2012-2019 Econ Dse MS

Paper 2
These documents were prepared for markers'reference. They should not be regarded as sets of model
answers. Candidates and teachers who were not involved in the marking process are advised to
interpret their contents with care.
The answers provided in the marking scheme are for reference only. They are not the only possible
answers. Alternative answers are acceptable so long as they are well reasoned.
The examination emphasises the testing of the understanding of economic theories and the application of
the knowledge of economic analysis to practical problems. Candidates are advised to study this
document in conjunction with the examiner's comments on candidates'performance in this booklet.
For essay-type questions, candidates are expected to demonstrate an understanding of the question, an
ability to deploy relevant knowledge of the subject in response to the questions, and to present their
answers logically and coherently.
The following symbols are used:
I A single slash indicates an acceptable alternative within an answer.
@ The number in front of the symbol indicates the marks for each point.
max Maximum mark for the question/sub-question
Section A
Marks
I. No, because (1)
the good may be produced from scarce resource which have alternative uses./ more of the (2)
good may still be preferred.
2. The law states that (holding technology constant,) when more units of a variable factor (3)
are added successively to a given quantity of fixed factors, the marginal product of this
factor will eventually diminish.
No, because (1)

all factors are variable. (1)
、1
,＼1
3. (a) Conglomerate expansion, because
�、
the firm has expanded into unrelated industries.
,
(
'
(b) Possible motives:
to have product I income diversification so as to spread risk
to make use of its brand name of one product in other products
to use resources more efficiently as the two companies can share some of their
resources @ I;
to enjoy economies of scale (e.g. Lower average cost of advertising as the total max: 3
cost can be spread over a larger quantity of output.)
any other relevant point
[Mark the FIRST THREE points only.]
41
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Marks Marks
4. (a) wider (1) 7. - Gold is more durable while cigarettes may lose their value during transaction.
Gold is more generally accepted as medium of exchange than cigarettes. }
(b) Lower, because (1) Gold is more homogenous while cigarettes have different qualities. m�x\
higher income group has a lower post-tax income while the income of lower income (2) any other relevant point
group remains unchanged. [Mark the FIRST TWO points only.]
5. (a) No, because (1)
、
there is excess demand / shortage. (1)
`
8. No, because
1,1
( （2
other competitive criteria/non-price competition, such as queuing, will (2) if the demand for import is inelastic , the import value will not decrease
} max: 3
)、
emerge.
`
as the percentage increase in price will be greater than percentage decrease in quantity
,
（
the new competitive criteria do not necessarily depend on income. (2) demanded.
(b) Yes, because (I) Indicate in the diagram:

transportation and other tourist-related expenses, which are regarded as export of (2) P j, Qd ! (1)
service, increases so the invisible trade account increases. gain in import value > loss in import value (2)
(c) No, because (I)
there is greater deadweight loss. / total social surplus decreases. (I)
D
Indicate in the diagram:
lowering of the price ceiling (I)
correct position of increase in deadweight loss/loss in total social surplus (I)
P
2^
Increase in deadweight loss / Loss in total social surplus
s
十
Pl
P P
。
1
D
十
2
Qd�Qdl
。
Q
Q2�Q,
9. (a) In country A, opportunity cost of producing IS = 0.2W (1)

In country B, opportunity cost of producing IS = 0.25W (1)
6. (a) - Loss of output
Loss of human capital
Political unrest @I
ma x:，2
(b) If each country specializes in producing the good in which the country has a lower
opportunity cost, the total output will increase.
(2 )

[Mark the FIRST TWO points only.]
} Country A would export shirts. (1)
(c) 0.2W<1S<0.25W OR 4S<1W<5S ( 2)

(b) - Falling or even negative real GDP growth
Low / falling inflation or even deflation
Falling business confidence, levels of investment, consumption @I
ma x:，2
}
42 43
Section B Marks
11 . ()
a Persistent mcrease in the general price level (2)
Marks
10. (a) (i) No, because (I) (b) No, because (I)
there is no corresponding production. (1) the real income of workers would fall if the percentage increase in price level is (2)
greater than the percentage increase in nominal wage.
(ii) - He can get interest return even if the company does not make any profit
that year. 2 (c) The opportunity cost is the nominal return of the ibonds. (2)
Higher priority of getting paid than shareholders if the company is max:，4
liquidated. (d) The ibonds help pr�serve the purchasing power of the invested sum of money (2)
} @ because the interest return of ibonds will increase at the same rate as actual inflation.
(b) - Equity is a subjective concept that involves value judgments. / Different (1)
people use different standards of equity.
Yes, because the $6 000 results in a higher percentage increase in income of (2) 12. (a) Oligopoly (I)
the poor. a few dominating firms
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
mcome.
(2)
「 max:4
price searcher
interdependence of pricing policies
product can be heterogeneous @I;
No, at it is not equalizing outcome as not everyone can benefit from the (2) non-price competition max:2
scheme, e.g. non-permanent residents and residents who are below 18 years not easy to enter the industry
old are not eligible for the $6 000. imperfect information
any other relevant point (2) any other relevant point
(c) Verbal Elaboration:
Disposable income increases. (b) Advantages:
Consumption expenditure increases.
哥 tighter control of ownership / more difficult to be taken over
Aggregate demand increases.
Price level increases.
詞
(1)
no need to disclose the accounting information to public
any other relevant point } m�\
Aggregate output unchanged in the long run. (1) [Mark the FIRST TWO points only.]
Indicate in the diagram: Disadvantages:

AD shifts out (1) cannot issue shares to general public to raise capital
Vertical LRAS
P increases and Y unchanged
(1)
(1)
difficult to transfer its ownership
any other relevant point } m�\
Price level
LRAS
P^
2
P1 , - - - - - - - - - - - - - - - - - - - - - - - �
AD2
。
AD1
Aggregate Output
Y
44 45
Marks Section C
(c) (i) Verbal Elaboration:
Living units under HOS and private housing are substitutes. (1) Marks
Bigger supply of public housing (living units under HOS) would re.suit in (1) 14. (a) Price discrimination is a kind of pricing behaviour by which different prices are (2)
a drop in demand for private housing. charged on different customers for the same goods for reasons unrelated to
Price of private housing drops. (1) difference in costs.
Indicate in the dia紅am: (b) - The seller needs to be a pnce searcher.

D shifts to the left (1) The markets are separable. / Resale of goods and services between markets is
LowerP (1) difficult or very costly. @ l;
Customers in different markets have different elasticities of demand. max:2
Price
Customers in different markets have different information costs.
」
(c) (i) No, because (1)
the practice of lowering the price of the same item during a promotional (2)
period applies to all customers.
Pl
OR } max:2
lv 叱
the sellers make no attempt to separate customers. I the market is not (2)
separated.
D1 (ii) Yes, because (1)

the costs of serving customers with or without discount coupons are the (2)
l
D2 same.
。
OR max:2
Quantity
+-
customers with discount coupons are the ones who are more sensitive to (2)
Q2 Q1 price changes and hence higher price elasticity. Therefore, they are
charged a lower price.
、
(d) Price fixing: horizontal agreement
,
(I)
l
l（l
＇l
十十
(ii) A rise in the mortgage interest rate could cool down the property market (1) Exclusive dealing:vertical agreement
(2)
（
）
because some people fail or are unwilling to borrow at a higher interest rate. (1)
The demand for private housing drops. (1)
(e) higher price
lower output
lack of choices to consumers @ I;
loss in consumer surplus max:2
13. (a) Required reserve ratio = ($500 million - $100 million)/ $2 000 million (1) market competition restricted
= 20% (1) any other relevant point
(b) 1 (1)
Maximum possible amount of deposits = $500 million x —
0.2
= $2 500 million (1)
(c) I (2)
Deposit = $700 million x —= $3 500 million
0.2
Cash in public circulation = 0 (1)
Money supply = Deposit + Cash in public circulation
= $3 500 million (1)
(d) - QTM: MV = PY, where M = money stock, V = velocity of circulation of (2)

money, P = general price level and Y = real output; assuming V constant.
An increase in M leads to an increase in P when Y increases by a smaller
proportion.
OR =2
}=
An increase in M leads to an increase in P by the same percentage when Y
is constant.
二
46 47
Marks
15. (a) (i) In country A, the opportunity cost of producing IX = IY while in country B, (1)
the opportunity cost ofproducing IX = 0.667Y.
Country B has a lower opportunity cost in producing good X, therefore . (I)
Country B has a comparative advantage in producing good X. Marking Schemes
、
(ii) Yes, because
,
U0 QQ
＇、
their costs ofproducing goods X and Y are different. Paper 1
｀, 、丿丶
(b) Country A will gain(lY-0.8Y 0.2Y=) Question No. Key Question No. Key
and Country B will gain(O.SY -: 0.667Y =) 0.133Y
｀＇
per unit ofX traded respectively. 1. C (76) 21. A (22)
2. C (74) 22. A (60)
(c) (i) No, because (1) 3. D (45) 23. D (76)
country B will still enjoy a CA in producing good X as country A's and B's B (82) 24. B (65)
4.
opportunity cost of production does not change. (1)
5. C (71) 25. B (41)
(ii) Uncertain, because (1)
country B may no longer enjoy a CA in producing good X if the maximum 6. D (55) 26. C (58)
possible level ofproduction ofY exceeds 30 units. (1) 7. D (83) 27. B (67)
8. A (82) 28. B (43)
(d) (i) HDI measures the level of economic and social development ofa country in 3 (2) 9. A (84) 29. A (56)
dimensions: health (measured by life expectancy at birth), education
(measured by mean years of schooling and expected years of schooling) and 10. D (60) 30. D (59)
living standard(measured by Gross National Income per capita).
11. B (87) 31. B (45)
(ii) - More production, business activities and employment opportunities in 12. A (25) 32. B (74)
the import/export industry lead to higher per capita GDP. 13. B (63) 33. A (91)
} m®.:'2
Foreign health product or technology imported lead to better health. 14. C (41) 34. C (82)
15. D (54) 35. A (70)
[Mark the FIRST ONE point only.]
16. A (46) 36. C (80)
17. D (40) 37. D (52)
18 . A (52) 38. A (50)
19. B (59) 39. A (64)
20. D (69) 40. C (70)
Note: Figures in brackets indicate the percentages of candidates choosing the correct answers
40
48
Paper 2
Marks
These documents were prepared for markers'reference. They should not be regarded as sets of model I. Reasons:
answers. Candidates and teachers who were not involved in the marking process are advised to interpret Sellers provide heterogeneous services, e.g. different tour groups.
their contents with care. Market information is imperfect, e.g. information about routes and services.
.' 4
@a
2
Sellers engage in both price and non-price competition, e.g. advertisements.
） m
X
The answers provided in the marking scheme are for reference only. They are not the only possible any other relevant point
answers. Alternative answers are acceptable so long as they are well reasoned. [Mark the FIRST TWO points only.]
The examination emphasises the testing of the understanding of economic theories and the application of
answers logically and coherently. 2. (a) Private property rights refer to the exclusive right to use, the exclusive right to (4)
receive income from, and the right to transfer a property owned by an individual.
In questions asking for a specified number of reasons or examples etc. and a candidate gives more than The private property rights over the flats under the scheme are weakened as the
the required number, the extra answers should not be marked. For instance, in a question asking flat-owners'right of selling (or transferring) their flats to non-residents is confined.
candidates to provide two examples, and if a candidate gives three answers, only the first two should be
marked.
(b) Price will be lower because the number of potential buyers will drop resulting in a (3)
lower demand for these flats.
A single slash indicates an acceptable alternative within an answer.

