Chapter 2 the Three Basic Economic Problems and Private Property Rights

8/13/2019 Chapter 2 the Three Basic Economic Problems and Private Property Rights

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Economics Inquiry for HKDSE Microeconomics 1Chapter 2 The Three Basic Economic Problems and Private Property Rights

Multiple Choice Questions

|!|EM12001|!|

The how to produce problem is illustrated when the government decides to

A. provide more free dental services to the public.

B. construct more roads.

C. upgrade the computer system used for collecting tax.

D. build more public housing estates.

##

C

Upgrading the computer system used for collecting tax concerns the change in the method of

production. Therefore, the how to produce problem is illustrated.

##

|!|EM12002|!|

Which of the following is NOT related to the basic economic problem of what to produce?

A. the quantity of T-shirts a garment factory produces

B. the types of workers a garment factory employs

C. the types of T-shirts a garment factory produces

D. the types of trousers a garment factory produces

##

B

The types of workers a garment factory employs illustrate the how to produce problem, which is

about what kinds of factors of production to use.

##

|!|EM12003|!|

Which of the following involves the question of for whom to produce?

A. A film distributor invites only reporters to a special screening of its new film.

B. LW, a luxury brand, uses special materials to produce handbags.

C. Companies tend to produce more of the products that are popular.

D. None of the above.

Aristo Educational Press Ltd. 2-1


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##

A

A film distributor determines who can attend the special screening as it invites only reporters.

Therefore, it involves the question of for whom to produce.

##

|!|EM12004|!|

Which of the following is related to the question of what to produce?

A. ABC Car Manufacturing Company decides to cut price.

B. Winnie Beauty Salon offers frequent customers a special discount for hair treatment.

C. Producers keep on exploring new methods to cut production cost.

D. Happy Shoe Company conducts a survey on customers preferences for their products.

##

D

Conducting a survey on customers preferences determines which kinds of shoes the company will

produce. Therefore, it is related to the question of what to produce.

##

|!|EM12005|!|

Which of the following is related to the question of how to produce?

A. Many companies have more than one product line.

B. Good sculptures are usually hand-made.

C. A restaurant offers discounts to holders of certain credit cards.

D. A singer has reserved some seats at her concert for some of her friends.

##

B

The word hand-made in option B concerns the method of production. Therefore, this is related to the

question of how to produce.

##



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|!|EM12006|!|

Which of the following are related to the problem of for whom to produce?

(1) Only disabled people can apply for a disability allowance.

(2) University places are allocated mainly according to students HKDSEE results.

(3) On Ladies Nights, the bar admits only female customers.

A. (1) and (2) only

B. (1) and (3) only

C. (2) and (3) only

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

##

D

The three options above concern who can get the goods. Therefore, this is related to the problem of for

whom to produce.

##

|!|EM12007|!|

In the 1990s, many factories in Hong Kong moved to the Mainland for the lower rent and wages. The

movement of factories is related to the basic economic problem of __________________.

A. how to produce

B. what to produce

C. for whom to produce

D. where to produce

##

A

Choosing the places of production concerns the method of production. Therefore, this is related to the

problem of how to produce.

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|!|EM12008|!|

Suppose the MTR Corporation charges the elderly only $2 for travelling with MTR on Wednesdays and

public holidays. This decision is related to the basic economic problem of _______________.

A.

what to produce

B. how to produce

C. for whom to produce

D. how much to produce

##

C

As only the elderly can enjoy the discount, this concerns the criteria of allocating the goods, so it

concerns the for whom to produce problem.

##

|!|EM12009|!|

Mr. Chan is the owner of a bakery. He is now considering either to buy more machines or to employ

more staff to expand output. Which basic economic problem(s) is/are illustrated in this case?

(1) what to produce

(2) how to produce

(3) for whom to produce

A. (1) only

B. (2) only

C. (1) and (2) only

D. (2) and (3) only

##

B

Making a choice between buying more machines and employing more staff determines the method of

production. Therefore, this case illustrates the problem of how to produce.

##



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|!|EM12010|!|

The Leisure and Cultural Services Department should not allow a single performance to use the

Grand Theatre of the Hong Kong Cultural Centre for more than three months in a row. Otherwise it is

unfair to other arts organisations. Which basic economic problem is illustrated by the statement

above?

