Suggested answers to Mock Paper (2013 February)

Paper 1 (40 marks)

1. A 6. A 11. B 16. D 21. C 26. B 31. B 36. C
2. D 7. D 12. C 17. B 22. D 27. D 32. B 37. A
3. C 8. D 13. A 18. D 23. A 28. B 33. C 38. A
4. D 9. A 14. C 19. B 24. B 29. D 34. B 39. D
5. D 10. C 15. C 20. A 25. C 30. C 35. A 40. D

Paper 2
Section A

1. a. The value of being a teacher. (2 marks)

b. If students are more obedient, it means the value of being a teacher increases.
Therefore, Samuel’s cost of being an accountant increases. (2 marks)
c. When Samuel buys clothes now, he has to pay interest, which can be used for future
consumption. Thus, interest is the cost of earlier availability of goods in this case.
(2 marks)

2. a. i. Capital (1 mark)
ii. Capital (1 mark)
ii. Labour (1 mark)
b. Possible reasons include:
• Complex organisation of the expanded restaurant may delay decisions, block
communication and weaken coordination.
• The restaurant may expand its scale through borrowing. Lenders may charge the
restaurant a higher interest rate when the restaurant’s loans increase.
• The supply of some inputs is limited. When the restaurant continuously increases
its inputs, it may have to purchase inputs from more expensive sources or use
costlier substitutes.
(Any TWO of the above or other reasonable answers. 2 marks × 2 = 4 marks)

NSS Exploring Economics 1 © Pearson Education Asia Limited 2013

Mock Paper (2013 February) (Suggested answers)
 c. Features (of monopolistic competition) include:
• Large number of sellers
• Free entry
• Heterogeneous products
• Imperfect information
• Price searching behaviour
• Both price and non-price competition may occur
(Any TWO of the above or other reasonable answers. 1 mark × 2 = 2 marks)

3. The law of diminishing marginal returns states that when a variable factor is added
continuously to a given quantity of fixed factors, the marginal return or marginal product
(of the variable factor) will eventually decrease, ceteris paribus. (2 marks)
The data illustrate the law as the marginal product decreases. (1 mark)

Machines (units) Marginal output (units)

1 100
2 110
3 115
4 100
(2 marks)

4. Indicate in the diagram:

• Decrease in the demand for digital cameras (1 mark)
• Decrease in the quantity transacted and price of digital cameras (1 mark)
• Original producer surplus (Area abe) > New producer surplus (Area cde) (1 mark)

Digital cameras
Unit price ($) Original producer surplus = Area abe
S New producer surplus = Area cde

a b
P1

c d
P2
D1

e D2
Quantity
0 Q2 Q1

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Mock Paper (2013 February) (Suggested answers)
 Verbal elaboration:
The price of memory cards increases as the sales tax decreases the supply of memory
cards. (1 mark)
The demand for digital cameras decreases as memory cards are a complement of digital
cameras. (1 mark)
Both the price and quantity transacted of digital cameras decrease. As a result, the
producer surplus decreases from Area abe to Area cde. (2 marks)

5. When parallel traders gather at the MTR stations to divide up and distribute their goods,
they only consider their private costs. (1 mark)
However, their activities adversely affect other MTR users and residents nearby, such as
blocking their way and worsening the environmental hygiene in nearby areas. (1 mark)
Since parallel traders do not compensate the parties who are adversely affected, their
activities impose an external cost on other people. As a result, there is a divergence
between private and social costs. (2 marks)

6. a. Uses include:
• To assess the economic performance of an economy
• To reflect the economic welfare of an economy
• To facilitate international comparison
• To provide information for the government in formulating economic policies
• To help firms make production and investment plans
(Any TWO of the above or other reasonable answers. 1 mark × 2 = 2 marks)
b. The costs to the unemployed include:
• Lower living standard
• Family problems
• Loss of skills
• Loss of self-esteem
(Any TWO of the above or other reasonable answers. 1 mark × 2 = 2 marks)
c. Recovery (1 mark)

7. a. GNP at current market prices

= $[200 + (50 + 12) + 100 – 5 + 8] billion = $365 billion (3 marks)
b. Possible reasons include:
• The supermarket chains sell second-hand products.
• Some of the revenue comes from the sale of past inventory.
• Intermediate consumption is involved.
(ONE of the above or other reasonable answer. 2 marks)