3. (a) Nominal interest rate (R) = expected inflation rate + real interest rate (r) (2)
(b) No, R will be lower than r only when the expected inflation rate is negative. But (3)
the existence of actual deflation does not imply that the deflation is expected.
OR Any one
Yes, because people may expect deflation beforehand and an expected deflation (3) max: 3
will result in a nominal interest rate being lower than real interest rate.
OR
Yes, because the realized (actual) real interest rate will be higher than the nominal (3)
interest rate when there is actual deflation.
41 42

Marks
Marks 5. (a) In Country A, the opportunity cost of producing I smartphone (S) = 0.75 Food (F) (3)
4. (a) Wealth effect: As many of the assets in the economy are denominated in nominal (3) In Country B, the opportunity cost of producing I smartphone (S) = 0.5 Food (F)
values, the higher the price level, the lower the purchasing power of money. This Country B has a comparative advantage in producing smartphones.
reduces the wealth of the economy (in real terms). As a result, households and
firms reduce their purchases of all goods and services and the real output drops.
(b) Yes, because the potential gain from trade (0.75F-0.5F=0.25F) per unit of (3)
Interest rate effect: As the price level rises, households and firms demand more (3) smartphones is greater than the transportation cost (0.2F).
money to finance their transactions. Given the fixed supply of money, the interest
rate would rise. An increase in interest rate would cause decline in investment and
consumption and also the real output. Any one
max: 3
Net exports effect: As the domestic price level rises, foreign-made goods become (3)
relatively cheaper so the quantity demanded of imports increases. However, the rise
in the domestic price level also means that domestic-made goods are relatively
more expensive to foreign buyers so the quantity demanded of exports decreases. 6. (a) Balance of current account = 35-50+47-27 = $5million (I)
When the volumes of exports decrease and of imports increase, net exports will
decrease (if the price-elasticities of demand for exports and/or imports are
sufficiently high). Because net exports are a component of real GDP, the demand (b) No, because the BOP balance is -$ lOmillion, which implies a BOP deficit. (3)
for real GDP declines as net exports decline.
(b) Verbal elaborat10n:

Increase in the price of raw materials results in a rise in factor prices. So the SRAS (5)
will decrease. Price level increases and the output will fall in the short run. The 7. (a) Construction. (I)
resulting excess supply of labour / deflationary (output) gap will result in a This is because the entry to a particular occupation is closely associated with a (2)
downward pressure on the input prices. In the long run, wages will adjust person's human capital, which tends to be more homogeneous among the
downward and the SRAS will increase and the price level will fall back to the construction workers than among finance professionals.
original level. max: 3
The construction industry often pays their workers by time rates, which are more or (2)
less uniform across workers. In addition to basic salaries, compensations to the
Indicate on the diagram: employees of financing, insurance, real estate and business services often include
SRAS shifts to the left (I) performance-based commissions, bonuses and profit-sharing, which may result in a
P increases, Y drops (I) greater diversity of income within this industry.
SRAS shifts back to the original position (1)
final fall in P, back to the original level (1)
(b) The Gini coefficient, which reflects the degree of income inequality, has increased (1)
in the HK economy as a whole.
。 Possible reasons:
P
LRAS SRAS
1
As shown in Table 1, income inequality in both the construction and (2)
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.
As shown in Table 2, there is an increase in the proportion of working max: 3

(2)
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.
AD
。
｀ Yr
Y
43 44
Marks Marks
8. Government should increase the income tax rate to reduce the budget deficit: 10. (a) Division of labour (1)
if the increase in tax revenue due to the rise in tax rate outweighs the reduction in (4) choosing the most suitable person for the job
tax payment due to the reduction in the tax base/taxable income (e.g., a fall in the practice makes perfect
number oftax payers as a result of disincentive effects to labour). saving time in training
because increase in tax rate is fairer as income tax is often proportional (or even (2) stimulus to mechanisation
progressive) and this helps equalize income. Any other relevant point
if there is an inflationary (output) gap as an increase in income tax reduces output (2) [Mark the FIRST THREE points only.]
and relieves the inflationary pressure.
}『:
(b) (i) - It improves the work incentive of the manager.
max: 4
Government should not increase the income tax rate to reduce the budget deficit any other relevant point �:2
if the increase in tax revenue due to the rise in tax rate falls short of the reduction (4) [Mark the FIRST point only.]
in tax payment due to the reduction in the tax base/taxable income (e.g., a fall
taxable income as a result ofreduction in aggregate output).
(ii) - It gives a more stable income as the manager still receives a basic
｝二
because an increase in income tax rate will result in a greater disincentive to work (2)
and more people may quit the job and rely on welfare programmes and this further salary even if the business is poor.
�x: 2
worsen the budget deficits. any other relevant point
as an increase in income tax rate reduces the aggregate output, which may result (2) [Mark the FIRST point only.]
in unemployment / deflationary (income) gap.
(c) Verbal elaboration:
An effective price floor will create a surplus of workers. If the restaurant workers (4)
change to work in other industries (for example, tum into security guards) the
supply of workers in this industry drops, there may be a shortage for workers at the
minimum wage rate.
9. (a) Verbal elaboration:
If the demand for MTR service is inelastic, the percentage increase in fare will be (3)
higher than the percentage decrease in the number of trips, so the total expenditure Indicate on the diagram:
will increase. wage rate set above the original equilibrium (1)
surplus (1)
magnitude of the leftward shift of the supply curve greater than the surplus (2)
Indicate on the diagram: final shortage (1)
correct position ofgain and loss (I)
gain > loss (I)
Worker in catering industry
Wage rate
P
S1
P2
＾
十
w
P1
D
。
Number of workers
Q
Q2 < Q1
(b) No, as the provision of MTR service involves the use of scarce resources having (2)
alternative uses.
(c) No, as people have different alternative uses oftime, their time costs will not be the (3)
same.
45 46

Marks Marks
12. (a) Monetary base = $400 million+ $1000 million = $1400 million (2)
11. (a) Objective (1): Yes, as it provides cash subsidies relieving the burden on travelling (2) Money 叩pply = $1000 million+ $2000 million = $3000 million (2)
expenses.
Objective (2): Yes, if the WITSS continues to subsidize the workers on travelling
expenses.
OR
Objective (2): No, as employment (as well as unemployment) largely depends on
二} max2
(b) New money supply
= $1000 million+ $400 million x 1/25% = $2600 million (2)
the aggregate demand and supply of the economy (which may fluctuate over time)
rather than the WITSS. (c) Verbal elaboration:
An upward adjustment of required reserve ratio reduces the money supply, (5)
resulting in an increase in interest rate and a drop in investment expenditure. The
(b) (i) It increases the geographical mobility as workers are more willing to travel to (3) aggregate demand will fall, and so will the price level and output level.
other districts for work. 1
Indicate on the diagram:

(ii) It helps to reduce the income inequality. It helps equalize outcome as it (3) AD shifts to the left (I)
provides extra money for the lower-income group only / it increases their price level falls (I)
opportunity of finding a job with higher income because they can travel output level falls (I)
farther away from their residential area.
(iii) The effect on the unemployment rate is uncertain. The size of the labour force (3) Price level
would increase as more people originally outside the labour force are induced
to look for jobs. But the total number of unemployed may also increase as SRAS
some of these new workers may fail to get a job. The resulting rate of
unemployment depends on the percentage increase in the unemployed
population relative to that in the labour force.
P,
P2 「----------✓,
＇＇
＇
＇＇ I
＇＇
＇＇＇
。
Aggregate Output
兄Y1
1The lump-sum subsidy will not change the marginal cost of travelling. But some of the workers originally
constrained by high travelling expenses may have the incentive to travel further for work (for a higher paid job).
47 48

Marks
13. (a) Verbal elaboration: Marks
The monopolist has a constant marginal cost of production. It will produce at the (3) (a) (i) Country A will import Good Y because the domestic production cost of Good (2)
14.
output level where marg呾乜竺門竺皿止邛呾豳吐芝�in order to maximize Y is higher than the terms of trade.
百
profit. At this output涵祉margma enefit is greater than marginal cost and there
is a deadweight loss.
(ii) Indicate on the diagram:
、
`
l
Correct position of PPF
,
（（
，、l
Indicate on the diagram: Correct position of CPF
�
、
、,、
Correct position of marginal revenue
l
(l
Constant marginal cost
,
（＇l
＇、
Good Y (units)
Correct position of P and Q
,
'｀
\＇
丶'
·
Correct position ofDeadweight Loss
l
`
Price
10
CPF
4。
MC
Good X (units)
10
。
Quantity
(iii) Country A will still import Good Y because the domestic production cost of (4)
Good Y is still higher than the terms of trade. Country A will be better off as
the CPF shifts outward I Country A can consume more of Good X and Good
Y.
(b) Yes. This is because the seller is selling the same product produced at the same (3)
cost to different people (tourists and locals) at different prices produced at the same
cost. Indicate on the diagram
Correct position of PPF (1)
Correct position of CPF (1)
(c) C)
1 Resale price mamtenance. This reduces price competition among retailers. (2)
Good Y (units)
(ii) Predatory pricing. This aims to drive out competitors. (2)

、
__@rM
(d) Administrative costs may be high

20
Higher cost of production
2a
.'
Other measures can be used to promote competition

＼
Market is competitive and government intervention is not necessary

Vi
CPF
—
J
PPF
8
。
Good X (units)
20
49 50

Marks
(b) (i) Hong Kong. (2)
Hong Kong: GNI per capita rank - HDI rank = --4,
Given HDI rank = 13, GNI per capita rank = 9
Japan: GNI per capita rank - HDI rank = 11,
Given HDI rank = 12, GNI per capita rank = 23
＼
Marking Schemes
(ii) -
Japanese have longer years of schooling on average. (2)
Japanese have a longer life expectancy on average.
[Mark the FIRST TWO points only.] Paper 1
Question No. Key Question No. Key

(iii) Any example of policy that can enhance the education level or health (2)
condition of Hong Kong people. E.g., increase government subsidy on I. A (32) 26. A (51)
tertiary education. i. A (70) 27. A (61)
3. C (59) 28. C (48)
4. D (75) 29. D (69)
5. C (79) 30. D (56)
6. C (56) 31. A (73)

7. D (71) 32. A (57)
8. B (74) 33. A (70)
9. B (79) 34. C (42)
10. D (67) 35. B (67)
11. B (83) 36. D (52)

12. A (53) 37. D (56)
13. B (60) 38. D (75)
14. C (84) 39. C (60)
15. C (54) 40. C (66)
16 . C (48) 41. A (59)

17. B (80) 42. B (59)
18. B (93) 43. D (38)
19. B (81) 44. D (39)
20. A (73) 45. D (64)
21. A (65)
22. B (72)
23. C (66)
24. C (73)
25. B (54)
Note: Figures in brackets indicate the percentages of candidates choosing the correct answers
51 42
Paper 2
Marks
I. (a) Yes. (l)
These documents were prepared for markers'reference. They should not be regarded as sets of model
It is because the reduction in the starting salary of administrative officers would (I)
answers. Candidates and teachers who were not involved in the marking process are advised to interpret
only decrease the value of Serine's chosen option without affecting her highest
their contents with care.
valued option forgone.
m6
answers. Alternative answers are acceptable so long as they are well reasoned. (b) No.
Government provision of unemployment benefits may increase the value of
The examination emphasises the testing of the understanding of economic theories and the application of Serine's 3 option lo a level higher than that of the 2 option. So the cost of
rd nd
the knowledge of economic analysis to practical problems. Candidates are advised to study this choosing to work ns an administratiye officer may now change from the value of
document in conjunction with the examiner's comments on candidates'performance in this booklet. the 2 option (i.e., to work in an accounting firm as a trainee) to that of the 3
nd rd
option (i.0., to continue to seek a job without taking up any job and simply enjoying
the u111.1111ploym011t hcnc lil).
In questions asking for a specified number of reasons or examples etc. and a candidate gives more than
the required number, the extra answers should not be marked. For instance, in a question asking
candidates to provide two examples, and if a candidate gives three answers, only the first two should be
marked.
Marks
The following symbols are used: (n l t•:11trcprcncursh1p
ns he bears business risk and makes business decisions. ｛鬪
(h) Cost of buying the accessories, or wages of part-time workers (1)
The number in front of the symbol indicates the marks for each point. as expenses on these items would vary (increase) with the output of Ah Wing's (1)
@
shop.
max Maximum mark for the question/sub-question [Mark the FIRST example only.]
(c) Monopolistic competition (1)

