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The spokesman of Cable & Wireless HKT International (the former Hongkong Telcom International) said that after several years of expansion, the companys average cost had been increasing, so they had to reduce the number of staff and their wages. Suggest TWO reasons why the average cost of Cable & Wireless HKT International had increased and explain. (4 marks) 2. A sushi-bar takes over a fish stall in the market. a. State and explain the type of integration involved (2 marks) b. Explain how the sushi-bar benefits from this expansion. (2 marks) 3. With the introduction of the Cyberport development project, the demand for construction workers will increase. Some construction companies in Hong Kong claim that they are facing the problem of labour shortage. Suppose the government has decided to allow the construction companies to import foreign labour, but the construction companies keep the wages of the construction workers unchanged. With the aid of a diagram, explain how the labour shortage will be lessened by the importation of foreign construction workers. (5 marks) 4. Suppose there are only two banks, Bank A and Bank B, in an economy, Bank A keeps no excess reserves. The following are the balance sheets of the two banks. Bank As Balance Sheet Assets ($) Reserves 2,500 Loans 7,500 Liabilities ($) Deposit 10,000 Bank Bs Balance Sheet Assets ($) Reserves 12,000 Loans 18,000 Liabilities ($) Deposits 30,000

a. Calculate the minimum reserve ratio in the economy (2 marks) b. Calculate the amount of excess reserves of Bank B. (2 marks) c. Now suppose both banks have no excess reserves. Calculate the maximum possible increase in deposits after Bank B chooses not to keep excess reserves and lend out as loans to customers. (4 marks) 5. Suppose the Hospital Authority increases doctors salaries by increasing charges for the general ward in government hospitals. Explain how income is redistributed in the local economy. (4 marks) 6. Suppose the amount of resources required for producing dance mats and computer games in Taiwan and in Japan are as follows: Unit of Resources Required per unit of Dance Mats Computer Games 8 or 10 12 or 10

Taiwan Japan

a. Which region should export dance mats according to the law of comparative advantage? Why? (2 marks) b. Given that both Taiwan and Japan have 120 units of resources. What will be the total output if the following events happened? i) Without trade, each region uses half of its resources to produce each good. (4 marks) ii) With specialization. (4 marks) 7. Country A is a small country in Africa. It highly depends on international trade and is now facing very high inflation rate. An economist of Country A gives the following suggestion: In order to solve the problem of inflation, we should stop our currency from depreciating. Explain how the depreciation of country As currency may lead to a higher inflation rate. (5 marks)

Section B: 1a. Amy has $100,000 for investment. She is wondering whether to buy ordinary shares preference shares or bonds issued by ABC company. Give her some advice if she wants to i) ii) have the highest possible return. (3 marks) bear the least risk. (3 marks)

1b. State THREE disadvantages of the Housing Authority being run by the government rather than by a private corporation. (6 marks) 2. In recent years, the government has encouraged the implementation of Information Technology (IT) in teaching and learning in school. Computer becomes a basic tool in learning. Moreover, the technology in producing computers has undergone fast improvement. Consequently, the cost of producing computers decreases. These two factors have affected the market of computers. With the aid of a supply-demand diagram, explain why there is a fall in the price of computers in Hong Kong. (8 marks) 3. In Hong Kong, there is a minimum wage set for the foreign domestic helpers, e.g. Filipino maids and Thai maids. Suppose the government raises the minimum wage of the foreign domestic helpers. Explain with the aid of a diagram, why the total wage earned by all Indonesian maids in Hong Kong may fall. (7 marks) 4. Stationery shops sell similar stationery but in different brands and packaging. a. To what type of market structure does stationery retailing belong? (1 mark) b. Explain the significance of differentiated products on price of the good. (3 marks) b. Explain the significance of differentiated products on non-price competition. (3 marks) 5a. A toys manufacturer produced toys worth $100,000 in 1998, but only sold 90% of them for $90,000. i). Was his contribution to the GNP of the year $90,000? Why? (3 marks) ii). Was the value-added $90,000? Why? (3 marks) 5b. The following shows the Consumer Price Index (A) of Hong Kong for the years 1997 to 1999: Year 1997 1998 1999 Index 100 110 120 i). What does it indicate through out the three years. (1 mark) ii). Give two reasons for the change in the index. (2 marks) iii). Mention three kinds of people who would benefit because of the changes in the price index. (3 marks) iv). How would the changes in the price index affect income distribution and government revenue. (4 marks)

End of paper

Paper I: Section A


Cable & Wireless HKT Intl faces diseconomies of scale. IT can be explained by: Management diseconomies Marketing diseconomies Finance diseconomies [ Any two points; any other relevant points are acceptable]

