a monopolist lies entirely below the average cost curve,

price discrimination may provide sufficient revenue to cover the cost of production. D. Price discrimination can only occur if there is only one seller of the good.

87.13 Which one of the following statements about monopoly is TRUE? A. A monopolist may suffer losses. B. Price discrimination is always less efficient than the use of one single price. C. A monopolist always produces a smaller output than if the same good is produced under

competition. D. Monopoly will no exist without government protection.

87.14 The increase in pornographic magazines in Hong Kong suggests that A. there is too much freedom in Hong Kong. B. the Coase Theorem fails. C. the market can never resolve social issues. D. none of the above

87.15 Some private housing developers in Hong Kong try to sell private housing estates by ballot, in addition to their asking prices. This indicates that A. non-price competition is chosen to complement the market solution. B. the listed price of that particular private housing is set below the market-clearing price. C. a shortage is resolved by the ballot. D. all of the above.

87.16 The demand curve for labour corresponds to A. the entire marginal revenue product curve. B. the entire average revenue product curve. C. the marginal revenue product curve below the maximum of the average revenue product

curve. D. the average revenue product curve below the maximum of the marginal revenue product

curve.

87.17 A newspaper seller buys newspapers for $0.70 each and sells them for $1.00. Which one of the following statements about the transaction is TRUE? A. The newspaper seller gets $0.30 per script that otherwise would go to the publisher. B. The newspaper sellers costs in making the transaction may be higher than $0.30. C. Without the newspaper seller, the transaction costs will be at least $0.30 per script. D. Without the newspaper seller, the cost of the newspaper to the consumer would be less

than $1.00.

87.18 Which one of the following statements about competition is FALSE? A. Waiting in line is a form of competition. B. The rules of competition define the criteria that determine who wins and who loses. C. Price is the main criterion of competition in a free enterprise economy. D. There is no competition in a socialist economy because resource allocation is determined

by the government.

87.19 A price-taking firm differs from a price-searcher in that A. the price-searcher tends to make a greater profit. B. the price-takers marginal revenue curve lies below its average revenue curve. C. the demand curve facing the price-searcher is downward sloping. D. the price-taking firm earns zero profit in the short run.

87.20 Paying workers by the hour means A. the workers are paid according to their contributions. B. the factor market and the product market become separate. C. the workers will work harder than if they are paid by piece rates. D. the law of diminishing returns does not hold.

87.21 Constant returns to scale means A. when all factors of production are increased, output will also increase. B. when all factors of production are increased, output will remain constant. C. when all factors of production are increased by the same percentage, output will increase

by the same percentage. D. when some factors of production are increased and others held constant, output will

increase at a constant rate.

87.22 In beauty (hairdressing) salons customers often wait for their turns to be attended to. This phenomenon is explained by the fact that A. the cost of obtaining instant service is so high that customers in general are not willing to

pay. B. the prices of hairdressing services are not set to maximize wealth. C. disequilibrium exists in the hairdressing market. D. the wage rates of hairdressers are rising.

87.23 Firms exist because A. they can provide job opportunities to workers who otherwise would be unemployed. B. employees enjoy being told what to do. C. it is costly to use the price system. D. economic organizations are supported by the government.

87.24 Which of the following statements about interest is FALSE? A. Interest is the price of earlier availability. B. The higher the rate of interest, the lower will be the present value of a given income

stream. C. Interest will not exist without money. D. Interest is not part of income, but the whole of it.

87.25 Suppose in a price-taking industry, the market price of a product is $6. A firm is producing output at the point where the average total cost equals the marginal cost, both of which are $8. The average variable cost is $5. In order to maximize wealth, the firm will A. keep on producing but reduce its output. B. produce zero output. C. leave its output unchanged. D. increase its selling price.

87.26 Middlemen exist in the market because A. both the buyers and the sellers want them to exist. B. there is an information cost in the market. C. society gains from having middlemen. D. all of the above.

87.27 Suppose there were a law of increasing marginal personal use value, i.e., the more the consumer had of a good, the higher its marginal personal use valuation. The economic theory would predict that the consumer would A. refuse to purchase any goods. B. spend all his income on only one good. C. allocate his income until the marginal use values of the last dollar spent on each good are

equal. D. buy more than one good and obtain the same total use value from each good purchased.