Reasons:
}『�:2
- many sellers / no dominant sellers
- sellers selling heterogeneous products
- free entry into the market
- any other relevant point
43 44

Marks
Marks 5. (a) The inflation rate in 2013: (126-120)/120*100% = 5% (1)
3. No. (1)
Verbal elaboration:
The ineffective price floor (P.) becomes an effective price floor (Pb)- (1) (b) Differences:
At the new quantity (where the horizontal Pb-line intersects the demand curve D), (I) - CPI only includes consumer goods while GDP deflator includes both consumer
.
｝
marginal benefit (maximum willingness-to-pay) is higher than marginal cost goods and producer goods.
n
on
e
Am
yx
'
and there exists a deadweight loss. (1) �max: 6 - CPI calculates a fixed basket of goods and the weighting will be revised every 5
a
2
years while GDP dctlulor has variable baskets ofgoods for each year.
Indicate on the diagram: [Mark the FIRST point only.I
- Correct Po Q
- Correct P 1 Q 」
。 (1)
(1)
- Correct position of deadweight loss (DL) (1) (c) (i) Kit1111111 would guin (1)
hc,c1111"0 lite unexpected inflation would lower the real value (purchasing (l)
power) 111'lhc loan repayment.
Unit price
GoodX
(II) Mnrlcnt'would lose (1)
ht'rnll�c. given the 15% rate ofactual nominal return and the 5% rate ofactual (2)
l111lntlo11, her actual real rate of return equals 10% (= 15%-5%), which falls
s
�hurt of her expected real rate ofretum (12%).
P1 =Pb
P 。 DL
Marks
,, (a) No, (1)
because, according to the source principle, income not derived from HK would not (1)
Pa be taxed by the HK government.
(b) Direct tax,
1
。
（1
）、丿
because the tax burden cannot be shifted by these tax-payers to someone else.
（
Quantity
Qi Q 。
Figure 1
Marks
4. (a) Vertical backward expansion because, by starting Fai Lok Institute, Tai Fai Lok (2)
Group has expanded its operation vertically backward to the previous stage of
production to control directly the supply of factor inputs (chefs and managers) to
its original (food) business.
(b) Advantages:
- More steady supply of factor inputs such as chefs and managers
- Better use of the brand name
- Program can be tailor-made for those graduates from the Institute who are hired
to work in the Group's restaurant, so as to shorten their training time
- Any other relevant point
45 46

Section B
Marks
9. (a) The condition is that the elasticity of demand for the good is smaller than the (I)
elasticity of supply.

- Parallel upward shift of supply curve due to the per unit tax (1)
- Price increases and quantity drops (I)
- Correct positions of buyers'tax burden and sellers'tax burden (I)
- Buyers'burden> sellers'burden (I)
Soft drinks
P
S1
S 。
P,
P。
Q
(b) Indicate on the diagram:
reduction in consumer surplus : buyers'burden+ area a (1)
(c) Law of demand: when the price of a good increases, the quantity demanded of the (5)
good decreases, vice versa, ceteris paribus. Here the unit of measurement to which
the tax applies is "bottle," rather than volume (e.g., in litres), of soft drinks. When
the same amount of tax is added to each unit (bottle), then -- per volume of liquid
contained -- larger-bottle soft drinks would become cheaper than the small-bottle
ones. The relative price of larger-bottle soft drinks (in terms of small-bottle ones)
thus drops. The law of demand then implies that people would buy more larger-
bottle soft drinks relative to small-bottle ones, so the proportion of larger-bottle
soft drinks sold in the market would increase.
48
Marks Mnrl,s
IO (a) (i) A declining birth rate implies a slower growth in the size of the work force (2) 11. (a) Verbal elaboration:
and possibly a shrinking working population in the future. As fewer workers Japanese Yen depreciated against Hong Kong dollar. (I)
are there to pay taxes, future tax revenue may be reduced. As the price of Japanese automobiles does not change, the automobiles become (I)
cheaper in terms of HKD and Hong Kong importers will buy more Japanese
(ii) A rising old-age dependency ratio implies higher percentage of the elderly in (2) automobiles.
the population. The elderly may have lower (or even zero) income and greater The demand for Japanese automobiles by HK people increases. (I)
needs for medical services. They may thus require moregovemmenf support Quantity transacted increases. (I)
in terms of social welfare and public health, implying an increase in public Therefore, total export value of Japanese automobiles increases.
expenditure on such programs.

(b) Relaxation of one-child policy would likely result in a rise in the birth rate, (3) Demand curve shifts to the right (1)
implying a bigger work force and a bigger aggregate supply and output in the A higher quantity transacted (1)
future Gain in total value (1)
Price in terms of
(c) Public limited company / listed company. (1) Japanese Yen
(d) (i) In a partnership, any given owner cannot transfer his/her shares of ownership (2)
without the consent of other partners while in a public limited company, the
shares are freely transferable.
(ii) A partnership does not have independent legal status while a public limited (2)
。
P l
＼
company has an independent legal status.
D」
(e) People expected the birth rate to rise, resulting in an expected increase in future
demand for the baby products.
(I) 。 Q。 Q1
Quantity
So Goodbaby International was expected to earn bigger profits (I)
and to distribute more dividends per share to its shareholders in the future. (I)
The expected increase in future dividends would raise the demand for the (I)
company's shares and thus its stock price as soon as people expect changes in the (h) - Nol all factor inputs used to produce Japanese cars originated from Japan. e.g., (2)
old-child policy. some or the purls o「rnw 11111tcri11ls were imported
- Sonlt'Jupnncsc rnr.� �old in 201.1 WCl'l'not produced in the same year. e.g., some (2)
or thclll l'1111lC'11'11111 tilt'11I Vl'lltory
I Mnrk till'1:ll{ST l'W< l re11so11s only. I
49 50
Section C
Marks Marks
12. (a) Monetary base cash in public circulation+ reserves held by commercial banks
=
(1) 13. (a) Verbal elaboration:
The monetary base mcreases because the commercial banks have more reserves. (2) The profit-maximizing output for a monopolist is determined by the equality (1)
between its marginal cost and marginal revenue.
、l
(b) Credit creation process: Correct marginal revenue curve
（（
�
When the central bank purchases bonds from commercial banks, more cash is
、
(I)
`
Correct Qm and Pm
,
1
'
injected to the commercial banks as reserves and there would be excess reserves in
the banking system.
The banks would lend out the excess reserves. (1) Price
And the bank loans will be re-deposited into the banking system. (I)
The process will go on and on (until the actual reserves are equal to required
reserves).
No. The monetary base will remain unchanged as the sum of cash in public (2)
circulation and reserves in the banking system will not be affected by the credit
creation process.
P m �- 八---�, /
＇＇
＇，
(c) Verbal elaboration:
The purchase of government bonds increases money supply ＇＇
丶
l
＇，
'
（（（（（
, )
一一一一一- - _.,. - • - - - - - •
resulting in a drop in the interest rate. ／＇I
）
I、l
r·
Investment / consumption expenditure increases ' / ,r
'
'/ :
�、
,
;Ff I
and aggregate demand increases.
l＇、l
＼
,｀
In the short run, the output and price levels increases. ＇
I
,
二
＼
＇
Ml(
，I
I
＇＇
Indicate on the diagram: ,_
＇
II
- AD curve shifts to the right
➔
、
Quantity
`
l
I)
,
（（（
＇、
- Higher price level
、
lJ、l
, ｀丿
- Higher output Ill) V11llal 1laL!m11llu11
、l
I Jnd,i I'"'rnt n11111w1ili1111, output is determined by the equality between marginal
(
丿、
Price 皿I 111m11,l11nl willi11g11css-to-pay.
I'll!!!
．
I hr 11pr11ht!l, or 11w 11111rkct will result in a drop in price
＇
1
level
＇、
（（
SRAS ,uul 111阮in q1111111ily.
．丿
1
l11dil:11tc__on皿diagram:
l'orruct Q c and Pc (I)
(c) No, as all consumers are entitled to the same discounts (pricing practice) and there (3)
E Onm
ith
r
e
is no market segmentation.
d邱
OR
3
AD 」 Yes, as consumers buying different quantities ("pounds") of beef would end up
,
。 paying different "average prices" (price per pound) for the same beef produced at
。
AD the same cost.

Q 。 Q」
Output level
(d) (i) Exclusive dealing. It forecloses third-party access to its distribution network. (2)
(ii) Price fixing. Through such collusive action, they can drive the small retailers (2)
out of the market.
｝二
( e) Introducing more sellers may improve efficiency via competition
Consumers can enjoy lower price and higher quantity and quality of live cattle
�.2
products
[Mark the FIRST point only.]
51 52
Marks
14. (a) The marginal (and average) costs of production for Good X and Good Y are (2)
constant (and do not increase with the quantities of X or Y). So the opportunity Marking Schemes
cost ofX in terms ofY, which is the slope of the PPF, is constant.
Paper 1
(b) (i) Country B can produce 8 units of Good X by using all ofits resources. Given (3)
the amount of resources owned by Country A doubles·that of Country B, Question No. Key Question No. Key
Country A can only produce 5 (= I 0/2) units of X by using the same amount
of resources as B. So Country A does not have absolute advantage in l. C (71) 26. A(62)
producing X. 2. C(63) 27. D (68)
3. C (75) 28. A (55)
(ii) In Country A, the opportunity cost ofproducing one unit ofX is (10/10) = 1Y. (2)
4. D (89) 29. B (43)
In Country B, the opportunity cost ofproducing one unit ofX is (16/8) = 2Y.
So Country A has comparative advantage in producing Good X. 5. B (41) 30. A (70)
6. B (73) 31. B (52)

(c) Indicate on the diagram: 7. B (74) 32. C(64)
(i) production point of Country A: (10,0) (l) 8. A (88) 33. A(58)
(ii) CPF of Country A: a straight line with X-intercept equals 10 and Y-intercept (2)
equals 15 9. A(79) 34. B (20)
(iii) consumption point ofCountry A: (6, 6) (2) 10. D (32) 35. C(78)
Good Y 11. B (47) 36. A(72)

12. B (48) 37. C (59)
Figure 4 38. A(73)
13. C (57)
14. A(69) 39. B (84)
16 15. A(58) 40. A(66)
15 16. C (48) 41. D(45)

17. B (45) 42. C (62)
18. C (53) 43. D (54)
19. C(67) 44. D (19)
20. D (88) 45. D(68)
21. B (63)
22. D(64)
23. D(72)
24. C (75)
25. D(64)
Note: Figures in brackets indicate the percentages of candidates choosing the correct answers.
。
Production pQint A
8
10 Good X
(d) Policies:
r
- tax allowance for further education (or education subsidy)

2a
@m
- teaching grants -- to universities for more degree programmes

,
x
4
- bigger immigration quota for experts and professionals

'

53
38
Paper 2
Section A
Marks
These documents were prepared for markers'reference. They should not be regarded as sets of model 1. (a) (i) No,
answers. Candidates and teachers who were not involved in the marking process are advised to interpret
出eir contents with care.
because it has positive marginal cost of production; 虹
because it is produced from scarce resources, which have alternative uses.
闆
1
m切
answers. Alternative answers are acceptable so long as they 缸e well reasoned. (ii) Yes, 2
because a person cali download and study the course materials without
reducing the availability of those materials to others, i.e., these materials are
The exaininatfon emphasises the testing of the understanding of economic theories and the application of non-rivalrous in consumption.
ab山ty to deploy relevant knowledge of the subject in response to the questions, and to present their
mm
(b) No,
answers logically and coherently because the time cost of a person taking MOOC may be higher than the time cost
of another person taking on campus course plus the course fee;
In questions asking for a specified number of reasons or examples etc. and a candidate gives more than QI the former person (MOCC student) may have to spend extra time to
the required number, the extra answers should not be marked. For instance, in a question asking access/download the course materials and to communicate with the course
candidates to provide two examples, and if a candidate gives three answers, only the first two should be instructor or teaching assistant;
marked. 虹the former person may also have to pay for internet connection in order to
access the course materials.