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Mock Paper (2013 February) (Suggested answers)
8. a. Required reserve ratio = $10/$100 = 10% (2 marks)
b. i. Maximum change in money supply = $20 ×1/10% = +$200 (2 marks)
ii. Percentage change in money supply = $200/$100 = +200% (1 mark)
According to the quantity theory of money, the percentage change in nominal
GDP must be equal to the percentage change in money supply (+200%); thus the
percentage change in nominal GDP is +200%. (2 marks)
c. The monetary policies include:
• Buying government bonds from the market
• Lowering the discount rate
• Lowering the required reserve ratio
(Any TWO of the above or other reasonable answers. 1 mark × 2 = 2 marks)

Section B

9. a. The shareholders of a limited company enjoy limited liability. Their losses are
confined to the amount they have invested in the company. (2 marks)
A limited company is an independent legal entity with a separate existence from its
owners and it assumes all responsibilities. (2 marks)
Ownership and management of a limited company are often separated. Most
shareholders do not participate in the management of the company. (2 marks)
b. i. Specialisation / (complex) division of labour (1 mark)
ii. The following are possible reasons why division of labour can increase labour
productivity:
 Assign the right person to do the right job
 Practice makes perfect
 Save time in moving around jobs
 Capital goods are used efficiently
(Any TWO of the above or other reasonable answers with brief explanation.
2 marks × 2 = 4 marks)
c. No. (1 mark)
The company provides no more beauty care services in the current year as it has gone
bankrupt. (2 marks)

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Mock Paper (2013 February) (Suggested answers)
10. a. Income distribution can be measured by:
• Income share
• Lorenz curve
• Gini coefficient
(Any TWO of the above. 1 mark × 2 = 2 marks)
b. The sources of income equality include:
• Labour quality differences: Better workers normally earn higher incomes.
• Working condition differences: Poor working conditions are generally
compensated for by higher wages.
• Differences in human capital: Workers who invest more to acquire better
education and training can generally earn higher incomes.
• Age differences: More experienced workers can generally earn higher incomes.
• Monopoly power and political power: Workers with monopoly power or political
power can earn higher incomes.
(Any TWO of the above or other reasonable answers with explanation. 2 marks × 2 =
4 marks)
c. i. Equalising income (1 mark)
ii. Policy concerns include:
• Different principles of equity: Equity involves normative judgements. There is
no general agreement on what principle a government should adopt to achieve
equity.
• Trade-off between efficiency and equity: There is often a trade-off between
efficiency and equity in income distribution.
(Accept other reasonable answers with explanation. 2 marks × 2 = 4 marks)

11. a. Indicate in the diagram:

 A vertical money supply curve shifts rightwards. (1 mark)
 Nominal interest rate decreases while the quantity of money increases. (1 mark)

Nominal
interest rate
MS1 MS2

n1

n2
Md
Quantity of
0 M1 M2 money

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Mock Paper (2013 February) (Suggested answers)
 Verbal elaboration:
When the central bank buys securities from banks, currency flows from the central
bank to the market. Hence, the monetary base increases. (1 mark)
The money supply will increase and the money supply curve shifts from MS1 to MS2.
(1 mark)
Nominal interest rate decreases from n1 to n2 while the quantity of money increases
from M1 to M2. (2 marks)
b. i. Indicate in the diagram:
• The aggregate demand curve shifts rightwards. (1 mark)
• Real GDP and price level increase (in the short run). (1 mark)

Price level

SRAS

P2
P1

AD2
AD1
Real GDP
0 Y1 Y2

Verbal elaboration:
Under the linked exchange rate system, depreciation of the US dollar will cause
the Hong Kong dollar to simultaneously depreciate by a similar percentage.
(2 marks)
When the Hong Kong dollar depreciates against other foreign currencies, the
quantity of Hong Kong’s exports will increase while the quantity of Hong Kong’s
imports will decrease. As real net exports increase, aggregate demand (AD)
increases. (2 marks)
The aggregate demand curve will shift rightwards. As a result, both Hong Kong’s
real GDP and price level will increase in the short run. (2 marks)
ii. As the Hong Kong dollar depreciates against other foreign currencies, the
domestic prices of Hong Kong’s imports will increase. (1 mark)
According to the law of demand, Hong Kong’s quantity demanded of imports will
decrease. (1 mark)
The change in total value of imports in terms of Hong Kong dollars is uncertain,
depending on the price elasticity of demand for imports. (2 marks)