A. what to produce

B. how to produce

C. when to produce

D. for whom to produce

##

D

This statement concerns who can use the theatre. Therefore, this is related to the problem of for whom

to produce.

##

|!|EM12011|!|

The owner of a watch manufacturing company decides to produce digital watches and employ more

highly skilled labour. This decision is related to the basic economic problems of ________________

and ________________ respectively.

A. what to produce what to produce

B. what to produce how to produce

C. how to producefor whom to produce

D. for whom to produce how to produce

##

B

Deciding to produce digital watches concerns what kinds of goods to produce. Therefore, it is related to

the problem of what to produce.

Employing more highly skilled labour concerns what kinds of factors of production to use and their

quantities. Therefore, it is related to the problem of how to produce.

##



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|!|EM12012|!|

Which of the following are likely to be found in a traditional economy?

(1) People celebrate Chinese New Year.

(2) Females are not allowed to inherit properties from their ancestors.

(3) People use some primitive tools to produce.

A. (1) and (2) only

B. (1) and (3) only

C. (2) and (3) only

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

##

C

In a traditional economy, people follow their customs and traditions to allocate goods and assets.

Females are usually not allowed to inherit properties. Also, as people follow the ways their ancestors

produced, primitive tools are usually used.

##

|!|EM12013|!|

In a traditional economy,

A. allocation of resources is determined by price.

B. there is no competition of resources.

C. there is no scarcity.

D. variety of goods is likely to be limited.

##

D

In a traditional economy, people decide what to produce based on customs and traditions. They always

produce similar things to what their ancestors produced and do not decide what to produce according to

the market prices. Variety of goods is therefore likely to be limited to what their ancestors produced.

##



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|!|EM12014|!|

The main difference between a planned economy and a market economy lies in their difference in

A. political orientation.

B. ownership of resource.

C. method of resource allocation.

D. level of economic development.

##

C

In a planned economy, resources are allocated by government decisions. In a market economy,

allocation of resources is guided by market prices.

##

|!|EM12015|!|

In a command economy,

A. scarcity does not exist.

B. competition exists.

C. all people have the same amount of income.

D. the living standard is lower than that in a market economy.

##

B

In a command economy, it faces the problem of scarcity. Competition therefore cannot be avoided.

##

|!|EM12016|!|

Which of the following is MOST likely a correct description of a command economy?

A. It is poorer than a market economy.

B. Its tax rate is lower than that in a market economy.

C. The government assigns jobs to most people.

D. There are no private property rights.



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##

C

In a command economy, the government plans for her people and commands her people to follow.

Therefore, the government assigns jobs to most people.

##

|!|EM12017|!|

An economy is considered as a market economy when

A. private property rights exists.

B. the tax rate is sufficiently low.

C. it supports free trade.

D. its resources are allocated by price mechanism.

##

D

In a market economy, allocation of resources is guided by market prices, which are determined by the

interactions between buyers and sellers in the markets.

##

|!|EM12018|!|

In a market economy,

A. the living standard is higher than in a command economy.

B. when the price of a good rises, its producers will produce more of it.

C. the distribution of income is more even.

D. there are no free goods.

##

B

In a market economy, allocation of resources is guided by market prices. When the price of a good

rises, its producers will allocate more resources to produce it so that they can earn more.

##



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|!|EM12019|!|

Allocation of resources in a pure market economy is guided by

(1) the demand for the goods.

(2) the supply of the goods.

(3) the government.

A. (1) and (2) only

B. (1) and (3) only

C. (2) and (3) only

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

##

A

Resource allocation in a pure market economy is guided by market prices, which are determined by the

interactions of demand and supply in the markets. It is free from any government intervention.

##

|!|EM12020|!|

Which of the following does NOT happen in a market economy?

A. The government orders farmers to grow only watermelons.

B. Farmers grow more watermelons because the price of watermelons increases.

C. The increase in supply of watermelons leads to a drop in price.


##

A

Resource allocation in a market economy is guided by price signals and is free from any government

intervention. Therefore, the government will not order farmers to grow only watermelons in a market

economy.