Marks
2. (a) Tertiary production
as it provides retail services. g�
(b) Reasons:
-·reduce cost of marketing and promotion
- reduce transp01tation cost for suppliers
- more related businesses available such as accessories and repair ｝二�4
[Mark the FIRST TWO points only.}
1Or because it has positive marginal use value (MUV).

2The answer can be "No" ifthere exist network capacity constraints (or congestion problems) in downloading the
course materials.
39 40
MarlG
Marks 5. Unemployment rate = (number of unemployed I total labour force) x 100% (4)
3. Agree. (1) Since both total labour force and number of unemployed drop by an equal amount,
the percentage decrease in the unemployed population is greater than the
Verbal elaboration: percentage decrease in the total labour force, implying a reduction in the
The increase in effective quota would raise the supply and thus raise the quantity (I) unemployment rate.
transacted and reduce the price.
The gap between marginal benefit and marginal cost is reduced as the quantity produced (1)
is increased toward its efficient level.
Marks
Indicate on the diagram: 6. (a) (i) Legal Reserve ratio = $1000 million / $5000 million = 0.2 (1)
-- Rightward sh沮of the supply curve corresponding to an increase in quota (l)
A reduction in P and a rise in Q (1) (ii) Money supply = $150 million+ $5000 million = $5150 million (2)
- Correct position for the reduction in deadweight loss (area wxyz) (I)
S1" S2 (b) New monetary base = $150 million+ $1050 million = $1200 million (2)
P
l
➔ So-"
P1L一w 二、｀｀： (c) New money supply= $150 million+ $1050 million/0.2 = $5400 million (3)
ipzl'"'
w.w
惡�｀，碌函 L沁_:-:{�
Marks
7. (a) Uncertain. Since the 徂nount of resources owned by the two countries is not given, (2)
their productivities (i.e., output-input ratios) cannot be determined and compared.
`
`
,
。
,
Do, (b) In Country A, the opportunity cost in producing 1 unit of clothing (C) in terms of
1＼ 1
、
rice (R) = 15/3 = 5 units ofrice (R).
'（
Q i , Q z,
Q
In Country B, the opportunity cost in producing l unit of clothing (C) in terms of

➔ rice (R) = 8/4 = 2 units of rice (R).
Therefore Country A (B) enjoys comparative advantage in producing rice
(clothing).
Per unit gain from trade for Country B = 4R - 2R = 2R

Total gain from trade = (4R-2R)x3 = 6R
e
e
h
it
「 ,．
OR
丿
Marks
e
o
nax
4 a Functions ofpnce: In other words, Country B would be the clothing-exporting country, producing 4C,
2
m
() exporting 3C in exchange for 12R and keeping IC for domestic consumption.
Higher prices of small-sized flats would induce real-estate developers to direct
r
2ax
Without trade, it could have produced 1C and 6R on its own. Its total gain from
@m
more resources towards the production of small flats. [allocative functionJ

·
trade is thus 6R (= 12R-6R).4

2
·
A
Prices help transmit information about consumer demand relative to producer

supply. [signal function]
a

、I
(b) The supply of large flats would drop

丿丶
（1
as small flats and large flats are in competitive supply. 3

'
（
,
4 Using knowledge learned in Elective 2, candidates may reach different answers depending on their assumptions
about the initial, before-trade production point. (Actually, information about preferences of Country B's
consumers is required to determine its autarky equilibrium, hence gains from trade.) Suppose, without trade,
Country B would produce R8 units of rice and C8 units of clothing. Its total gains from trade are thus (12-料）
units of rice plus (l-C8) units of clothing. Given that the terms of trade (TOT) equal 4(=12/3) units of rice per
3 Assuming the absence of differential land-use restrictions for flats of different sizes. unit clothing, these gains amount to (12-料）/4+(1-CB) units of clothing m: (12-RB)+(l-CB)x4 units ofrice.
41 42
Section B
Marks
8. Proposal l: Marl.s
-- Equalizing opportunities: 9. (a) Advantage:
- Lower risk of being taken over
｝二�•
Free education for longer years means that the poor are able to receive more
education and improve their productivity and hence income-earning power in No need to disclose accounting information to the public
- Any other relevant point l
the future.
- Other things equal, more money spent on education would increase government [Mark the FIRST point only.]
expenditure, leading to an increase in aggregate demand and thus aggregate @2;
堡山皿[Demand effect) max:4
- Free education for longer years would improve labour productivity and thus Disadvantage:
｝二�.,
aggregate output over time. (Supply effect] - Owners cannot freely transfer their stocks
- Provision of free education beyond normal school age would reduce labour The frrm cannot raise capital by issuing stocks to the general public
supply (by keeping more people at school) and thus aggregate output in the - Any other relevant point
current period, (Cost of investment in human capital] [Mark the FIRST point only.]
、
(b) Lateral expansion,
i
l
'
（（
一、l
as fast food and coffee are related but not directly competitive products.
丿
Proposal 2:
- Equalizing income/outcome:
More welfare payments to the unemployed could help reduce the income
inequality between the employed (rich) and the unemployed (poor).5
、
Unemployment benefits would increase the disposable income and consumption (c) Possible reasons:
@2; - Lower-quality coffee
of the jobless, and thus aggregate demand, resulting in a rise in aggregate
@m
max:4
2v
, 4
四. (Demand effect] Lower production cost
4
~
a
Unemployment benefits may, however, produce disincentive effects on labour - Less pleasant environment
supply, resulting in de-skilling of labour (i.e., decumulation of human capital) - Less attractive brand name
J
and a drop in aggre2:ate output now and in the future. (Supply effect] Any other relevant point
Any other relevant point [Mark the FIRST TWO point only.]
(d) No, 6 (1)
}『�.,
because it is not sold to the market and thus not counted in production [Output
Approach]
- because it is neither counted in consumption nor investment [Expenditure
Approach]
6 Or because business losses due to destroyed products (i.e., negative profits) would offset exactly wages paid to
5 But this may NOT serve to narrow the income gap between the rich and the poor in the case ofhigh�skill workers and other material costs incurred in producing these products (i.e., positive wage and other factor
unemployment. incomes). [Income Approach]
43 44
Marks
Marks 11 (a) (i) The percentage change in direct tax revenue and percentage change in (2)
IO (a) (i) HK's GDP would increase (by $3 million). As the course is a current-year (2) nominal GDP tend to move in the same direction. Fluctuation of the former is
production by a resident production unit, its value would be included in GDP. greater than that of the latter.
(ii) HK's GNP would decrease (by $5 million), as change in GNP= change in (3) (ii) Direct taxes in the form of income taxes (such as taxes on salaries and profits) (2)
GDP (+$3 million)+ change in net income from abroad (-$8 million). As the are highly affected by the macroeconomic situation. Growth in the economy
Brazilian coach is NOT a HK resident, the $8 million he received would be (increases in GDP) would be accompanied by growth in salary and profit
cour1ted as income outflow and enter as a negative item in HK's national incomes, which would in turn generate higher revenue from taxes on such
income account. mcomes.
Progressive taxation may be one explanation for why direct tax revenue
fluctuated more than GDP.
(b) Advantage of Contract B over Contract A:

- The owner of the football team can share some business risks with Player B as
@m
the former would make less payment to the latter when no match. is played
2 a
and/or no goal is scored
4
(b) Introduction of new types of indirect taxes, such as general sales tax or value-added (2)
兀
A
- The owner of the football team can have a lower cost of monitoring players's tax, would make more people or commodities fall into the tax bracket, thus
perfonnance as Player B would have a higher work incentive iI1 training and broadening the tax base.
4
in matches
� Any other relevant point
[Mark the FIRST TWO point only.]
(c) Tobacco duty would increase the market price of duty-paid cigarettes 皿d thus (1)
reduce its quantity demanded.
If cigarette consumers are addicted, their demand for cigarettes would be inelastic, (3)
m
(c) Professional football players have low occupational mobility, so the percentage decrease in quantity demanded would be smaller than the
m
as their skills are very specific and not easily transferable to other jobs. percentage increase in price. In this case, even a huge increase in tobacco duty
may not be effective in reducing the consumption of cigarettes
45
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46
(d) Verbal elaboration:
On the one hand, due to the HK Customs'crack-down effort, the supply of duty- (4) Marl{S
闆
not-paid cigarettes would drop. On the other hand, as duty-paid cigarettes and duty- 12. (a) A drop in the export of services to mainland tourists
not-paid cigarettes are substitutes, tobacco duty would increase the demand for would reduce HK's current account surplus (or enlarge its deficit).
duty-not-paid cigarettes. It is thus possible that the total quantity of duty-not-paid
cigarettes sold would increase if the increase in demand has a bigger effect on the
quantity transacted than the decrease in supply.
(b) Verbal elaboration:
、
Export would fall,
l
`l
（1
、丿
resulting in a drop in aggregate demand,
（
so output would fall back to Y f·
Rightward shift of the demand curve (I)
Leftward shift of the supply curve (1)
Final equilibrium with a higher quantity transacted (I)
- AD curve shifts to the left
I
)
(l
- Correct position of initial shoti-run aggregate output Y。
、
Du扒-not-paid cigarette,
｀、
（l
Price,
,J
- Correct position of new short-run aggregate output Y 1 (=Yr)
、l
（
｀ Price leyel
Figure 2
LRAS 。 SR.AS 。`
S1 / J,
＇＼以、D1«
Qo, Qi, Quantity
ADrr
。
Yer
Output
(c) Hong Kong is facing an inflationary gap. There is an excess demand in the factor (4)
嚀·ket, creating pressure for factor prices to ad」 ust upward, so that costs of
production would increase over time and short run aggregate 頤pply (SRAS) would
fall over time, restoring output to Yr in the long run.
(d) Negative extemality / divergence between private and social costs. (1)
When the public transportation system is overcrowded (i.e., at full capacity), any (3)
additional passenger using the system would increase the time cost for other
passengers without having to compensate them for this extra cost (implying a
divergence between private and social costs). As marginal social cost is now
higher than marginal social benefit, the number of passengers using the system
would exceed its efficient level.
47
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Section C
Marks
13. (a) Verbal elaboration: (d) Yes. Different groups of customers (domestic users and industrial users) are (3)
Super Power will produce at the output level where Marginal Revenue = Marginal (1) char0ed different prices for the same good (power used) produced at the same
Cost. cost.勺

