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Tang Shiu Kin Victoria Government Secondary School

Mock Examination 2019-2020

Economics Paper 2

Secondary 6 ( ) Date：21. 2. 2020

Name： Time：10:15 a.m. – 12:45 a.m.

Class Number： Time allowed：2 hours 30mins.

Total marks：120

INSTRUCTIONS:

1. After the announcement of the start of the examination, you should first write your Name,

class and class number in the spaces provided.

2.

This paper consists of three sections: A, B and C. ANSWERS ALL QUESTIONS.

3. Write your answers in the spaces provided in this Question-Answer Book. Do not write in

the margins. Answers written in the margins will not be marked.

4. Supplementary answer sheets will be supplied on request. Write your Name, class and

class number on each page.

5. No extra time will be given for writing your Name, class and class number after the “Time

is up” announcement.


Section A (44 marks)

1. Mary has the following three options to further her study.

Priority Options

First Studying at a local university

Second Enrolling in a programme provided by the Vocational

Training Council (VTC)

Third Studying abroad

(a) Suppose Mary’s application for a student visa was rejected and she could not study

abroad. Explain whether her opportunity cost of studying at a local university will

change. (2 marks)

(b) Suppose the VTC decided to provide more training programmes. Which type of labour

mobility in Hong Kong would be affected? How would it be affected? Explain. (3 marks)


2. The table below shows the input-output relationship of a firm.

Labour (units) Machines (units) Total output (units) Average cost ($)

8 1 10 11

9 1 18 6.7

10 1 24 5.4

11 1 28 5

12 1 31 4.8

(a)

Suppose the firm employs 8 units of labour. Explain whether its labour productivity will

increase if it employs 1 more unit of labour. (2 marks)

(b) State the law of diminishing marginal returns and explain whether the above date

illustrate the law. (5 marks)


3. The following table shows China’s Gini coefficient.

Year Gini coefficient

2008 0.491

2013 0.473

2018 0.468

(a)

Based on the given data, what can you conclude about the trend in China’s income

distribution? (2 marks)

(b) To reduce poverty, the Chinese government has decided to provide free high school

education in poor rural areas. Explain how the provision of free high school education in

poor rural areas may improve equality. (3 marks)


4. In 2016, Centaline Property Agency Limited abandoned a plan to be listed on the Hong Kong

Stock market. It was reported that Centaline only has three shareholders.

(a) State ONE advantage and ONE disadvantage for the form of business ownership to which

Centaline Property Agency Limited belongs over a partnership. (2 marks)

(b) Centaline Property Agency Limited set up Centaline Mortgage Broker Limited to provide

mortgage loan services to property buyers.

(i) Explain what type of expansion is involved. (2 marks)

(ii) Give TWO possible motives for Centaline Property Agency Limited to set up

Centaline Mortgage Broker Limited. (2 marks)

5. The following table shows the labour force data and real GDP growth rate of Hong Kong.

Quarter Labour force Unemployed

population

Real GDP

growth rate

2018 Q4 3,973,400 105,700 +1.2%

2019 Q1 3,970,800 110,400 +0.6%

2019 Q2 3,985,000 114,300 +0.5%

Source: Census and Statistics Department

(a) Calculate the unemployment rates for 2019 Q1 and 2019 Q2. Suggest ONE possible loss

that unemployment causes to society. (3 marks)

(b) Explain to which phase of a business cycle the period 2019 Q2 belonged. List ONE

general feature that could be observed during this phase of a business cycle other than

changes in real GDP and the unemployment rate. (2 marks)


6. Maria, a Hong Kong permanent resident, lives in Shenzhen and works as a chief financial

officer at a listed company in Shenzhen. Her nephew studies at an international school in Hong

Kong and the school employs some full-time native English teachers.

(a) Explain whether Maria’s salary is included in Hong Kong’s GDP. (2 marks)

(b) Explain whether the salaries of the native English teachers employed by the international

school should be taxed in Hong Kong. (2 marks)


7. The following table shows the balance sheet of a banking system.

Assets ($ billion) Liabilities ($ billion)

Reserves 400 Deposits 1,000

Loans 600

Suppose the required reserve ratio is 25% and the public initially kept $100 billion as cash. Due

to the popular use of electronic payment methods, the public deposits all of the cash into the

banking system. After that, the banking system is fully loaned up.

(a) Fill in the balance sheet below to show the new amount of reserves, loans and deposits.

(3 marks)

Assets ($ billion) Liabilities ($ billion)

Reserves ________ Deposits ________

Loans ________

(b)

What are the changes in the monetary base and money supply? Show your work.

(2 marks)


8.

Suppose Country A and Country B produce and consume fish (F) and pork (P) only. The

following table shows their output if they use half of their resources in producing fish and half of

their resources in producing pork.

Fish (units) Pork (units)

Country A 10 and 12

Country B 20 and 35

(a) Explain whether Country B enjoys an absolute advantage in the production of fish.