##



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|!|EM12021|!|

Which of the following are features of a market economy?

(1) Firms in a market economy must be perfectly competitive.

(2) Most resources are privately owned in a market economy.

(3) Consumers determine the amount of a good they buy based on the price of the good.

A. (1) and (2) only

B. (1) and (3) only

C. (2) and (3) only

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

##

C

(1) is not correct. In a market economy, allocation of resources is still guided by market prices even

firms are not perfectly competitive.

##

|!|EM12022|!|

Which of the following markets in Hong Kong use(s) price signals to guide production?

(1) water supply

(2) flowers

(3) tax loans

A. (1) only

B. (2) only

C. (2) and (3) only

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



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##

C

For (2), when the price of flowers increases, it will attract more producers to enter the market or each

of the existing producers will produce more.

For (3), when the interest rate of tax loans increases, it will attract more lenders to enter the market or

each of the existing lenders will provide more loans.

##

|!|EM12023|!|

Which of the following statements about planned and market economies is CORRECT?

A. Only price signals are used for resource allocation in a planned economy.

B. Proportion of privately-owned resources is higher in a market economy than in a planned

economy.

C. Output of a planned economy must be lower than that of a market economy.

D. A market economy must have a wider income gap than that of a planned economy.

##

B

Most resources are privately owned in a market economy while most resources are owned by the

government in a planned economy.

##

|!|EM12024|!|

Compared to a command economy, a market economy

A. has a lower unemployment rate.

B. has a higher living standard.

C. has a lower crime rate.

D. has a higher proportion of resources being allocated by price signals.

##

D

Allocation of resources is mainly decided by the government in a command economy while allocation



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of resources is mainly guided by market prices in a market economy.

##

|!|EM12025|!|

Which of the following statements is TRUE?

A. A market economy must have a lower inflation rate than a command economy.

B. A market economy must have a lower saving rate than a command economy.

C. People are usually richer in a market economy than in a command economy.

D. More resources are privately owned in a market economy than in a command economy.

##

D

Most resources are privately owned in a market economy while most resources are owned by the

government in a planned economy.

##

|!|EM12026|!|

Which of the following statements is CORRECT?

A. Hong Kong is a market economy because all resources are privately owned and it follows

the free trade policy.

B. Sweden is a command economy because the tax rate is high and peoples welfare is very

good.

C. China is a mixed economy because it uses customs and traditions, government decisions and

market mechanism to tackle the basic economic problems.

D. Japan is a traditional economy because people follow a lot of customs and traditions.

##

C

Options A, B and D are not correct because Hong Kong, Sweden and Japan are mixed economies.

##



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|!|EM12027|!|

In Country A, the government announces a production plan every year. The government assigns jobs to

the citizens as well. Country A is most likely a

A. traditional economy.

B. command economy.

C. market economy.

D. mixed economy.

##

B

In a command economy, the government plays a central role in deciding how resources are allocated.

She decides what to produce (i.e. announcing a production plan) and commands her people to follow

(i.e. assigning jobs to the citizens).

##

|!|EM12028|!|

As the price of petrol increases, drivers cut back on car usage and switch to public transport. This will

most likely happen in a

A. traditional economy.

B. command economy.

C. market economy.

D. one-man economy.

##

C

When the price of petrol increases, the cost of driving increases and switching to public transport can

reduce drivers cost to travel. This shows that allocation of resources is guided by market prices and

this most likely happens in a market economy,.

##



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|!|EM12029|!|

In Country A, properties were mainly owned by the government in the past. After transforming to

another economic system, most properties become privately owned. Most probably, Country A has

transformed from a ______________ to a ______________.

A. traditional economy command economy

B. command economy market economy

C. market economy traditional economy

D. command economy traditional economy

##

B

In a command economy, the government owns most properties and plays a central role in deciding how

societys resources are allocated. In a market economy, most properties are privately owned and

allocation of resources is guided by market prices.

##

|!|EM12030|!|

Private property rights do NOT include

A. the exclusive rights to use the good.

B. the exclusive rights to own the good.

C. the exclusive rights to generate income from the good.

D. the exclusive rights to transfer the good.

##

B

##



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|!|EM12031|!|

Which of the following exist(s) in a one-man economy?

