1990 Section A 90.1. The law of demand

A. is derived from the indifference curve analysis. B. is an assertion. C. is a tautology. D. does not apply in the case of conspicuous consumption.

90.2. Consumer equilibrium; means A. to each individual, the marginal valuation of a good is equal to its price. B. to each individual, the marginal valuation of every good is equal. C. to each individual, his total expenditure is equal to his total income. D. the marginal valuation of a good is the same for all consumers in the market.

90.3. The price of a good is said to be in equilibrium when A. it is determined in the long run. B. it is observed in the market. C. it will not often fluctuate. D. we have sufficient information to explain its existence.

90.4. Economic rent A. is income earned by the owner of land. B. may exist in any economic resource. C. is a part of profit. D. will be eliminated by competition.

90.5 Which of the following is true of profit? A. Profit is an unexpected gain in wealth. B. A monopolist will earn a higher profit than a competitor. C. The tax base for the Hong Kong governments profit tax is what we mean by profit. D. Profit is interest payment on capital.

90.6. The long-run equilibrium of a price-takers market is characterized by

A. no price fluctuation from time to time. B. a lower price at the margin than under a price-searchers market, irrespective of the

pricing structure. C. no entry of new firms into the market. D. All of the above.

90.7. If a forest is privately-owned and is used for the production of lumber, then A. the trees will be cut earlier if the interest rate falls. B. the trees will not be cut until they reach maturity. C. the trees will not be cut if their standing value is growing at a rate higher than the

rate of interest. D. the possibility of replanting the forest will not affect the timing of the cutting of the

trees. 90.8 Which of the following would raise the average cost of production?

(1) It is necessary to speed up the rate of production at the request of buyers. (2) There is a rise in the property value of the factory building used for production. (3) The market interest rate is increased. A. (1) and (2) only B. (1) and (3) only C. (2) and (3) only D. (1), (2) and (3) only

90.9. Suppose land and labour are the only factors involved in farming. If the use of land for farming is reduced by law, then the marginal product of land will and that of labour will .

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A. rise, rise B. fall, fall C. rise, fall D. fall, rise

90.10. The presence of transaction costs implies A. the price mechanism is always the most efficient allocative device. B. the firm will emerge to organize production. C. the product market and the factor market are not separable. D. some resources will be misallocated.

90.11. In a certain garment factory, workers are paid by piece rates while the foreman is paid a salary. This is because A. for different performances, there are different costs associated with monitoring inputs

and outputs. B. garment workers have a greater tendency to shirk working than workers in other

industries. C. a higher-ranking post is typically paid by time rates. D. All of the above.

90.12. Suppose only fixed costs exist in operating the Cross Harbour Tunnel. To maximise wealth, the tunnel company should charge a price where the market demand is A. elastic. B. inelastic. C. unitarily elastic. D. infinitely elastic.

90.13 In the short run, assuming one fixed factor of production and one variable factor, then, A. when the average product of the variable factor rises, the average variable cost falls. B. when the average product of the variable factor falls, the average cost rises. C. when the marginal product of the variable factor rises, the marginal cost rises. D. when the total product of the variable factor rises, the total cost falls.

90.14 The following diagram shows a rise in demand from D1 to D2 in a price-searchers market. If the marginal cost is constant, then

Price

QuantityD D1 2

A. the price will rise. B. the price will fall. C. the price will remain unchanged.

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D. the price cannot be determined.

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90.15. A monopolist practising perfect price discrimination is said to be economically efficient because A. output is increased and sold at a lower marginal price. B. the consumer surplus is fully extracted. C. the marginal use value of the output equals its marginal cost of production D. the average cost of production is at a minimum.

90.16. In 1989, the Light Transit System in the New Territories proposed to increase its toll in order to raise revenue. No change in demand was expected. If the proposed increase in toll would in fact lead to an increase in revenue, then before the toll increase, A. the marginal revenue must be negative. B. the demand must be inelastic at the existing toll. C. the Light Transit System must not be maximizing its wealth. D. All of the above.

