F.5 Economics

Chp 12 Efficiency, Equity and the Role of

Government

(Past Papers)

Name: ___________________

Class: __________( )

Group X_____

F.5_Efficiency, Equity and the Role of Government_Past Papers 1

Paper 1 MC Questions:

1.

(Sample paper Q19) Ans: B

2.

(Practice paper Q18) Ans: B

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3.

(2012 Q20) Ans: D

4. Which of the following are possible causes of income inequality among

individuals?

(1) difference in race

(2) difference in capital ownership

(c) difference in health

A. (1) and (2) only

B. (1) and (3) only

C. (2) and (3) only

D. (1), (2) and (3) (2012 Q21)

5. Suppose the market equilibrium output level is greater than the efficient output

level. It implies

A. total social surplus will increase if output is reduced towards the efficient

output level.

B. at the equilibrium output level, marginal benefit is greater than marginal

cost.

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C. the sum of consumer surplus and producer surplus is maximized as the

market output level satisfies the equilibrium condition.

D. government intervention is necessary to reduce output as there is over-

production. (2013 Q18)

6. Refer to the following demand-supply diagram of a good with the government

setting a quota at Q1.

Which of the following will be the result of a reduction in quota on the good?

(1) The total expenditure on the good may increase or decrease.

(2) The consumer surplus will decrease.

(3) The total social surplus may increase or decrease.

A. (1) only

B. (1) and (2) only

C. (2) and (3) only

D. (1), (2) and (3) only (2013 Q19)

7. A beekeeper keeps the bees for their honey. The bee-keeping benefits the farmers

in the orchard nearby because the bees help pollinate the fruits in the orchard.

Which of the following statements about this case is correct?

A. There will be a divergence between private and social benefits and the

honey is over-produced.

B. The beekeeper should be subsidized by the government to improve

economic efficiency.

C. If the value of honey is higher than the value of fruits, there is no need for

the government to intervene to correct the externality.

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D. There will be no divergence between private and social benefits if the

orchard nearby is owned by the beekeeper. (2013 Q20)

8. Koreans pop singers are becoming more popular in Hong Kong. To these singers,

which of the following are their private benefits?

(1) the rise in royalties from the sales of their albums

(2) the rise in sales revenue of Korean-designed fashion

(3) the rise in the number of tourists visiting Korea

(4) the rise in revenue shared from their concerts held in Hong Kong

A. (1) and (3) only

B. (1) and (4) only

C. (2) and (3) only

D. (2) and (4) only (2014 Q18)

9. Which of the following are ways to lessen the problem of divergence between

private and social costs in Hong Kong?

(1) to collect a sewage charge

(2) to collect a university tuition fee

(3) to collect a charge on electricity

(4) to collect a levy on plastic bags

A. (1) and (3) only

B. (1) and (4) only

C. (2) and (3) only

D. (2) and (4) only (2014 Q19)

10. Which of the following policies can reduce the Gini coefficient based on post-

social transfer monthly household income in Hong Kong?

A. to raise the standard tax rate on salaries tax

B. to reduce the marginal tax rate on salaries tax

C. to reduce the amount of Comprehensive Social Security Assistance

Schemes

D. to grant an equal sum of money to the Mandatory provident Fund accounts

of every employee (2014 Q20)

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11. Which of the following are results of the government lowering an effective price

ceiling on a good?

(1) a reduction in the producer surplus

(2) an increase in excess demand

(3) an increase in the total sales revenue if the demand is elastic

A. (1) and (2) only

B. (1) and (3) only

C. (2) and (3) only

D. (1), (2) and (3) (2014 Q21)

12. The imposition of a per-unit sales tax on cosmetic will

A. reduce the total expenditure on cosmetics.

B. reduce the total sales revenue (net-of-the-tax)

C. increase the total social surplus in the cosmetics market.

D. increase the producer surplus in the cosmetics market. (2014 Q22)

13. Suppose the supply curves of cars and petrol are upward-sloping. If the

government imposes an effective quota on the production of cars,

A. the total social surplus in the car market will increase.

B. the producer surplus in the car market will decrease.

C. the total social surplus in the petrol market will decrease.

D. the consumer surplus in the petrol market will increase. (2014 Q23)

Paper II Conventional Questions

1. Give TWO reasons for the existence of income inequality in an economy.

(4 marks) (Sample paper Q2)

- Differences in human capital: well-educated people may earn a higher income

- Discrimination: people of certain gender/race may earn a lower income because of gender/racial discrimination.