2a. Vertical backward integration It occurs when a firm combines with another firm engaging in a preceding stage of production. 2b. Through the vertical backward integration, the sushi-bar can obtain fresh fish from the fish stall in the market, thus ensuring an adequate supply of raw materials fish. 3. With the importation of foreign construction workers, supply of construction workers will increase from S1 to S2. When there is no change in wage rate, the shortage will decrease from (Q2 Q1) to (Q2 Q3). 4a. The minimum reserve ration = $(2,500 / 1,000) X 100% = 25% 4b. The excess reserves - $12,000 -$30,000 x 25% = $4,500 4c. The maximum possible increase in deposits = $4,500 X (1 / 25%) = $18,000 5. Doctors working under the Hospital Authority will benefit from the government medical services. Thus, there is a redistribution of income from the patients of the general ward to those doctors. 6a. The opportunity cost of producing one unit of dance mats: Taiwan: 8 / 10 = 0.8 unit of computer games Japan: 12 / 10 = 1.2 units of computer games Taiwan has a comparative advantage in producing dance mats because it has a lower opportunity cost in producing the mats. Thus Taiwan should export dance mats and trade with Japan. 6b. Without trade, each region uses 60 units of resources to produce each good. Dance Mats Produced (units) Computer Games Produced (units) Taiwan 60 / 8 = 7.5 60 / 10 = 6 Japan 60 / 12 = 5 60 / 10 = 6 Total 12.5 12 6c. With specialization, each region uses all 120 units of resources to produce one good. Taiwan Japan Total Dance Mats Produced (units) Computer Games Produced (units) 120 / 8 = 15 0 0 120 / 10 = 12 15 12

7. When the currency of Country A is depreciated, import price ( in terms of local currency) will become higher. People have to use more local currency to buy the same amount of imports. Besides, if Country A highly depends on the imported materials for production, then depreciation of its currency will lead to an increase in the production cost as well as the price of the product. All these will lead to a higher inflation rate in Country A. Section B 1ai. She should buy ordinary shares. Being an ordinary shareholder. Amy can receive varied rate of dividends in profitable years. When the company earns a huge amount of profits, an ordinary shareholder will receive more dividends than a preference shareholder. Hence, her return will be the highest. 1aii. She should buy bonds

It is because a bondholder receives stable interest no matter the company makes profits or suffers from losses. Besides, when the company goes bankrupt, a bondholder is the first one to get his/ her money back when compared with ordinary and preference shareholders. 1b. - Less inflexible operation The structure of a government enterprise like the Housing Authority is most likely to be very complicated. Each proposal must pass through different department for discussion, so the flexibility of management is highly reduced. - Higher cost of production The cost of production in the Housing Authority would tend to be higher because government officials may not have the incentive to reduce cost. - Lower incentives Civil servants in the Housing Authority may not have strong working incentives. This is because they will not be rewarded even if the Housing Authority made profits. - Slow response to changes in the market As the Housing Authority is a government enterprise, it can afford losses and need not adjust price or output even when demand changes. In this way, resources may be wasted. - Diseconomies of scale With an adequate supply of capital, the Housing Authority, as a government enterprise, may be over expanded and thus, result in diseconomies of scale. 2. After the implementation of IT in teaching and learning in school, the demand for computers will increase. With ah increase in demand, the demand curve shifts to the right, from D1 to D2. When the cost of producing computers decreases, the supply of computers will increase. The supply curve shifts to the right, from S1 to S2. As the increase in demand is smaller than the increase in supply, the equilibrium price of computers in Hong Kong will decrease. 3. The total wage earned by all Indonesian maids in HK may fall if the demand for Indonesian maids is elastic. If the government raises the minimum wage, the quantity demanded of Indonesian maids will be smaller. As the demand for Indonesian maids is elastic, the percentage decrease in quantity demanded will be greater than the percentage increase in wage rate. Therefore, the total wage earned by all Indonesian maids may fall. 4a. Monopolistic competition. 4b. Price can be set according to consumers demand for differentiated products. 4c. More non-price competition, e.g. advertising, free gifts, will be resulted because differentiated products provide a basis for sellers to promote sales in order to increase consumers demand for the product. 5ai. His contribution to GDP was $100,000 instead of $90,000, for the unsold goods are regarded as having been purchased by himself in GDP computing. 5aii. We cant count the value-added, for we dont know how much has been spent by the toys manufacturer in buying raw materials. 5bi. It indicates a persistent inflation in HK in the period. 5bii. Rise in land value in the period / continued economic boom of HK / imported inflation. 5biii. Those who keep their savings in the banks, for the interest rates were much lower than the inflation rates. Those who live on pension. Those employees whose wage increase failed to keep pace with the inflation. 5biv. The disposable income of the depositors, pensioners and fixed income earners would decrease. Government revenue would increase owing to an increase in indirect tax, which is based on the price of goods and services.