Conect position ofQ1 (I )
- Correct position of P 1 (I)
F滾ure 3
(e) Merger. (l)
＄ Jt restricts the entry of potential competitors. (1)
(f) The merger may reduce the average cost of production by lowering the cost of raw (2)
materials/ enjoying economies of scale. If Super Power transfers such benefits to
the consumers via a reduction in the price of electricity, the merger may not be
anti-competitive.
、MR
。
i
Q1::::Q2,.
Q

At Q i, marginal benefi t exceeds marginal cost. (1)

- Correct position of deadweight loss (1)
(c) (i) No. Since the lump sum tax is a fixed cost, which does not vary as output (2)
changes, it would not affect marginal cost.
(ii) Indicate on the diag;rarn:

、
`
- Correct position of Q2
,
（1 l
、
、J
Correct position of P2
（
7 Assuming that the same technology is used to supply power for both domestic and industrial uses.
49 更多試卷歡迎瀏覽 http://dsepp.com 50 更多試卷歡迎瀏覽 http://dsepp.com

Marks
14. (a) No, (1) (e) (i) Reason:
- GDP may increase because of trade-induced transfer of superior technology
r
because there will be idle resources in the country/ the country is not maximizing (1)
@m
l
its production. 8 from its trading partners, resulting in an increase in productivity.
l
- Exchange in health technology may increase life expectancy.
邱
A
4
(b) No (1)
Because, without trade, the domestic cost of good X trade in country A (= 2.5Y) (2)
exceeds the world price of X (= 1 Y)
OR
i
r
Opportunity cost of X = slope of the tangent ofPPF at E > slope of AB (ii) Reasons:
卽max
- Workers in import-substitute industries may suffer unemployment
4
- Income distribution may become more uneven
4
- Pollution may increase (due to specialization in producing more "polluted"
'
goods)
[Mark the FIRST TWO point only.]
(c)
Good Y,,
Figure 4..
丶
｀
�丶丶
丶
。
丶丶
＂、
AL
丶
｀
1
丶丶
丶
丶
丶
丶
｀
丶
丶
丶
丶
｀
丶
丶
Z
丶丶
. 丶丶丶
4
-
丶
丶
丶
丶
丶
丶
丶丶丶
丶
丶
、
丶
、
丶
、
｀
丶 F
丶
丶
丶
丶．
丶
丶
．
,'
．
丶
P
p
C、
p
F
丶
丶
過
丶
丶丶丶
丶丶
。
丶
丶丶
』
·
E
GoodX.,
心
10,.,
- correct position of production point after trade

、
r\,
,
l
＇丶
- tangency between CPF and PPF

'
Ir1
J、
\,
- CPF is parallel to AB
`
｀
,
(d) Verbal elaboration:

Yes, because the country can consume beyond its PPF (which is also its CPF (2)
without trade) / the country can consume more of X and Y after trade.
Indicate on the dia紅am:

- Correct pos1t1on of consumption point after trade (1)
8 The country may produce at point N if there exists unemployment due to, say, market frictions or structural
changes
52
51 更多試卷歡迎瀏覽 http://dsepp.com 更多試卷歡迎瀏覽 http://dsepp.com
Ma「king Schemes Paper2
Paper 1
These documents were prepared for markers'reference. They should not be regarded as
sets of model
Question No. Key Question No. Ke y answers. Candidates and teachers who were not involved in the marking process are advised to interpret
1. B (74%) 26. D (6_5%)
2. C (66%) 27. C (57%) The answers provided in the marking scheme are for reference only. They are not the only possible
3. D(76%) 28. B (64%) answers. Alternative answers are acceptable so long as they are well reasoned.
4. 0(45%) 29. A(41%)
5. C(88%) 30. C (74%) The examination emphasises the testing of the understanding of economic theories and the application of
the knowledge of economic analysis to practical problems. Candidates are advised to study this document
in conjunction with the examiner's comments on candidates'performance in this booklet.
6. B (84%) 31. D (65%)
7. B (52%) 32. A (76%)
8. B (86%) 33. ＊
9. 0(49%) 34. D (34%) answers logically and coherently.
10. A(94%) 35. A(57%)
In questions asking for a specified number of reasons or examp�es etc. and a candidate gives more than the
11. B (72%) 36. C (61%) 「equired number, the extra answers should not be marked. For instance, in a question asking candidates to
B (76%) B (65%) provide two examples, and if a candidate gives three answers, only the first two should be marked.
12. 37.
13. D(64%) 38. ＊
14. A(55%) 39. A(69 %)

15. A(37%) 40. C(34%}
16. B (71%) 41. B (60%)
17. A(67%) 42. C (56%)
18. 0(44%) 43. B (48%) I A single slash indicates an acceptable alternative within an answer.
19. A(43%) 44. A(52%)
20. B (26%) 45. D (56%) @ The number in front of the symbol indicates the marks for each point.

21. C (68%)
22. D (61%)
23. C(54%)
24. D (37%)
25. C (48%) 1
* This item was deleted.
Note: Figures in brackets indicate the percentages of candidates choosing the correct answers.
General note on item deletion
It is normal for the HKEAA to delete a small number of items from its multiple-choice question papers if they
prove unsatisfactory. In practice, there are a number of reasons why this is considered necessary. By far the
most common reason for deleting an item is that the item fails to discriminate between weak and able
candidates - in other words, the majority of the candidates -involved had to rely on guesswork in answering that
question. If such an item is retained, the measurement process is rendered less effective. Where items have
been deleted in the live papers, they are still included in this series of publications. They are indicated as
deleted items. Such items may be discussed in the corresponding examination reports.
42 43

Section A
Marks
Marks
e
3. The law stats that (holding technology constant) when more units of a variable factor (3)
1. The full cost of buying the new model includes the price of new model (monetary cost) (3) are added successively to a given quantity of fixed factors, the marginal products of th.is
plus the value of time spent logging in the website. The resale value of the new model factor will eventually ditninish_
is not a forgone option so the cost of buying the new model does not change when such Yes, when labour increases from 3 to 4 units, the marginal product of labour drops from (3)
value falls. 18 to 14 units, so the law of diminishing returns holds.
旦珥
The drop in resale value will lower the (speculators') demand-hence, excess demand — (3)
for the new model, reducing the time spent logging in the website and thus the time cost
of buying the new model. The cost of buying the new model falls.
Marks
t
4. Taking photos may disturb other people in he restaurants/sharing the photos in the (3)
t
social media may disclose the design of dishes. Boh possibilities may have an
undesirable effect on the revenue/profit of the restaurants. but such effects are not
t
compensated (financially or oherwise) by the photo-takers. Such
Marks sharing behaviour may thus involve negative externality (external cost is involved).
2. (a) Public limited company/listed company. (1)
or
＿的
虹
Taking photos and sharing them in social media may have a promotion effect, attracting
more custome「s-bringing higher revenue/profit-to the restaurant, but the photo takers
do not receive compensation for such benefits. Such photo-taking-and sharing
behaviour may thus involve positive externality (external benefit is involved).
(b) Advantages:
- no interest burden
} @2
- no redemption obligation max: 2
Disadvantages:
- diluting the control right over the firm
} @2
- higher risk of being taken over
max:2
Marks
t
5. When he price level increases, the adjustment of input prices is imperfect/incomplete (3)
(e.g. due to the long term contracts of factor of production), so the real cost of
production 一i.e. nominal cost divided by the general price level-will fall. Finns
(c) Reasons: would thus use more factor inputs to produce larger output. Therefore, the SRAS curve
- cost of advertising shared by a larger number of students is upward-sloping, i.e. a higher price level would result in a higher output level.
- bulk purchase of raw material in production
- moreexte函ve division of labour 戶：3
[Mark the FIRST THREE points only.]
44 45

Marks Marks
6. 8. (a) Monetary base = $500million + $1000 million= $1500 million
闆
(a) The unemployment rate = 200 000/(3 800 000+200 OOO)x100% = 5% (2)
Money supply = $500 million + $4000 million = $4500 million
(b) Loss caused by unemployment:
` · ·
- loss of output (b) Change in monetary base = $1500 million 一 $1500 million = 0 (2)
I 邱
@m
- loss of human capital
3
- political and social unrest
[Mark the FIRST THREE points only.] Change in money supply (2)
= New money supply - Original money supply
= ($500 million + $ 1000 million x 2)一$4500 million =一$2000 million
＿
s
虹
Or
Change in money supply
(c) Economic phenomena: = Change in cash held by non-bank public + Change in deposits
` 』．
- rising real GDP grow出rate = 0 + ($1000 million x 2 一 $4000 million) =一
$2000 million
1 邱
@m
- rising inflation/lower deflation
2
- rising levels of investment/consumption
(c) (i) Under a fractional reserve banking system, banks are required to keep only a (3)
fraction of their deposits as reserves. They can create credit by lending out the
remaining fraction in the fonn of loans to businesses and private individuals,
which would eventually find their way back into the banking system in the form
of deposits, resulting in a multiple :inl沅邸e in deposits/a banking multiplier
larger than unity.
Marks (ii) If the legal reserve ratio is 100% (RRR=l)虹if all of the banlcs decide not to (1)
7. (a) In Country A, the opportunity cost ofproducing 1 C = 6/2= 3T (3) lend out their excess reserves even when RRR<l (e.g. during financial crisis,
The terms of trade: 1 C will exchange for (11/2=) 5.5T when default rates are high), the money supply will be equal to the monetary
As the opportunity cost of producing 1C is lower than the terms of trade, base.
Country A will produce and export C.
(b) The gain from trade = 5.5-3-2 = 0.5Tper unitofC. (3)
46 47

SectionB
Marks
9. Illustrate in the dia缸am: Marks
- Embargo effect: leftward shift of demand curve
10. (a) Monopolistic competition. (1)
(1)
- An original kinked supply curve S。, with the vertical segment at the quota level Q0 Features:
(1)
- Many sellers
。
- Quota-abolition effect: A new upward-sloping supply curve, overlapping the kinked (1)
one below the original quota level Q - Price searchers
一 (slightly) differentiated products
l @m
1
- Intersection of new demand curve (D 1 ) and new supply curve (S 1) results in a (1)
- Non-price competition
2
reduction in P
邱
- Imperfect market information
[MarktheF瞬T TWO points only.]
Price($)
(b) Land. It is because it is a natural resource which is a gift of nature. (2)
D 。 r
(c) Verbal elaboation:
- Condition: demand for solar panels is more elastic than its supply. (2)
Q 。 Quantity
Indicate in the dia印皿1:
nn
- upward shift of the supply curve
(n
- P increases
（＇
- Q decreases
n\,
- Correct position ofbuyers'burden and producers'burden
n＼(
- buyers'burden< producers'burden
Chinese Solar panels sold in European Union
Price($)
Buyer = buyers'burden
Seller = producers'burden
Q琿ntity
49
48

Marks (d) Equity:
11. (a) No. (1) After the fee raise, the poor may no longer be able to afford the fee and thus be (2)
deprived of the opportunity to enjoy the medical services. Equity may be worsened
because public services are usually subsidized—i.e. provided at or below cost, (2) as the poor cannot enjoy the transfer/subsidy while the rich can still use the service.
which is in turn lower than market price. Their contribution to GDP (or market
value), computed using market price, would thus be出gher than $45 (the Qr 壁
subsidized price charged by the clinic). After the fee raise, the poor may no longer be able to afford the fee and thus be (2)
deprived of the opportunity to enjoy the medical services. The poor may then be
Or
deprived of the chance to work and earn income due to their poor health.
-5
because the public services which are not sold at the market price will be counted
using factor cost in the GDP, which is higher than $45.
Efficiency:
The fee increase would improve efficiency as it results in a price closer to the (2)
equilibrium level, thus narrowing the gap between MB and MC and reducing the
size of deadweight loss.
(b) Illustrate in the diagram:
nn
Price set below equilibrium 1
（n
Correct position of Q1
（（
Correct position of deadweight loss
s
Price($)
DL = deadweight loss
＇II,
Shortage
,＇4 Qd
。
Quantity
Verbal elaboration:
、
,
Price is set at $45 which is below equilibrium.