90.17. The prohibition of blood sales in the free market A. ensures a higher quality of blood for use in transfusions. B. tends to reduce the variation in the quality of blood for use in transfusions. C. restraints the monopoly power of doctors. D. implies that poor people will be protected from exploitation in the sale of their blood.

90.18. The Open Learning Institute accepted only 3 000 students out of 60 000 applicants. Which of the following methods of allocating the places would be discriminatory? A. First come, first served. B. Raising the entrance requirements until only 3 000 applicants were eligible. C. Random selection by computer. D. All of the above.

90.19. The Open Learning Institute accepted only 3 000 students out of 60 000 applicants. If admission were randomly selected, but afterwards the rights to places were allowed to be freely bought and sold in the market place, then there would have been A. a redistribution of places to those who value open education the most. B. a redistribution of places to those who have the highest academic qualifications. C. a redistribution of places to those who have higher incomes. D. no redistribution of places.

90.20 Which of the following shows the shape of an indifference curve between a good and a bad?

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A. B.

C. D.

Bad Bad

Bad Bad

Good

Good

Good

Good

U

U U

U

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90.21. Which of the following describe(s) a shortage? A. A shortage exists whenever the price is fixed by the government. B. A shortage exists when a queue is found. C. A shortage exists when, at the given price, the quantity demanded exceeds the

quantity supplied. D. All of the above.

90.22. Which of the following statements about economic theory is correct? A. A theory should be abandoned when its assumptions are found to be unrealistic. B. A theory is useless when it cannot be refuted by facts. C. A useful theory may not have testable implications. D. It is important to know whether a theory is right or wrong.

90.23 The convexity of the indifference curves to the origin A. is asserted by economists. B. has no testable implications. C. is inconsistent with the Giffen Paradox. D. is inconsistent with the law of demand.

90.24. A unit tax is levied on a price-takers market. The burden of this tax will fall

A. entirely on the producer. B. entirely on the consumer. C. more on the consumer if demand is more elastic. D. more on the producer if supply is more inelastic.

90.25. Suppose a factory pollutes the environment. If the right to pollute is well-defined and transferable, A. the level of pollution is subject to market contracting. B. pollution will be eliminated. C. the factory will necessarily increase its production. D. then, on efficiency grounds, the government should intervene when the right to

pollute is not transacted.

90.26. For an exchange between two individuals to take place, A. each individual must have a surplus in one good and a shortage in another good. B. each individual must have different consumer surpluses. C. the transaction costs must be zero. D. each individual must have different marginal valuations of the goods before the

exchange.

90.27. Which of the following about an investment decision is correct? A. The cost of an investment project will be lowered if it is completed earlier. B. The more one has invested in a project, the more reluctant one is to abandon it. C. Given an investment project, wealth maximization may not imply cost minimization. D. The net present value of an investment project is the key factor in an investment

decision.

90.28 Which of the following is NOT an example of price discrimination? A. A university charges over-aged students higher tuition fees. B. An electric power company charges more for electricity used during peak hours. C. The Mass Transit Railway sells tickets to students at a discount. D. A dentist charges different patients different fees for the same treatment.

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90.29. In an ocean which is NOT privately-owned, fish A. are a free good, because they are so abundant that more of them are not wanted. B. are not an economic good if the fishermen are not allowed by the government to

compete among themselves. C. are a public good, because the fish are publicly-owned. D. are an economic good, because we are willing to sacrifice something in exchange for

the fish.

90.30. A divergence between private and social costs is NOT wasteful if A. the majority of people benefit from the divergence. B. the cost of eliminating the divergence is greater than the cost of the divergence itself. C. people who suffer from the divergence choose not to complain to the government. D. the divergence is not expected to last for a long time.