(1) scarcity

(2) private property rights

(3) competition

A. (1) only

B. (1) and (3) only

C. (2) and (3) only

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

##

A

With limited resources and unlimited wants, scarcity exists even in a one-man economy, as resources

available are not sufficient to satisfy the persons wants.

For (2) and (3), private property rights exist in order to solve the conflicts of competition. As there is no

competition in a one-man economy, private property rights do not exist.

##

|!|EM12032|!|

Which of the following rights is NOT associated with private property rights?

A. the right to lease a property to other people

B. the right to own a property forever

C. the right to use a property exclusively

D. the right to derive income from a property

##

B

##



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|!|EM12033|!|

Which of the following situations best illustrates the problem arising from the lack of well-protected

private property rights?

A. When there is a price cut, some people cannot buy the goods they want.

B. Not all people can get the goods that are distributed for free.

C. People are less likely to pay for the goods.


##

C

Price is a signal for allocating the private property rights of the goods. If the private property rights are

not well protected, there is no reason to own and pay for the goods and services.

##

|!|EM12034|!|

Which of the following statements about private property rights must be TRUE?

(1) Private property rights do not exist and are meaningless in a one-man economy.

(2) Private property rights do not apply to individuals only.

(3) Specialisation in production can occur only if private property rights are well protected.

A. (1) and (2) only

B. (1) and (3) only

C. (2) and (3) only

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

##

A

For (1), private property rights exist in order to solve the conflicts of competition. However, since there

is no competition in a one-man economy, private property rights do not exist and are meaningless.

For (2), private property rights can also apply to a group.

##



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|!|EM12035|!|

What is/are the private property right(s) that the Chief Executive of the HKSAR may have over his or

her office?

(1) exclusive rights to use his or her office

(2) exclusive rights to lease out his or her office

(3) rights to derive income from his or her office

A. (1) only

B. (1) and (2) only

C. (2) and (3) only

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

##

A

(2) and (3) are not correct. As the office is owned by the HKSAR Government, he or she cannot lease

out or sell the office in order to generate income. Therefore, the Chief Executive does not have the

exclusive rights to derive income over his or her office,

##

|!|EM12036|!|

Private property rights exist in a

(1) traditional economy.

(2) command economy.

(3) market economy.

A. (3) only

B. (1) and (2) only

C. (2) and (3) only

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

##

D



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##

|!|EM12037|!|

Mr. Wong is a sales manager of a company. He most likely possesses a full set of private property

rights over

A. the desk that he uses at the office.

B. the stationery he buys.

C. the notebook computer provided by his company.

D. the car he rents from a car rental company.

##

B

Options A, C and D are not correct because he possesses only the exclusive rights to use over the items

described in these options.

##

|!|EM12038|!|

Which of the following illustrates the exclusive rights to derive income?

(1) A person sells her luxury handbag to another person and makes a profit.

(2) A person receives dividends from her shares.

(3) A person buys a flat and leases it out.

A. (1) and (2) only

B. (1) and (3) only

C. (2) and (3) only

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

##

D

##



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|!|EM12039|!|

Which of the following is/are condition(s) for market mechanism to function properly in a market

economy?

(1) There should be a lot of firms in the market.

(2) There should be laws to protect private property rights of resources well.

(3) The government should allocate the resources in the economy.

A. (1) only

B. (2) only

C. (1) and (2) only

D. (2) and (3) only

##

B

In a market economy, if private property rights are not well protected, the market price cannot guide

resource allocation effectively. Therefore, market mechanism cannot function properly.

##

|!|EM12040|!|

Country A used to tackle basic economic problems by government decisions. Now it tackles the

problems by the market mechanism. Which of the following are MOST likely the changes in the

economy?

(1) Specialisation and exchange will take place in a lesser extent.

(2) Income distribution will be more even.

(3) Private property rights will be better protected.

(4) There will be more price fluctuations.

A. (1) and (2) only

B. (3) and (4) only

C. (1), (3) and (4) only

D. (1), (2), (3) and (4)



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##

B

For (3), under market mechanism, market price is a signal for allocating the private property rights of

goods. If private property rights are not well protected, market price cannot guide the allocation of

resources effectively. Therefore, private property rights will be better protected under market

mechanism.