1＇1
(（ 1
Quantity transacted is below equilibrium quantity or there is underproduction

) 、
or shortage.
囯
Marginal benefit > Marginal cost

（
＇
(c) Equalize income/outcome: basic medical service acts like a transfer or subsidy-in (2)
kind, enjoyed mainly by the low-income group; The high-income group may
choose not to "queue up" for such medical benefits and turn to private medical
service instead.
or
-s
虹
Equalize opportunities: basic medical service provided to patients with chronic
diseases would improve their health, allowing them to continue to work and earn
income. Therefore, their income would not be affected by their ability to afford
medical service (their background), but rather by their work effort.
The difference between the tenns "equilibrium" and "market clearing" is not required.
51
50

Marks Marks
12. (a) The relative importance of the gaming industry has been declining because its (2) 13. (a) Division oflabour/specialization (1)
gross revenue has been falling faster than GDP at current market price. Reasons:
- practice makes perfect
、
- choosing the most suitable person for the job
@m
1
- save time in training
3
A
邱
- stimulus to mechanisation
·
(b) Verbal elaboration: [Mark the FIRST THREE points only.]
- The cash-sharing scheme would raise the disposable income of the residents (1)
- and therefore result in an increase in consumption. (1)
- AD would rise, (1)
- raising price and output levels acco「dingly. (1)
illustrate in the dia紅am: (b) (i) Proposal A on current account:

an increase in income tax would lower disposable income (1)
Price level and result in a drop in consumption, AD, as well as output level (1)
Import would fall, implying (1)
a bigger surplus or smaller deficit in the current account balance. (1)
Proposal B on current account: �max6

心」
A fee charged on departing travellers would result in an increase in the cost of (1)
using the airport.
Travelling industry would be adversely affected, reducing the number of both (1)
incoming and outgoing travellers.
Both import and export of services would drop, (1)
．。
。
causing an ambiguous change in the current account balance. (1)

Y Y1 Output level
、
,
(ii) Proposal A on average flight distance:
`
- the rightward shift of AD
1,
\1
、
After the tax increase, some poor people would be unable to afford long
｀
- higher P and Y
,
(
distance flights and would switch to short-distance flights, thus reducing
average flight distance.
虹
(c) Arguments for: The increase in income tax would not affect the relative price between short
- Investment would increase potential output over time, but cash sharing would distance flights and long-distance flights, so consumption of the flights would @2
not have similar long-run effects on the economy. not be affected. max:2
- Investment would raise AD directly. But the cash-sharing scheme could only 缸
函se AD indirectly via an increase in consumption. In case the residents choose After the tax increase, some poor people would be unable to afford the flights.
not to spend the cash received on consumption, the AD effect would vanish. As budget-constrained people would often take short-distance flights, the drop
- Any other relevant point out of these travellers would result in an increase in average flight distance.
Arguments against: Proposal B on average flight distance:

- D血g economic downturn, a reduction in social welfare due to suspension of A lump-sum fee charged on both long-distance and short distance travellers will (4)
the cash-sharing scheme may result in discontent of the citizens and political result in a drop of the price of long-distance flight relative to short-distance
instability. flight. A higher proportion of travellers will thus take long-distance flights,
- While people can benefit from the cash-sharing scheme instantly, it may take a increasing the average flight distance.
longer time for investment to boost their income.
- Public investment may be inefficient due to high administrative costs or low
sensitivity to market/price signals (lack of profit incentives).
- Any other relevant point Remarks: Maximum fo「(b) is 10 marks.
Remark: Maximum mark of part (c) is 5 marks
52 53

Section C
Marks (c) Yes. As two groups of consumers (adults and children) are charged different prices (3)
14. (a) (i) - Correct position ofQm (1) for the same good (ferry service) produced at the same cost.
- Correct position of Pm (1)
(ii) Illustrated in the diagram:

correct position ofDL0 (1) (d) (i) If owners of the seafood restaurants agree to engage in price fixing and raise (3)
the price together (i.e. collusion), they would violate the first conduct rule
Verbal elaboration: under the Competition Ordinance.
At Qm, marginal benefit (MB) is higher than marginal cost (MC). (1)
(ii) The price increase may be a market response to increased demand fo「seafood (2)
(b) (i) The reduction in fuel cost reduces the marginal cost. (1) meals during public holidays due to a bigger number of visitors.
or
-e
The price increase may be a result of reduced supply of seafood meals due to
(ii) Verbal elaboration: higher p「oduction costs (e.g. need to hire more part time workers) on public
心
Economic efficiency would be lowered and the deadweight loss would be (2) holidays.
larger, as the gap between MB and MC would be enlarged and output would
now be even further away from its efficient level.
Illustrated in the diagram:

correct position of new DL/increase in DL/the increased gap between MB and (1)
MC
Fare($)
Pm
= increase in DL
Quantity
Qm
54 55

｀圧ks
15. (a) The marginal cos乜ofproducing of both X and Y are increasing in Country A. (1) (c) Indicate in the diagram:
(i) The correct position of PA (1)
(ii) The correct position of CA (1)
(iii) The correct volume of export (1)
The correct volume of import (1)
nn
(b) Country A's opportunity cost of producing IX 4Y
=
（n
Country B's opportunity cost of producing lX = 6.25Y
（（
Country A bas a lower cost in producing X, and thus it bas a comparative advantage
in producing X. (d) No, because the opportunity cost of producing X (and Y) will be unaffected by this (2)
technological change.
GoodY
Figure 3
(e) (i) Effects on economic grow出：

75
- Lower per-capita GDP
Lower human capital/labour productivity
Lower marginal productivity of capital (due to complementarity of
labour and capital)
Slower research and development
Any other relevant point
、...... . [Mark the FIRST TWO points only.]
一一一一一｀
... . C
A
----� 丶
�{
(ii) Policy:
-
怛 A -
Importation of high-skilled labour
l
______.._ _______ _ Scholarships to attract higher-quality overseas students
l＇,
@m
2
-
:P｀ ;, Relaxation of immigration policy to target the smarter brains
`·
｀
-
＇, Introduction of return migration policy
邱
丶
丶
-
, ,
丶

｀
丶
丶
＇＇ [Mark the FIRST point only.]

丶
丶
I
丶
＇
丶
丶
丶
丶
三
丶
丶
丶
｀
丶
丶
｀
丶
丶
丶
丶
丶
｀
丶
丶
｀
丶｀
u
丶
。
丶
丶
丶
12 GoodX
56 57

Ma「king Schemes Paper 2
Paper 1
These documents were prepared for markers' reference. They should not be regarded as sets of model
Question No. Key Question No. Key answers. Candidates and teachers who were not involved in the marking process are advised to interpret
1. C(90%) 26. A(52%)
2. C(53%) 27. B(76%) The answers provided in the marking scheme are for reference only. They are not the only possible
3. 0(82%) 28. C(76%) answers. Alternative answers are acceptable so long as they are well reasoned.
4. 0(44%) 29. 0(60%)
5. D(88%) 30. A(69%) The examination emphasises the testing of the understanding of economic theories and the application of
the knowledge of economic analysis to practical problems. Candidates are advised to study this document
6. A(84%) 31. B(36%) in conjunction with the examiner's comments on candidates'performance in this booklet.
7. B(65%) 32. A(61%)
8. D(55%) 33. C(43%) For essay-type questions, candidates are expected to demonstrate an understanding of the question, an
9. C(57%) 34. C(85%) ability to deploy relevant knowledge of the subject in response to the questions, and to present their
10. B(87%) 35. A(57%)
In questions asking for a specified number of reasons or examples etc. and a candidate gives more than the
11. C (75%) 36. C(64%) required number, the extra answers should not be marked. For instance, in a question asking candidates to
12. A(88%) 37. B(66%) provide two examples, and if a candidate gives three answers, only the first two should be marked.
13. A(46%) 38. B(68%)
14. C(59%) 39. D(51%)
15. B(84%) 40. B(45%)
16. B(64%) 41. B(48%)
17. 0(62%) 42. C (57%)
18. C(47%) 43. B(65%) I A single slash indicates an acceptable alternative within an answer.
19. 0(70%) 44. A(69%)
20. A(68%) 45. D(40%) @ The number in front of the symbol indicates the marks for each point.
21. D(91%) max Maximum mark for the question/sub-question

22. C(73%)
23. 0(47%)
24. A(69%)
25. A(40%)
Note: Figures in brackets indicate the percentages of candidates choosing the co"ect answers.
42
43

Section A
Marks
1. ( a) No. The value of the highest valued option forgone (i.e., the first option) would
泗
(2)
drop.
(b) No. The working time in South Korea may be quite long, so that the first option (3)
would become less preferred.
Marks
2. ( a) ( i) From the viewpoint of the employees: (2)
possibility of getting higher income with more effort and/or better service
(ii) From the viewpoint of the employer: (2)

lower cost of monitoring the performance of the waiters and/or higher
incentives for the waiters to work harder and provide higher-quality service to
the customers
(b) Reasons:
』
- The firm may have become too large in scale, so managerial efficiency starts
declining.
鉭max
- The firm may have large outstanding loans, so the marginal cost of further
．
·
．
4
borrowing increases.
- The market may have saturated, leading to a rise in the marketing cost.
'

[Mark the FIRST TWO reasons only.]
Marks
3. Oligopoly. (1)
Features:
`
一 several dominant firms

entry barrier
卻max
· L
interdependent pricing strategies

．
．
2
imperfect market information

[Mark the FIRST TWO features only.]
44

Marks Marks
7. (a) (i) Uncertain. Without knowing the total amount of resources of both countries, (2) 9. (a) Depression / trough (1)
二
the productivity (output per unit of resource) for food and computer cannot be
detennined.
(i;)! 1 ey utilize all of theU (b) A reduct10n m mterest rate would result m anse in investment and/or consumption.
Aggregate demand would thus increase, and so would aggregate output as well.
(3)
The opportunity cost of producing 1 unit of computer in Country A: (1)

=200/100=2 units of food (c) Consistent. (I)
The opportunity cost of producing 1 unit of computer in Country B: (1) When interest rate dropped in 2009, GDP growth rate increased and unemployment (3)
=200/200=1画t offood rate dropped.
Country B has a lower opportunity cost in producing computers, so it will (1) [Alternatively, it may be argued that the data is not consistent with the answer in
produce and export computers. (b)-as the US actually cut its interest rate in 2008, but GDP grow出was still
negative and the unemployment rate was still rising in 2009.] 1
(d) Subsidizing research and development / importation of labour / investment in (2)