- Any other possible reasons 2@, max: 4

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2. Under the School Textbook Assistance Scheme (STAS), needy students are granted subsidies to

cover the costs of textbooks and miscellaneous school-related expenses. Explain how STAS can

enhance equity in Hong Kong society.

(4 marks) (PP Q11d)

- The STAS increases the income of the needy students’ families while the rich families cannot enjoy this benefit.

− The STAS will help equalize opportunities as it helps the needy students further their studies.

− Education can increase future income of the needy students so it may help narrow the income gap over time.

− Any other relevant point (2@; max: 4)

3. According to the report of the United States in 2008, the Gini coefficient of Hong

Kong and Beijing were 0.53 and 0.22 respectively.

(a) Was the income gap between the rich and the poor in Hong Kong wider or

narrower than that in Beijing? (1 mark)

(b) Explain how an increase in the standard tax rate of salaries tax will affect

the post-tax Gini coefficient of Hong Kong. (3 marks) (2012 Q4)

(a) Wider (1)(b) Lower, because (1)

higher income group has a lower post-tax income while the income of lower income group remains unchanged. (2)

4. In 2011, the Financial Secretary announced the “Scheme $6000” which provides to each Hong

Kong permanent resident who is 18 years old or above.

(b) Do you think that the government should introduce the “Scheme $6000” to improve equity in

the Hong Kong society? Explain.

(4 marks) (2012 Q10b)

- Equity is a subjective concept that involves value judgements / different people use different standards of equity (1)

- Yes, because the $6000 results in a higher percentage increase in income of the poor. (2)

- No, as it does not help equalize opportunities. Relative to the rich, the poor do not get more resources to improve their productivity / increase future income. (2)

- No, it is not equalizing outcome as not everyone can benefit from the scheme, e.g. non-permanent residents and residents who are below 18 years old are not eligible for the $6000. (2) (max: 4)

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5.

(a) Construction, since the Gini coefficient is lower. (1)

Reasons:

1. The entry to a particular occupation is closely associated with a person’s

human capital, which tends to be more homogeneous among the construction

workers than among finance professionals. (2)

2. The construction industry often pays their workers by times rates, which are

more or less uniform across workers. In addition to basic salaries,

compensions to the employees of financing, insurance, real estate and

business services often include performance-based commissions, bonuses

and profit-sharing, which may result in a greater diversity of income within

this industry. (2) (max: 3)

(b) How may the data given in Table 1 and 2 help explain the change in the income

inequality of Hong Kong as reflected in Table 3? (4 marks) (2013 Q7)

The Gini coefficient, which reflects the degree of income inequality, has increased in

the HK economy as a whole. (1)

Possible reasons:

- As shown in Table 1, income inequality in both the construction and financing,

insurance, real estate and business services industries has increased. Other things

being equal, this would contribute to the increase in the income inequality in the entire

economy. (2)

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- As shown in Table 2, there is an increase in the proportion of working population in

the industry with a larger disparity of income (i.e. financing, insurance, real estate and

business services) and a decrease in the industry with a smaller disparity of income

(i.e. construction). Other things being equal, this changing pattern of employment

distribution across the two industries would contribute to the increase in the income

inequality in the entire economy. (2) (max: 3)

6. The government has launched the “Work Incentive Transport Subsidy Scheme”…

(b) Discuss the effects of the scheme on

(ii) income inequality (3 marks) (2013 Q11)

It helps to reduce the income inequality. It helps to equalize outcome as it provides

extra money for the lower-income group only./ It increases their opportunity of

finding a job with higher income because they can travel farther away from their

residential area. (3)

7. Figure 1 shows the market supply and demand curves of Good X. Suppose the

government raises the price floor from Pa to Pb.

With the aid of Figure 1, explain whether the rise in the price floor could

enhance efficiency. (6 marks) (2014 Q3)

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