For (4), as prices are determined by the interactions between buyers and sellers in the markets, they

will be affected by many factors. Thus, prices will be more fluctuated.

##



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Short Questions

|!|ES12001|!|

Recently, Mr. Chan bought a factory for producing garments. He decided to employ 800 workers and

buy 80 sewing machines.

(a) Which basic economic problems are involved in Mr. Chans case? (2 marks)

(b) Suppose the demand for clothes increases unexpectedly and Mr. Chan decides to raise the prices

of his products. At the same time, he decides to raise the output of his best-selling and high-end

products. State the economic system under which this would possibly occur. Explain your answer.

(4 marks)

##

(a) The problems ofwhat to produce and how to produce are involved. (2 marks)

(b) This would possibly occur under a market economy. (1 mark)

In a market economy, allocation of resources is mainly guided by market prices, which are

determined by the interactions between buyers and sellers in the markets. (2 marks)

Therefore, Mr. Chan can adjust the price of his products and decide which kinds of goods and

their quantities to be produced according to the market demand. (1 mark)

##

|!|ES12002|!|

Miss Lam is the manager of a factory owned by Mr. Chu. She is now considering either to buy more

machines or to employ more workers so as to increase the output of the factory.

(a) Which basic economic problem is Miss Lam facing? Explain. (2 marks)

(b) Do you think Miss Lam herself possesses a full set of private property rights over the machines of

the factory? Explain. (4 marks)



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##

(a) Miss Lam is facing the problem of how to produce because she is deciding which production

method, buying more machines or employing more workers, to use to increase output. (2 marks)

(b) No. (1 mark)

Miss Lam has the exclusive rights to use the machines of the factory. As she is the manager of the

factory, she has the right to decide the uses of the machines. (1 mark)

Miss Lam has only the rights to manage the use of the machines but she does not own them.

Therefore, she does not have the exclusive rights to derive income from the machines and the

rights to transfer the machines. (2 marks)

##

|!|ES12003|!|

Explain which basic economic problem is illustrated in each of the following situations.

(a) The government decides to cut funding for scientific research. (2 marks)

(b) A shop selling chocolate decides to sell coffee as well. (2 marks)

(c) A pizza courier decides to drive his motorcycle rather than go on foot to deliver the takeaway.

(2 marks)

(d) A research assistant decides to use new computer software to analyse the collected data. (2 marks)

##

(a) The problem of what to produce is illustrated. Since government resources are scarce, she

cannot satisfy all wants. Cutting funding for scientific research concerns the use of her resources,

which could be spent on other areas. (2 marks)

(b) The problem of what to produce is illustrated. With limited resources, the shop cannot produce

everything it wants to produce. Deciding to sell coffee concerns the kinds of goods to be

produced. (2 marks)

(c) The problem of how to produce is illustrated. Deciding to drive his motorcycle rather than go

on foot to deliver the takeaway concerns the method of providing the delivery service. (2 marks)

(d) The problem of how to produce is illustrated. Deciding to use new computer software to analyse

the collected data concerns the method of production. (2 marks)

##



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|!|ES12004|!|

Explain which basic economic problem is illustrated in each of the following situations?

(a) An airline decides to sell more duty-free goods on the plane. (2 marks)

(b) An airline buys an Airbus A380 aeroplane to accommodate more passengers. (2 marks)

(c) An airline decides to open a new route. (2 marks)

(d) An airline decides to install a socket in every business class seat to facilitate passengers use of

electronic devices. (2 marks)

##

(a) The problem of what to produce is illustrated. The airline decides what kinds of duty-free goods

and the quantities of duty-free goods to be sold on the plane. (2 marks)

(b) The problem of how to produce is illustrated. Buying an Airbus A380 aeroplane concerns what

factors of production are to be used in providing the air services. (2 marks)

(c) The problem of what to produce is illustrated. Opening a new route concerns what kinds of air

services to be provided. (2 marks)

(d) The problem of what to produce is illustrated. As it is a new service provided by the airline to

passengers, it concerns what kinds of services to be provided. (2 marks)

##

|!|ES12005|!|

Explain which basic economic problem is involved in each of the following situations.