(b) Terms of Trade (TOT)=7/4=1.75 F per unit ofC (1)
infrastructures could increase potential output or production capacity of the economy
Per unit gain for Country B=1.75-1=0.75F (1)
as a whole in the long run, and thus shift LRAS rightward.
Total gain=0.75x16=12F (1)
[Mark the FIRST policy only.]
Marks
8. (a) RRR=($1000-$250)/$3000=0.25 (1)
(2)
1
(b) The change in deposits=$250 x沄了= $1000
1 The long and variable time lag of monetary policy is not required.
46 47

Section B
Marks
11. (a) Verbal elaboration:
M
a
「
ks
`
10. (a) - Shares of a listed company are freely transferrable while shares of a private The condition is that the elasticity of demand for education services is lower than the (2)
limited company are not. elasticity of supply.
@m
1
- A listed company is fe<IUired to disclose its accounting information to the public
2
邱
while a private limited company is not.
- A listed company can issue shares and bonds to the general public while a private Illustrate in the diagram:
、�
limited company cannot Parallel downward shift of supply curve due to the per unit subsidy
1 1
,
（（＇＼（（
`
Correct position of New Price (瓦）
、.
'、
Correct position ofNew Quantity (Q」)
．丿丶丿丶
1 l l
Correct position of producer benefit and consumer benefit
}�,:2
Consumer benefit > producer benefit
··
'
(b) Arguments supporting the suggestion:
- Government will have a better control of the train fare, and it can freely reduce Price($)
the fare to relieve the burden of the passengers
- If MTR is fully owned and supported by the government, that would make it
easier for MTR to get loans to fund its operation or investment
霉
·•· -·
.....'
PB
,, ·,·.•; 、···l CB
.
s.
}�:2
Pz
::.�今定4
�ents opposing the suggestion:
- It may lower the efficiency of MTR's management and reduce its sensitivity to
PoJPl
market (price) signals.
- The money involved in the purchase of MTR is substantial. The government may
have better alternative uses of the money, such as education and medical services.
(c) No.
o
` o
) 、
Verbal elaboration:
`, ) ）
- There was a rise in demnncf
ò
- Both the price and the quantity transacted have increased.
Ù
。
- Total revenue has increased. ` D
max:7
Q 。 Q1
Quantity
Illustrate in the dia�缸n:

、
`
- Rightward shift in the demand curve

n
ò
,、｀
- Higher Price f!.lld Q血ntity

、U
,、`
- Higher Total Revenue

`
,

p At Q1, marginal cost is larger than marginal benefit. (1)
Illustrate in the diagram:
、
.
',
Correct position of marginal benefit
1 1
、
（（
`
Correct position of marginal cost
,
陔嚀 Increase i TR
^
n
Pl
_po
(c) Yes. Subsidizing education is a measure to equalize opportunities, so the poor will (3)
not be deprived of university education due to financial constraint. Education could
also raise their future income, thus reducing income inequality over generations.
。
48 49

Marks
Marks 13. (a) (i) Tertiaryproduction. (1)
12. (a) The geographical mobility of low-skilled workers from the EU .would be lowered一 (3)
because the visa requirement would increase the cost for those EU workers to go to
work in the UK.
(ii) GDP would rise, as charges for the service of the elderly care centre is (2)
regarded as consumption expenditure by Mr Chan on fmal goods and services.
(b)�
- The new visa requirement would increase labour cost for the British firm ( 2)
。
wners, resulting in a drop in SRAS. (b) (i) Proposal A's effect on aggregate output:
An increase in salaries tax would reduce AD via a drop in disposable (after- (4)
Political uncertainty would result in a drop in investment from the global (2)
investors and thus a fall in AD. tax) income and thus consumption. As a result, aggregate output would fall.
Aggregate output would thus drop. (1) [An increase in salaries tax may also reduce SRAS by creating a disincentive
effect on labor.]
Illustrate in the dia印am:

leftward shift of AD curve Proposal B's effect on aggregate output:
、 �、
1
(1
leftward shift of SRAS curve There would be no extra effect on aggregate output as a component of ADIAS (2)
`,、
（1
lower output does not change.
,＇
（
Price level
SRAS1
(ii) Proposal A's effect on income distribution:
。
Salaries tax payers (higher-income group) would pay more taxes while non (2)
tax payers (lower-income group) would not affected.
Qr 虹
High-income tax payers pay more, low-income tax payers pay less. (2)
The after-tax income inequality would thus be reduced. (1)
Proposal B's effect on income distribution:

- There will be no extra effect on current tax payers, so the income inequality (2)
＇＇I is unaffected.
＇＇ - Reduction of fiscal reserves may result in a tax increase in the future, so (2) } max: 2
＇＇ future tax payers (m皿nly the younger portion of the population) may have
＇＇ to pay more taxes, thus increasing income inequality between generations.
＇
。
Y1�Y
1
。 Output level
(iii) Proposal A's effect on other variables:
- Price level would drop as AD drops (while there is no such an effect
l
generated by proposal B).
@m
2
- Unemployment may increase as AD drops (while there is no such an effect
2
generated by proposal B).
邱
(c) Components of current account:
- Invisible trade: the increase in cost of travel would result in a fall in the number Proposal B's effect on other variables:
of British citizens visiting the EU and hence the import of services. - A worsening of the government's budgetary position (due to a drain on
Factor income (primary income): with fewer British workers wo「king in the EU, 扁cal reserves) may imply tax increase in the future. (No such effect arises
there would be a drop in total wage payment to such workers. under proposal A.)
Unilateral transfer (secondary income): with fewer workers wo「king in the EU, - Business confidence may be weakened. Expecting tax increases in the @2
there would be a drop in their remittance back to Britain. future (due to the problem of fiscal sustainability), which would reduce max: 2
their after-tax profits, business firms may choose to cut down their
investment. (No such effect arises under proposal A.)
Note: The maximum marks for part (b) is 10.
50 51

Section C
Marks Marks
15.
14. (a) (i) Illustrated in the dia缸am: GoodY
、
.
Correct position of MR
1
（l
'
、`
Correct position ofQM
,
（1
、�
Correct position of PM
（
Price($)
A'
M
Quantity
QE
Verbal elaboration:
HK ONLINE would produce at a quantity where MR= MC = 0. (1)
(a) (i) Illustrated in the diaw皿

(ii) - Correct position ofQE (1) correct position of CA = production point PA (1)
Verbal elaboration:
Without trade, Country A can only consume its own production. (1)
(b) (i) Yes. (3)
Different consumers(new and existing customers) are charged different prices
for the same services produced under the same cost.
｝
(ii) Illustrated in the dia缸血｀
Correct position of the straight line (L) (1)
(ii) No. (3) Verbal elaboration:

A lower price is charged for the internet service because, when combined with Slope of L is the marginal cost of Good X.
(1 )
TV service, its marginal cost of production (including, administration cost, L is steeper than TT'. (1)
marketing cost, installation cost, etc.) would be lowered. That means marginal cost of producing Good X is higher than the world (1) max: 3
price of Good X.
So Country A did not have a comparative advantage in producing Good X. (1)
(c) (i) Market sharing/ market allocation. (1)
Motives:
- Firms would face less competition within their assigned markets.
- They can raise prices and make more profit in their own assigned markets.
2
- By focusing on their assigned m血ets alone, firms can lower their �
marketing cost. }
[Mark the FIRST TWO motives only.]
(ii) The first conduct rule. Because this is a case of an anti-competitive (2)
agreement.
2 Knowledge of convex indifference curves is not required.
52 53

Marks
(b) ( i) Illustrated in the diagram:
- Correct position of PT
- Correct position of CPF ｛｝｝
Verbal elaboration:
- Country A would produce at耜where TOT = domestic marginal cost of (1)
production.
(ii) Illustrated in the dia缸am:

- Correct position of CT (1)
Verbal elaboration:
- Country A can consume at a point which is unattainable from local production (1)
before trade.
(iii) Illustrated in the dia印am:

- Correct position ofM (1)
(c) (i) - enhance economic growth (as shown by higher levels or positive rates of (1)
grow曲ofper-capita real GDP because
external trade could increase aggregate demand {through exports) and hence (1)
real GDP.
(ii) - no change in economic development (as reflected by the same level of HDI) (1)
because
more people may leave school e訌lier in order to take part in trading activities, (1)
thus decreasing the average number of ye缸s of schooling, while GDP rises as
a result of trade.
2!: 缸
pollution (as a by-product) may become more serious as production is (1)
increased after trade /
new disease or virus brought in by foreigners may shorten the life expectancy
at birth of the local people.
54
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2019 DSE Economics Marking Schemes 1 2019 DSE Economics Marking Schemes 2
Marks
4. Getting vaccinated protects oneself as well as lowering the chance of others being (4)
Section A infected by flu. Since the person receiving vaccination is not compensated by others
(whose chances of being infected are reduced), there exists external benefit, with
marginal social benefit exceeding marginal social cost. This implies that the number of
Marks
l. (a) The opportunity cost will remain unchanged. It is because the height limitation people getting vaccinated is below the efficient level. Subsidy can increase the quantity
(2)
only reduces the value of the reclaimed land but does not affect the highest valued of vaccination towards the efficient level and thus narrow the gap between marginal
option forgone. social benefit and marginal social cost.
Marks
(b) The government needs to spend extra money/resources to compete for the raw (3) 5. (a) Division oflabour/ (Principle of) comparative advantage (1)
materials in the case of shortage so monetary/non-monetary cost will increase and [Mark the FIRST point only.]
the full cost will increase.
Benefits: (2)
- Finding the most suitable person for the job: the parents in both families can use
their expertises in teaching their children so the children can learn both
languages better.
Specialisation and exchange: Mr Wong can specialise teaching English, i.e. the
production in which his opportunities cost is lower, then exchange for his
children learning Japanese from Mrs. Chan. The children can learn both
languages better with a lower cost. (Similar argument applies to Mrs Chan in
her teaching of Japanese as well.)
Marks any other relevant point
2. (a) Statement A is a positive statement because it is refutable by fact (2)
(b) Economies of scale. (1)

(b) Equalising income: the districts are with lower average household income so this
cash will help narrow the income gap. Benefits: (2)
- They can have more discounts when food ingredients are purchased in bulk
Equalising opportunity: the subsidy on education will enhance the chance of the which would reduce the average cost of producing the dinners.
poor to get higher education without being hindered by their backgrounds. - Cooking together can save the average cooking time and at the same time can
have a larger variety of food choices.
Marks
6. (a) Increased (+1.7%). (1)
Marks
3. Examples: (1)
- HK Airport Authority
- Hong Kong Export Credit Insurance Corporation (b) He would gain because when the actual inflation rate (1.7%) was lower than the (3)
- any other relevant example expected inflation rate (2.3%), the actual real interest rate received (3.3%) was
[Mark the FIRST point only.] higher than the expected real interest rate (2.7%). OR the purchasing power of the
interest received was higher than expected. 1
Advantages:
- easier to get information about the general public from the government for
decision-making
- can provide stable service with a lower price @1 {c) Real wage rates increased because the increase in the nominal wage rate 6.2% was (3)
- easier to get loan with the backup of the government max:2 higher than the inflation rate I. 7%.
1 The fact that Siu Keung was willing to lend money to Kitman in 2017 implies (by revealed preference) that they both expected gains from
such bolTOwing and lending ammgement (known as intertemporal trade). The fact that the actual inflation rate (I. 7%) turned out to be lower
than expected (2.3%) merely implies that the ex post (actual) gain from intertemporal trade was bigger than the ex ante (expected) gain.
46 47
Marks Section B
7. {a) Excess reserves= $300 million - $1 OOO million x 20% = $100 million (1)
Marks
9. (a) Public good. It is because the videos are non-rivalrous in consumption as people (3)
can concurrently watch the video without affecting one another.
{b) Old money supply= $1000 million+ $200 million (4)