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Mock Paper (2013 February) (Suggested answers)
12. a. i. Country X’s cost of producing 1 bread = (5/10) candies = 1/2 (or 0.5) candies
(2 marks)
Country Y’s cost of producing 1 bread = (8/12) candies = 2/3 (or 0.67) candies
(2 marks)
ii. Country Y (1 mark)
because it has a comparative disadvantage in producing bread / its cost of
producing bread is higher. (1 mark)
b. i. The maximum gain from trade = (2/3 – 1/2) candies = 1/6 (or 0.17) candies
(1 mark)
Thus, the range of the passage fee (in terms of candies):
0 < Passage fee < 1/6 (or 0.17). (1 mark)
ii. The passage fee imposes a per unit fee on the goods traded. (1 mark)
According to the law of demand, as the relative price of high-quality goods
decreases, more consumers would likely buy high-quality goods. (1 mark)
Therefore, the quality of goods traded will be higher. (1 mark)

Section C

13. a. We can obtain the following information:

Output / Quantity
Marginal Price Marginal
demanded per day
cost ($) ($) revenue ($)
(units)
1 16 20 20
2 16 19 18
3 16 18 16
4 16 17 14
5 16 16 12
6 16 15 10

Correct indication of marginal revenue at respective output level (2 marks)

In the perfectly competitive market, the output level will be 5 units where the market
price = marginal cost = $16. (2 marks)
In the monopoly, with simple monopoly pricing, the profit-maximising output level
will be 3 units where marginal cost = marginal revenue = $16. The profit-maximising
price will be $18. (2 marks)

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Mock Paper (2013 February) (Suggested answers)
 b. The marginal benefit of the third unit of the good to consumers ($18) exceeds the
marginal cost of producing that unit ($16). (1 mark)
Therefore, total social surplus can be increased by increasing output / there are
potential gains not being captured / there is deadweight loss. (1 mark)
c. Price discrimination is a practice of charging different price to different buyers for the
same good for reasons other than differences in costs. (2 marks)
The arrangement constitutes price discrimination.
Reason: VIP customers and non-VIP customers are charged different prices for the
same good. / Customers who want to become VIP members are more sensitive to
price changes and so have higher demand elasticity. As a result, they are charged a
lower price. (2 marks)
OR
The arrangement does not constitute price discrimination.
Reason: All customers face the same price schedule. Different customers pay different
prices because they consume different amounts of the good. / Due to economies of
scale, the average cost of serving customers with higher consumption levels may be
lower. The lower price may only reflect a lower production cost. (2 marks)
(Any ONE of the above stands with reasonable explanation.)
d. Examples of vertical agreement:
• Exclusive dealing
• Exclusive territory
• Resale (or retail) price maintenance
• Quantity discounts
• Tie-in sales or product bundling
• Long-term supply contracts
(Any TWO of the above. 1 mark × 2 = 2 marks)
e. Arguments against competition policy:
• Increasing business costs: It is costly to fulfil the requirements of a competition
policy.
• Interfering with normal business operations: Some people may abuse a
competition policy to hamper the normal business operations of certain firms.
• Not the only and the best solution: There may be better ways to solve the
problems.
(Any ONE of the above or other reasonable answers with explanation. 2 marks)

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Mock Paper (2013 February) (Suggested answers)
14. a. i. Country B has an absolute advantage in producing clothing (1 mark)
because Country B can produce more clothing (60 units of clothing) than Country
A (10 units of clothing) with the same amount of resources. (2 marks)
ii. Country B has a comparative advantage in producing clothing (1 mark)
because Country B’s cost of producing 1 unit of clothing (0.67 units of food) is
lower than that of Country A (2 units of food) / the slope of Country B’s PPF is
flatter than that of Country A. (2 marks)
b. i. No. Point G is not available for Country A’s consumption. (1 mark)
Because Point G lies outside of Country A’s PPF. (1 mark)
ii. Yes. Point G is available for Country A’s consumption. (1 mark)
Country A can produce 20 units of food, and export 10 units of food for 10 units
of clothes to attain Point G. (2 marks)
c. i. Factors affecting economic growth:
• Labour supply
• Physical capital
• Human capital
• Natural resources
• Technology
• Entrepreneurship
• Economic system
• Social, political and legal factors
• Natural hazards
(Any THREE of the above or other reasonable answers. 1 mark × 3 = 3 marks)
ii. Costs of economic growth:
• Loss of current consumption
• Pollution and other environmental damage
• Unemployment
• Exhaustion of natural resources
• Uneven income distribution
• Economic instability
(Any TWO of the above or other reasonable answers. 1 mark × 2 = 2 marks)

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Mock Paper (2013 February) (Suggested answers)