87.28 A British economist wrote: The effect of a tax on a commodity might seem at first sight to be an advance in price to the consumer. But an advance in price will diminish the demand. And a reduced demand will send the price down again. It is not certain, therefore, after all that the tax will really raise the price. A. The statement is false because it is rejected by evidence. B. The statement is false because the decrease in demand will not lead to a fall in price. C. The statement is false because the supply of the commodity may be perfectly inelastic. D. None of the above.

87.29 An economic theory is useful or testable if A. it is potentially refutable by facts. B. it is logically consistent. C. it is not always true. D. all of the above.

87.30 For some more of any good, a person is always willing to sacrifice some of any one of other goods. A. The statement is the law of demand. B. The statement describes the convexity of the indifference curve. C. The statement is the postulate of substitution. D. The statement describes the proposition of diminishing marginal value.

SECTION B 87.1. What is the difference between maximizing income and maximizing wealth? (8 marks)

87.2 Whenever there is no choice, there is no cost. Do you agree with this statement? Why or why not?

(8 marks)

87.3 Is monopoly rent a profit? Why or why not? (8 marks)

87.4 Under long-run competitive equilibrium, a marginal firm operates at a point when the price of the product equals the average cost. Why does this firm stay in business? (8 marks)

87.5 Is labour a capital asset? Explain. (8 marks) 87.6 Whatever an individual does, he is maximizing utility. Is this the purpose of using utility theory

to explain behaviour? Why or why not? (8 marks) 87.7 In Hong Kong, jewellery shops located in the popular tourist areas often have marked-up prices

for their products amounting to about five times the prices they are willing to sell.

(a) If, as a result of this marking-up practice, different customers end up paying substantially different prices for similar or even the same products in the same store, would you say that price discrimination exists? Why or why not? (8 marks)

(b) Jewellery shops located in areas with few tourists have marked-up prices no more than

double the prices they are willing to sell. How would you explain the difference in the marking-up practices between the tourist and the non-tourist areas? (i.e., how would you explain that the difference between the marked-up price and the willing-to-sell price is larger in the tourist area?) (8 marks)

(c) If tourists in general pay higher prices for similar products than local residents do, does it

imply that the tourists have lower elasticities of demand? (8 marks) 87.8 The Hong Kong government is planning to build a highway along the seashore from Central to

Aberdeen (as shown in the diagram below), and they also plan to charge a substantial toll for its use. This highway will of course create nuisance to the nearby housing properties, and the traffic now using Pokfulam Road as well as the Aberdeen Tunnel will be reduced.

(a) In calculating the social cost of the proposed highway, would you take into consideration the fall in the value of the properties nearby? Explain. (8 marks)

(b) At present Pokfulam Road is toll free and has traffic congestion. If the proposed highway

leads to a reduction in traffic congestion on Pokfulam Road, does this reduction imply an increase or a decrease in social gain? (8 marks)

(c) At present the Aberdeen Tunnel charges a toll and has no traffic congestion. If the

proposed highway leads to a reduction in traffic using the tunnel, does this reduction imply an increase or a decrease in social gain? (8 marks)

87.9 Use indifference curves to show, in comparison with an original equilibrium situation for an

individual consumer, the effects on the quantity demanded of a commodity X in the event of

(a) a fall in the price of X, holding money income constant. (6 marks)

(b) a change in preference making the consumer more desirous of consuming X than before, holding relative prices and money income constant. (6 marks)

(c) a requirement that a license be secured, involving a lump-sum payment to the

government independent of the quantity of X taken, as a condition of being permitted to purchase X at the previous market price. (6 marks)

(d) the payment of membership fee which entitles the consumer to purchase X at a lower

price, while leaving him with just enough money to purchase the original basket of goods. (6 marks)

87.10 A student entering the University of Hong Kong will have no income for three years, but after

graduation his income will rise at a fairly rapid rate for years thereafter. As an alternative, this student could go out to work immediately after matriculation, and his initial income will be considerably higher than if he enters the University, although his income through time will increase at a slower rate. Assume wealth maximization is the only objective of the student.

(a) If the total income in life of getting a university education is greater than the of not entering the university, will the student always choose university education? Explain. (8 marks)

(b) If the total income in life is higher without the university education, will the student ever

choose to enter the university? Explain. (8 marks)

(c) Will your answers in (a) and (b) be different if the university makes available low-interest loans to students? Explain. (8 marks)

Solution SECTION A

1D 16C 2B 17C 3B 18D 4B 19C 5C 20B 6B 21C 7C 22A 8A 23C 9C 24C 10C 25A 11B 26D 12D 27B 13A 28D 14D 29D 15D 30C

SECTION BSolutionSECTION A