(2 marks)

(b) According to the principle of comparative advantage, explain which country will import

fish. (3 marks)

(c) Suppose 1 unit of fish can be exchanged for 1.5 units of pork and the transportation cost is

zero. Calculate the importing country’s total gain if it imports 8 units of fish. (2 marks)

End of Section A


Section B (60 marks)

9. Suppose the government subsidises renewable electricity generation.

(a) With the aid of a diagram, explain the effects of the unit subsidy on the price and quantity

transacted of renewable electricity. Also, explain under what condition producers’ share of

the subsidy would be greater than consumers’ share of the subsidy. (9 marks)

(b) Explain why it may be efficient for the government to subsidize the generation of

renewable electricity. (4 marks)

(c) Explain the effect of the subsidy on the price of electric railway services. (3 marks)


10. The following shows the AS-AD diagram for Country L. The economy is initially at Point E.

Suppose there is a boom in Country L’s stock market.

(a) Give a reason for the upward sloping short run supply curve (SRAS). (3 marks)

(b) With the aid of the above diagram, explain the short run and long run effects of the boom.

(9 marks)

0

Price level

Aggregate output AD0

SRAS0

Yf

LRAS0

P0 E



11. In large shopping malls, there is usually one floor where different brands of cosmetic shops are

located. Many cosmetics brands can be found in Hong Kong. No brand has a high market share.

(a) What is the market structure of cosmetics products in Hong Kong? Give an example of

non-price competition found in this industry. (2 marks)

(b) Salespeople at cosmetics shops are usually paid a basic salary plus a commission. Explain

TWO advantages of this method of wage payment to employers. (4 marks)

(c) The lipstick effect suggests that during an economic downturn, consumers will buy fewer

luxury coats but more premium lipsticks, thus the sales of premium lipsticks can represent

an indicator of economic performance.

According to this theory, is lipstick a normal good or an inferior good? Why? (2 marks)

(d) Give ONE situation where a lipstick is a consumer good and ONE situation where it is a

producer good. (4 marks)



12.

Some people suggest that the Hong Kong government should introduce a goods and services tax

(GST) to broaden the tax base.

Source A: Information about Hong Kong’s tax base

Hong Kong has a narrow tax base. According to the 2015-16 Budget, only 40% of the

working population pays salaries tax, and only 10% of registered corporations pay profits

tax.

The tax revenue is highly concentrated among a few taxpayers. 60% of salaries tax

revenue and over 80% of profits tax revenue come from the top 5% of payers of salaries

tax and profits tax, respectively.

Source: www.budget.gov.hk

Source B: Major revenues of Hong Kong government (HK$ billion)

Financial year

2014-15 2015-16 2016-17

Profits tax 138 140 139

Salaries tax 59 58 59

Land premium 78 61 128

Stamp duty 75 63 62

Other revenues 129 128 185

Total government revenue 479 450 573

Source: Census and Statistics Department

Source C: Consumption tax in Japan

The Japanese government increased the consumption tax on all goods and services to 10%

since October 1, 2019. The following are some examples.

120,000 yen (excluding tax)

132,000 yen (including tax)

100 yen (excluding tax)

118 yen (including tax)


Source D: Opinions on GST in Hong Kong

A low-income household:

The GST is unfair! The tax rate is the same for rich and poor consumers!

A middle-income household:

The cost of living is already very high these days and we can hardly save any money. The

introduction of a GST will further increase our financial burden!

An economist:

Consumption tends to fluctuate less than salaries and profits. Thus, a GST is an important

source of government revenue during economic downturns.

(a)

(i)

Refer to Source B. Calculate the percentage change in total government revenue for

the financial years from 2015-16 to 2016-17. (1 mark)

(ii) Which source of revenue contributed most to the change in (a)(i)? (1 mark)

(b) Discuss the short run effects of the introduction of a GST on

(i) the price level; and (2 marks)

(ii) real consumption expenditure. (2 marks)

For part (c), students are required to present their answers in essay form. Criteria for marking

will include the use of sources and economic theories, relevant content, logical presentation and

clarity of expression.

(c) With reference to all of the sources and your knowledge, compare the GST with salaries

tax in the following economic aspects:

equality;

the tax base; and

the stability of the tax revenue. (12 marks)

(d) Give ONE suggestion on how the government can use a fiscal policy to reduce the effect

of the GST on the price level. (2 marks)



End of Section B


Section C (16 marks)

13. The following diagram shows the production possibilities frontier (PPF) for Country Z.

Country Z always consumes m units of bananas (as indicated in the diagram) and maximizes

the amount of peanuts it can consume.

(a) Indicate Country Z’s consumption point under autarky as Point A. (1 mark)

(b) Country Z starts to engage in international trade. TOT is the terms of trade line.

(i) Explain whether Country Z has a comparative advantage or disadvantage in

producing bananas. (3 marks)

(ii) Indicate Country Z’s production point after specialisation as Point B and the

consumption possibilities frontier (CPF) after trade. (2 marks)

(iii) Indicate Country Z’s consumption point after trade as Point C. Indicate the

amounts of exports and imports as X and I, respectively. (3 marks)

(iv) Explain whether Country Z is better off after trade. (3 marks)

(c) Explain how the following events affect Country Z’s Human Development Index (HDI).

(i) Country Z’s citizens like eating food with high sugar and high fat content.

(2 marks)

(ii) More families allow girls to go to school. (2 marks)

0

Peanuts (units)

Bananas (units) m

TOT

PPF


End of Paper

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Tang Shiu Kin Victoria Government Secondary School Mock ... material1920/19-20... · Tang Shiu Kin Victoria Government Secondary School Mock Examination 2019-2020 Economics Paper