(a) A company decides to hire more part-time workers to lower its production cost. (2 marks)

(b) A restaurant agrees to offer a free drink to students wearing school uniforms during lunchtime.

(2 marks)

##

(a) The problem of how to produce is illustrated. Hiring more part-time workers concerns what

factors of production to be used in production. (2 marks)

(b) The problem of for whom to produce is illustrated. Setting criterion for deciding who can get

the free drinks is involved. The criterion in this situation is that the customers have to be students

wearing school uniforms. (2 marks)

##



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|!|ES12006|!|

(a) The following are two suggestions made by a consultancy firm. Explain which basic economic

problem is involved in each of the suggestions.

(i) As the wage rate of local workers is too high, you should employ more workers from other

places. (2 marks)

(ii) As the market for your existing products is shrinking, you ought to develop some new

products to expand your business. (2 marks)

(b) Are the two statements above positive or normative? Explain. (4 marks)

##

(a) (i) The problem of how to produce is illustrated. Employing more workers from other places

concerns what factors of production are used in production. (2 marks)

(ii) The problem of what to produce is illustrated. Developing some new products concerns

what kinds of goods to be produced. (2 marks)

(b) The two statements are normative statements. (2 marks)

The words should and ought to involve value judgment on what is desirable or the best.

(2 marks)

##

|!|ES12007|!|

In tackling the basic economic problem of how to produce, what is the difference between a market

economy and a command economy? (4 marks)

##

In a market economy, since allocation of resources is guided by market prices, producers use

production methods which minimise the cost. (2 marks)

In a command economy, since the government plays a central role in deciding how the resources are

allocated, the methods of production used are determined by the government instead of the market

mechanism. (2 marks)

##

|!|ES12008|!|

What are the differences between the way that a traditional economy and a market economy use in

tackling the three basic economic problems? (4 marks)



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##

In a traditional economy, the three basic economic problems are tackled by customs and traditions.

(2 marks)

In a market economy, the three basic economic problems are tackled by market mechanism. (2 marks)

##

|!|ES12009|!|

The manager of a travel magazine decides to publish a new travel magazine with a free booklet

introducing different travel destinations. Moreover, as the workload of the existing editors is too heavy,

he decides to employ more editors.

(a) Which basic economic problem(s) is/are involved in the case above? (4 marks)

(b) Is the free booklet a free good? Explain. (4 marks)

##

(a) The problem of what to produce is involved. In this case, the manager decides what kind of

magazine to publish. (2 marks)

The problem of how to produce is also involved. Employing more editors concerns what kind

of factor of production and the quantities to be used. (2 marks)

(b) The free booklet is not a free good. (1 mark)

Free goods refer to those goods that people do not prefer more of as the quantity available is

sufficient to satisfy all human wants. (1 mark)

However, people prefer more of the free booklets as the quantity available is not sufficient to

satisfy all human wants; OR

People prefer more of the free booklets; OR

Production of the free booklets involves the use of scarce resources. (2 marks)

##

|!|ES12010|!|

Explain whether the existence of exchange implies the existence of private property rights. (3 marks)



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##

Exchange is the transfer of rights over a private property. In the process of exchange, market prices

serve as a signal for allocating the private property rights of goods. (1 mark)

If private property rights do not exist, there is no reason for people to pay for goods and services as

others may use your private property without your consent. (1 mark)

As a result, no exchange will take place. Therefore, the existence of exchange implies the existence of

private property rights. (1 mark)

##

|!|ES12011|!|

(a) Does the user of a computer in school library possess a full set of private property rights over the

computer? Explain. (4 marks)

(b) Does Grace possess a full set of private property rights over a computer bought and used by her?