= $1200 million
New money supply= ($300 million+ $200 million) x 1/20% + $0 million
= $2500 million (b) Horizontal expansion. (1)
Maximum possible change in the money supply= $2500 million - $1200 million
= $1300 million Reasons:
- enlarge the market share
- enjoy economies of scale
- make use of the brand name
Marks
8. (a) (i) Yes. (2) (c) Advantage: Cost of measuring output of the employees can be saved. (2)
When Country B has the same resource as Country A, the output of cars would Disadvantage: Work incentive may not be high.
be 200 units which is higher than that of country A [Mark the FIRST advantage and FIRST disadvantage only.]
(d) Advantage: Higher output will yield higher income. (2)

o~ m Disadvantage: Income may be unstable.
The opportunity cost of producing 1C in Country A= 1T [Mark the FIRST advantage and FIRST disadvantage only.)
The opportunity cost of producing lC in Country B= 0.6T
Country B has a comparative advantage in producing cars.
{b) TOT: 1C=0.8T (3)

The per unit gain for the car-importing country {i.e., Country A)= 1T - 0.8T = 0.2T
Its total gain from trade= 0.2T x 10 = 2T
48 49
Marks
Marks 11. {a) The launch ofHSR will increase the geographical mobility of workers because the (3)
10. (a) It is a progressive tax because higher average tax rate is charged for tax payers with (2) transportation network improves.
higher income.
{b) Verbal elaboration: (2)

(b) Verbal elaboration: Fares are set above the market-clearing {or equilibrium) level. So marginal benefit
(4) of train service is larger than marginal cost.
The middle income group is charged a lower average tax rate, their disposable
income rises, consumption and aggregate demand increase, narrowing the
deflationary gap. Illustrate in the diagram:
- correct position of P and Q (1)
Illustrate ln the diagram: - correct position of deadweight loss {DL) (1)
- correct initial deflationary gap (1) Fares($)
- AD shift rightward 2 (l)
- correct new Y with a smaller gap (I)
Price level
LRASo s So
AD: aggregate demand

SRAS: short run aggregate supply
LRAS: long run aggregate supply
gap: deflationary gap
(c) Verbal elaboration: (6)

Because of the linked exchange rate system, RMB depreciates against HKD
accordingly thus lowering fares in terms of HKD. If the demand is elastic, the
percentage drop in price will be smaller than the percentage rise in quantity. Total
0 Aggregate output ticket revenue will therefore increase.
Illustrate in the diagram:

- correct position of gain and loss (2)
- gain> loss
(c) For: Pros of the monetary policy OR Cons of the fiscal policy (2)
- The monetary policy increases Y via investment which will help Fares (in terms of HKD)
enhance present/future productivity (while the tax policy may not have
such an effect).
- The tax policy may worsen the fiscal balance of the government (while
the monetary policy will not have such an effect).
- any other relevant p9int
Against: Pros of the fiscal policy OR Cons of the monetary policy (2)
- The tax policy may narrow the income gap (while the monetary policy
won't have such an effect).
- Bank loans and money supply may not increase even if there is a fall in
the required reserve ratio (while the tax policy will not be affected by
the action of commercial banks).
2SRAS and I or LRAS may also shift to the right because of the increase in work incentive as a result of tax reduction. Ifwe focus only on the O....__ _ ___.Q._o---_-_-_-_:_:_::);-Q
....-~Number1 of passengers
short run effect of the policy, then the deflationary (output) gap should be narrowed.
50 51
Marks
12. (a) (i) Illustrated in the diagram: (c) Marks award for effective communication <EC: max 2 marks)
(3)
- S shifts up Marks Perfonnance
- Lower total market value (net-of-tariff) 2 • Support arguments with the source/data and appropriate economic
theories.
• Present relevant material.
Price • Present well-organised and coherent answers without repetition OJ
ideas.
• Use language that expresses ideas clearly and fluently with appropriate
use ofwords/terms/symbols.
1 • Present arguments with some support of the source/data and economic
theories.
• Present some irrelevant material.
• Present answers in a less organised way with some repetition.
• Use language that conveys a clear message with some inappropriate use
~ - loss in total market value (net-of-tariff) ofwords/terms/symbols.
0 • Present arguments with no support of the source/data and economic
theories.
• Present material unrelated to the gist ofthe question.
• Present inconsistent arguments.
• EXTJress limited ideas with inaoorovriate use ofwords/termslsvmbols.
The maximum marks for content is 11 marks. Answers may include the following:
D
Effects on aggregate output:

• Re-exports drops, AD drops, and aggregate output drops.
• The stock prices drop and people's wealth drops, consumption drops, and
aggregate output drops.
• Some trading firms may, consider moving away from Hong Kong to other
countries in order to escape from the tariffs/ explore new markets. SRAS drops
and aggregate output drops in the future.
(ii) China retaliates by charging tariffs on US goods. The value of exports of US (3)
to China will drop. If the effect on exports outweighs the effect on imports, Effects on tax revenue:
trade deficits will be enlarged. 3 • Profits tax revenue will drop because some logistic/trading firms suffer and
profits drop.
• Income tax revenue will drop as aggregate output and the average household
income fall.
• Revenue from stamp duty may drop as the stock market crash may lower the
volume of trade in the stock market.
(b} No. Hong Kong is a major re-exporter between US and China and some re- (3)
Effects on other variables:
exported goods are subject to tariffs. So the value of these re-exports may drop and
the total value of HK exports (which includes re-exports) may thus dropped as • Unemployment rate may increase as production drops and demand for labour is
reduced as firms more away from Hong Kong. The unemployed population
well.
increases while the labour force remains unchanged.
• HKD may appreciate against RMB as Chinese government may lower the
exchange rate of RMB to lessen the effect of the tariff on exported goods/ there
may be large capital outflow from China.
• Government spendings may increase as the government may need to grant
subsidy or loans to the affected firms and/or provide unemployment benefits to
the jobless.
3In the real world there are other factors that affect the trade balance: the demand elasticities of Chinese goods in US market and US's goods
in China matket, exchange rate policies of both coWltries and the reactions of the private finns in both countries, etc.
52 53
Section C Marks
(c) (i) Same products produced at same cost (e.g. smartphones) are charged different (2)
Marks
13. (a) Verbal elaboration: prices to different groups of consumers (e.g. students).
(1)
Marginal revenue = Marginal cost to determine profit maximising output. The firm
will then set the price according to the demand curve. (ii) Conditions: (2)
- Market is separable.
Illustrate in the diagram: - Elasticities of demand of two sub-markets are different.
(3)
- correct position of marginal revenue curve [Mark the FIRST TWO points only.]
- correct position ofQ 1
- correct position of P 1
(d) Tie-in sale. (3)
Price($) '
Harms to consumers:
- higher price
- lack of choice
- any other relevant points
IIlID Old deadweight loss

~ New deadweight loss
'-~_., _ _ _ _ _ _.......--..._ _ _ _ _ _ _ ___,._D....1~Quantiy

0 Q1 Q2
(b) (i) Illustrate in the diagram: (2)

- downward shift of marginal cost curve
- correct position of P 2 and Q2
(ii) Verbal elaboration: (1)

Efficiency is worsened because the deadweight loss increases. 4
Illustrate in the diagram: (2)

- correct position of the old deadweight loss
- correct position of the new deadweight loss
4 It depends on the new position of the marginal cost curve. Candidates may answer "uncertain" if they can draw the old DL and new DL with
similar size.
54 55
Marks
Marks (d) No. If the world price of Good X falls such that it is lower than the domestic (3)
14. (a) Good X. Because the opportunity cost of producing lX = l .5Y < world price (2)
(=2Y). opportunity cost (i.e., IX < I .SY), Country A will no longer have a comparative
advantage in producing Good X.
(b) Illustrate in the diagram: (5) (e) Reasons: (2)

correct position of consumption point before trade C0 (10, 15)
- Closing the door to those foreign workers who possess better knowledge and/or
correct position of production point after trade P 1 (20, O)
correct position of CPF after trade skills than domestic workers would lower the average level of human capital in
Country A (and may even reduce its investment in human capital), and thus
correct position of consumption point after trade C 1(10, 20) 5
slow down its output growth.
Verbal elaboration: - Closing the door to foreign trade would eliminate possibilities of importation of
Gain from trade= 5 units ofY better-quality capital (machines and equipment) and superior production
technology from foreign countries, and thus create negative effects on
technological improvement and output growth in Country A.
(c) Illustrate in the diagram: (2) - Loss of foreign funding in support of research and development in Country A.
- correct position ofXA thus lowering its rate of technical progress.
- correct position of MA - any other relevant point
Good Y
50 (f) Reasons:
- Health of citizens in Country A may deteriorate due to loss of opportunities to (2)
import new and more effective medicine, better-trained doctors, and superior
45 medical equipment and technology from foreign countries.
- Average level of education in Country A may be lowered due to closing down
4 of international schools and departure of foreign teachers (as well as foreign
students).
MA: Import of Country A

XA: Export of Country A
0 5 10 15 20 25 30 35 40 45 50
~
XA
lInstead of indicating all the before-trade and after-trade production and consumption points in the diagram to find the gain from trade,
candidates may also calculate the gain using formula.
56 57

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Paper 2

The following symbols are used:

I A single slash indicates an acceptable alternative within an answer.

max Maximum mark for the question/sub-question

No, because (1)

5. (a) No, because (1)

(b) Yes, because (I) Indicate in the diagram:

9. (a) In country A, opportunity cost of producing IS = 0.2W (1)

any other relevant point

(c) 0.2W<1S<0.25W OR 4S<1W<5S ( 2)

Indicate in the diagram: Disadvantages:

Indicate in the dia紅am: (b) - The seller needs to be a pnce searcher.

D1 (ii) Yes, because (1)

(d) - QTM: MV = PY, where M = money stock, V = velocity of circulation of (2)

A single slash indicates an acceptable alternative within an answer.

max Maximum mark for the question/sub-question

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(b) Verbal elaborat10n:

As shown in Table 2, there is an increase in the proportion of working max: 3

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Indicate on the diagram:

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(ii) Predatory pricing. This aims to drive out competitors. (2)

(d) Administrative costs may be high

Other measures can be used to promote competition

Market is competitive and government intervention is not necessary

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Question No. Key Question No. Key

6. C (56) 31. A (73)

11. B (83) 36. D (52)

16 . C (48) 41. A (59)

(c) Monopolistic competition (1)

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(b) Direct tax,

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Indicate on the diagram:

Indicate on the diagram:

I Mnrk till'1:ll{ST l'W< l re11so11s only. I

Indicate on the diagram:

and aggregate demand increases.

AD the same cost.

6. B (73) 31. B (52)

Good Y 11. B (47) 36. A(72)

15 16. C (48) 41. D(45)

- tax allowance for further education (or education subsidy)

- teaching grants -- to universities for more degree programmes

- bigger immigration quota for experts and professionals

- any other relevant point

The following symbols are used:

I A single slash indicates an acceptable alternative within an answer.

max Maximum mark for the question/sub-question

1Or because it has positive marginal use value (MUV).

In Country B, the opportunity cost in producing l unit of clothing (C) in terms of

Per unit gain from trade for Country B = 4R - 2R = 2R

more resources towards the production of small flats. [allocative functionJ

trade is thus 6R (= 12R-6R).4

Prices help transmit information about consumer demand relative to producer

[Mark the FIRST point only.]

(b) The supply of large flats would drop