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Section B 90.1. The Giffen Paradox is logically inconsistent with the law of demand. Do you agree with this

statement? (10 marks) 90.2. Capital, land and labour are all capital. Is this statement correct? Explain your answer. If

your answer is yes, then why is capital often treated as neither land nor labour? (10 marks) 90.3. It is sometimes said that the firm replaces the market. If there is such a replacement, explain

its nature. If there is not, why not? (10 marks) 90.4. What is utility? Is it necessary for economists to know that people are in fact maximizing

utility?. (10 marks)

90.5 What is competition? In what sense does competition exist under a monopoly? (10 marks) Section C 90.6 In Beijing, cabbage is harvested every November, and citizens buy and store this vegetable

through the cold winter until early spring in March. The government, serving as the middleman, purchases the cabbage from peasants at a set price and resells it to citizens at another set price. In November 1988, there was a severe cabbage shortage in Beijing. The mayor, following the governments planning principle, agreed to raise the purchase price the following year and required the peasants to devote more land to cabbage-growing. In November 1989, there was a huge cabbage surplus in Beijing, with large quantities rotting in the streets and in the fields. (a) Why was there a shortage of cabbage in Beijing in November, 1988? It is said that

the average citizen consumes about 40 kilograms per season. If the available supply was only 30 kilograms per citizen, would it be easy to eliminate the shortage instantly? Explain. (8 marks)

(b) Why was there a surplus of cabbage in Beijing in November, 1989? What would you

propose to eliminate the surplus quickly. (8 marks) (c) The mayor of Beijing, realizing the huge surplus problem in November 1989, urged

the citizens to demonstrate their patriotism by buying more cabbage. Unfortunately, the citizens seemed to lack this kind of patriotism. What methods would you suggest to encourage citizens to demonstrate their patriotism by buying more cabbage? In what sense is the free market the same as any method of encouraging patriotism that you suggest? (9 marks)

90.7. In the 14th century, the Black Death (Bubonic Plague) killed a large number of the population

of England (possibly 1/3) within three years.

(a) It was allegedly observed that in the ensuing years, there was a strong tendency for real wages to rise and land rents to fall. Is this consistent with economic theory? Explain, in term of an aggregate marginal productivity schedule for labour. (Note that production of the time was largely confined to the use of land and labour.) (8 marks)

(b) It was also allegedly observed that amidst the evidence of economic decline

(abandonment of marginal lands, reduction in trade), there were indications of a rise in the general standard of living. Is this consistent with economic theory? Explain with the aid of a diagram. (8 marks)

(c) The population density in England today is far higher than that in the 14th century,

and yet their general living standard today is also far higher. How can you reconcile this with (a) and (b) above? (9 marks)

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90.8 For the year 302, historical records show that the Emperors at that time commanded that there should be cheapness that is, there should be maximum prices for foodstuffs. In introducing the law the Emperors expressed themselves as follows: The price of things bought in the markets or brought daily into the cities by merchants has far exceeded all limits that greed is restrained neither by rich harvests nor by abundance of goods. Unprincipled greed appears wherever our armies march, ... with the result that prices of foodstuffs rise not only fourfold and eightfold, but exceed all measure. Frequently, a single purchase robs the soldier of his pay. (Burckhardt, The Age of Constantine the Great)

(a) By means of simple diagram, explain the rise in the prices of foodstuffs due to

changes of supply and demand. (7 marks)

(b) How would you measure the degree of greed of the food merchants? (4 marks) (c) Was it likely that the prices exceed all measure? Why or why not? (4 marks) (d) What would be the consequences of the law of setting maximum prices; that is, what

are some of the phenomena we expect to observe as the result of the price control? (10 marks)

90.9. In the diagram below, dA and dB are the demand curves of a good of individuals A and B

respectively. The total quantity of supply is q which, as indicated by SB, belongs to individual B entirely. In the absence of market exchange, the marginal valuation of B for the last unit is ov, and the marginal valuation of A is ov. (a) Indicate in the diagram the equilibrium price of exchange and label it p. State the

condition of market equilibrium. (6 marks)

dd

0 q '

Sv 'Price

Quantity

B

A

B

v

(b) At this market equilibrium, indicate in the diagram (i) the quantity A is buying and

label it qA and (ii) the quantity B is keeping for himself and label it qB. Are the two quantities equal? If so, why? If not, why not? (6 marks)

(c) Indicate in the diagram )by the use of shaded areas) the gains from exchange for

individuals A and B. Explain. (7 marks) (d) Derive the market demand, D, by adding dA and dB in the diagram. Explain. (6 marks)

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Solution SECTION A

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

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SolutionSECTION A