Explain. (4 marks)

##

(a) No. (1 mark)

The user of a computer in school library only possesses the exclusive rights to use the computer. When it

is his turn to use the computer, no one is allowed to use the computer without his permission. (1 mark)

He does not possess the exclusive rights to derive income from the computer. Since the computer

is owned by the school library but not him, he cannot sell or lease out the computer in order to

generate income. (1 mark)

He does not possess the rights to transfer the computer. Since the computer is owned by the

school library but not him, he cannot transfer the computer to a third party. (1 mark)

OR any reasonable answer with explanation (4 marks)

(b) Yes. (1 mark)

Grace possesses the exclusive rights to use the computer. No one is allowed to use her computer

without her permission. (1 mark)

She possesses the exclusive rights to derive income from the computer. As the computer is her

property, she can sell or lease out her computer in order to generate income. (1 mark)

She possesses the rights to transfer over the computer. As the computer is her property, she can

transfer the computer to a third party. (1 mark)


##



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|!|ES12012|!|

Explain whether each of the following statements is true or false.

(a) Hong Kong is a command economy because the government controls the allocation of some

resources, such as water. (3 marks)

(b) People in every economic system have to face the three basic economic problems. (3 marks)

(c) Deciding who carries out the production is a for whom to produce problem. (3 marks)

##

(a) False. (1 mark)

Although the Hong Kong Government controls the allocation of some resources, most resources

are allocated by the price mechanism and some are allocated by customs and traditions. Hence,

Hong Kong is a mixed economy instead of a command economy. (2 marks)

(b) True. (1 mark)

People in every economic system have to face the three basic economic problems. However,

different economic systems tackle these problems in different ways. (2 marks)

(c) False. (1 mark)

Deciding who carries out the production is related to the problem of how to produce. This

concerns what kinds of factors of production to be used in production, but not setting criteria for

deciding who can get the goods. (2 marks)

##

|!|ES12013|!|

In a secondary school, students who claimed they are in need could borrow notebook computers from

the school. They were not required to submit any proof of income. Someone complained that some

students abused this service. In order to tackle this problem, the school decided that students would be

required to submit their proof of income when they borrowed the notebook computers from the school.

(a) Which basic economic problem was involved in the schools decision? (2 marks)

(b) Did the borrowers of the notebook computers possess a full set of private property rights over the

notebook computers? (4 marks)



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##

(a) The problem of for whom to produce was involved. As the notebook computers from school

were scarce, some students wants could not be satisfied. The school thus set criteria to decide

who could borrow notebook computers. (2 marks)

(b) No. (1 mark)

The borrowers of the notebook computers possessed the exclusive rights to use the notebook

computers. Without the borrowers permission, no one was allowed to use the notebook

computers. (1 mark)

However, they did not possess the exclusive rights to derive income from the notebook

computers. As the notebook computers were owned by the school but not them, they could not

sell or lease out the notebook computers in order to generate income. (1 mark)

They did not possess the rights to transfer the notebook computers. As the notebook computers

were owned by the school but not them, they could not transfer the notebook computers to a third

party. (1 mark)


##



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Long Questions

|!|EL12001|!|

A cinema chain is planning to expand its business. There are two options:

1. Open a new cinema in another district.

2. Open a restaurant next to each of its cinemas.

The chain can only pick one of these options. Even there is a concession counter in each of the

cinemas, the restaurant business is new to the chain. A lot of difficult decisions have to be made.

(a) What is the opportunity cost of opening a restaurant to the cinema chain? (3 marks)

(b) What type(s) of basic economic problems does the cinema chain need to tackle when running a

restaurant? Use ONE example of each to explain. (6 marks)

(c) Suppose the new cinema is located in a shopping mall and the cinema chain has to rent the

premises to run it. The contract states that the premise can only be used to run a cinema. Do you

think the chain has a full set of private property rights over the premises? Explain. (4 marks)

(d) Suppose the chain has decided to open a new cinema in another district but the business is much

worse than expected. Will the opportunity cost of choosing to open a new cinema change?

Explain. (3 marks)

##

(a) Opportunity cost of a choice is the highest-valued option forgone. (1 marks)

The opportunity cost of opening a restaurant to the cinema chain is the value of opening a new

cinema in another district. (2 marks)

(b) The problem of what to produce needs to be tackled. As resources are limited, the cinema chain

has to decide what kinds of food they want to serve and in what quantity. (2 marks)

The problem of how to produce needs to be tackled: The cinema chain has to decide the method

of cooking, what factors of production to be used and how to serve their customers. (2 marks)

The problem of for whom to produce needs to be tackled. The cinema chain has to decide who

their target customers are. (2 marks)



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(c) No. (1 mark)

The cinema chain possesses the exclusive rights to use the premises. No one is allowed to use the

premises without the cinema chains permission. (1 mark)

The cinema chain possesses the exclusive rights to derive income from the premises. The cinema

chain can make use of it to run its business and derive income. (1 mark)

The cinema chain does not possess the rights to transfer the premises. As the premises are not

owned by the chain, it cannot transfer the premises to a third party. (1 mark)


(d) The opportunity cost of choosing to open a new cinema will not change. (1 mark)

It is because the value of the highest-valued option forgone (opening a restaurant next to each of

its cinemas) does not change. Only the value of opening a new cinema changes. (2 marks)

##

|!|EL12002|!|

In a land auction, a property developer bid $400 million for a plot of land. It won the bid as the price

was the highest bidding price. The owner of the land is allowed to build anything on the land, rent it out

or transfer the rights to use the land to other developers.

(a) Which type of economic system is illustrated in the question? State ONE of its features. (4 marks)

(b) Now the developer is considering whether to build a hotel, a commercial building, or a shopping

mall.

(i) Which basic economic problem is illustrated in this case? (2 marks)

(ii) Suppose the cost of building is the same for each of the three land usages mentioned. What is

the opportunity cost of building a shopping mall (excluding the cost of land)? (3 marks)

(c) Do you think the developer possesses a full set of private property rights over the plot of land?

Explain. (4 marks)

##

(a) A market economy is illustrated because the allocation of land is guided by market price.

(2 marks)

In a market economy, the problem of what to produce is tackled by market mechanism. When

the price of a good increases, it will attract more producers to the market or existing producers

will produce more. (2 marks)

(b) (i) The problem of what to produce is illustrated. Since the area of land is limited, the

developer cannot build all the things it wants. It has to decide the usage of the land.(2 marks)



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(ii) Opportunity cost of a choice is the highest-valued option forgone. (1 mark)

The opportunity cost of building a shopping mall would be building a hotel or a commercial

building, depending on the preference of the developer. (2 marks)

(c) Yes. (1 mark)

The developer possesses the exclusive rights to use the land because it can decide the usages of

the land. (1 mark)

It possesses the exclusive rights to derive income from the land. It can rent out the land in order to

generate income. (1 mark)

It possesses the rights to transfer the land. It can transfer the rights to use the land to other

developers. (1 mark)

##

|!|EL12003|!|

Suppose Country A produces 10 units of apples or 20 units of oranges with all its resources.

(a) What is the cost of producing one unit of apple, in terms of oranges? What is the cost of

producing one unit of orange, in terms of apples? (4 marks)

(b) Suppose there is advancement in technology which helps Country A produce 20 units of apples or

30 units of oranges with all its resources. The government of Country A is considering whether to

introduce this technology or not.

(i) What is the cost of producing one unit of apple now, in terms of oranges? Does the cost

increase or decrease? (3 marks)

(ii) Which basic economic problem is the government of Country A facing? (2 marks)

(c) Every farmer in Country A has to rent his or her farmland from the government. Do you think the

farmers have a full set of private property rights over their farmland? Explain. (4 marks)

##

(a) The cost of producing one unit of apple

= 20 units of oranges / 10 units of apples

= 2 units of oranges (2 marks)

The cost of producing one unit of orange

= 10 units of apples / 20 units of oranges

= 0.5 unit of apples (2 marks)



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(b) (i) The cost of producing one unit of apple now

= 30 units of oranges / 20 units of apples

= 1.5 units of oranges (2 marks)

The cost of producing apple decreases from 2 units of oranges to 1.5 units of oranges.

(1 mark)

(ii) The government is facing the problem of how to produce because she is facing the choice

of the method of production. (2 marks)

(c) No. (1 mark)

The farmers possess the exclusive rights to use their farmland. They can decide what kinds of

crops to grow on the farmland. (1 mark)

They possess the exclusive rights to derive income from their farmland. They can make use of the

farmland to grow crops and derive income. (1 mark)

They do not possess the rights to transfer their farmland. As the farmland is not owned by them,

they cannot transfer the farmland to a third party. (1 mark)


##

Documents

Chapter 2 the Three Basic Economic Problems and Private Property Rights