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Hong Kong Examinations AuthorityAll Rights Reserved 2001

2001-AL-ECON 1B&C–1

HONG KONG EXAMINATIONS AUTHORITY

HONG KONG ADVANCED LEVEL EXAMINATION 2001

ECONOMICS A-LEVEL PAPER 1

ECONOMICS AS-LEVEL

Question-Answer Book for Section B and Section C

This paper must be answered in English

Candidate Number

Centre Number

Seat Number

INSTRUCTIONS FOR CANDIDATES

1. Write your Candidate Number, Centre Number and Seat Number in the spaces provided on this cover.

2. Write your Candidate Number in the spaces provided on EACH answer sheet in this book.

3. Answer each question on the TWO pages provided for that particular question. NO marks will be givenfor answers written on the wrong page.

4. There are SIX questions in Section B and THREE questions in Section C. Attempt ALL questions andkeep your answers SHORT.

5. If you have used any supplementary answer sheets, you should write your Candidate Number on everysupplementary answer sheet and fasten it with a white string to the page in this book where the relevantquestion is.

2001-ALECONPAPER 1 B&C

2001-ASLECONB & C

2001-AL-ECON 1B&C–2

This is a blank page.

2001-AL-ECON 1B&C–3 – 1 –Go on to the next page

Marker No. Candidate No.

Examiner No. Paper/Section IB

Checker’s Initial Question No. 1

What is the law of demand ? What is a Giffen good ? Is a Giffen good consistent with the law of demand ?(7 marks)

[NOTE : Don’t use a supplementary answer sheet unless you have fully utilized this page and the next page.]

Marks

2001-AL-ECON 1B&C–4 – 2 –

Paper/Section IB

Question No. 1 (Continued)

2001-AL-ECON 1B&C–5 – 3 – Go on to the next page

Marker No. Candidate No.

Examiner No. Paper/Section IB

Checker’s Initial Question No. 2

What is cost ? If someone purchased a flat (an apartment) and after a year the market value of that flat fell by half,does this mean that the cost of living in that flat has gone up, gone down, or remained the same ? (7 marks)

[NOTE : Don’t use a supplementary answer sheet unless you have fully utilized this page and the next page.]

Marks

2001-AL-ECON 1B&C–6 – 4 –

Paper/Section IB

Question No. 2 (Continued)

2001-AL-ECON 1B&C–7 – 5 – Go on to the next page

Marker No. Candidate No.

Examiner No. Paper/Section IB

Checker’s Initial Question No. 3

If the market price of a haircut charged by barber shops rises during holidays because customers have more freetime to get their hair cut, does this mean that to customers haircuts are really more expensive during holidaysbecause of an increase in market demand ? (7 marks)

[NOTE : Don’t use a supplementary answer sheet unless you have fully utilized this page and the next page.]

Marks

2001-AL-ECON 1B&C–8 – 6 –

Paper/Section IB

Question No. 3 (Continued)

2001-AL-ECON 1B&C–9 – 7 – Go on to the next page

Marker No. Candidate No.

Examiner No. Paper/Section IB

Checker’s Initial Question No. 4

What is investment ? When you read a book, are you investing or consuming ? (7 marks)

[NOTE : Don’t use a supplementary answer sheet unless you have fully utilized this page and the next page.]

Marks

2001-AL-ECON 1B&C–10 – 8 –

Paper/Section IB

Question No. 4 (Continued)

2001-AL-ECON 1B&C–11 – 9 – Go on to the next page

Marker No. Candidate No.

Examiner No. Paper/Section IB

Checker’s Initial Question No. 5

In agriculture, when two persons work together on a given piece of land, helping each other, the output may bemore than double that of one person working singly on the same piece of land. Is this consistent with the law ofdiminishing marginal productivity ? (6 marks)

[NOTE : Don’t use a supplementary answer sheet unless you have fully utilized this page and the next page.]

Marks

2001-AL-ECON 1B&C–12 – 10 –

Paper/Section IB

Question No. 5 (Continued)

2001-AL-ECON 1B&C–13 – 11 – Go on to the next page

Marker No. Candidate No.

Examiner No. Paper/Section IB

Checker’s Initial Question No. 6

A first-class airplane ticket to the United States is selling at four times the price of an economy-class ticket. Is thisprice discrimination ? Movie theatres in Hong Kong sell tickets at much lower prices on Tuesdays than on otherweekdays. Is this price discrimination ? (6 marks)

[NOTE : Don’t use a supplementary answer sheet unless you have fully utilized this page and the next page.]

Marks

2001-AL-ECON 1B&C–14 – 12 –

Paper/Section IB

Question No. 6 (Continued)

END OF SECTION B

2001-AL-ECON 1B&C–15 – 13 – Go on to the next page

Marker No. Candidate No.

Examiner No. Paper/Section IC

Checker’s Initial Question No. 7

Royalty vs. Fixed Payment

A book writer is paid royalty, that is, a percentage of the price of each book sold. A newspaper or magazine writeris paid by the number of articles or by the number of words written, i.e., at piece rate.

(a) How would you explain the difference in payment methods of book writers and newspaper writers ? (5 marks)

(b) Royalty rates are different among book writers; piece rates are different among newspaper writers. Forwhich of these payment methods would there be a larger difference in the rates among writers ? (5 marks)

(c) Why do publishers of books pay writers in the form of royalty and not in lump-sums to buy the copyrightoutright ? (5 marks)

[NOTE : Don’t use a supplementary answer sheet unless you have fully utilized this page and the next page.]

Marks

2001-AL-ECON 1B&C–16 – 14 –

Paper/Section IC

Question No. 7 (Continued)

2001-AL-ECON 1B&C–17 – 15 – Go on to the next page

Marker No. Candidate No.

Examiner No. Paper/Section IC

Checker’s Initial Question No. 8

One Dollar per Chicken

The cost of buying, preparing and cooking a chicken in a Hong Kong restaurant is over $20. Some restaurants sellcooked chickens to dine-in customers for $1 each, way below cost.

(a) Why would these restaurants do this ? Why don’t they reduce the price a little for each of all the other dishesinstead ? (5 marks)

(b) Some customers have little preference for chicken. To them a cooked chicken is worth, say, no more than $10in use value, also way below cost. If such customers make up a large proportion of those who dine in theserestaurants, would you expect the one-dollar-per-chicken pricing be adopted ? Explain. (5 marks)

(c) Under what condition would the one-dollar-per-chicken pricing not imply economic waste (deadweight loss) inthe textbook usage of the term ? (5 marks)

[NOTE : Don’t use a supplementary answer sheet unless you have fully utilized this page and the next page.]

Marks

2001-AL-ECON 1B&C–18 – 16 –

Paper/Section IC

Question No. 8 (Continued)

2001-AL-ECON 1B&C–19 – 17 – Go on to the next page

Marker No. Candidate No.

Examiner No. Paper/Section IC

Checker’s Initial Question No. 9

The Jimmy Lai Paradox

Hong Kong businessman Jimmy Lai operated adM@rt, which sold and delivered goods to customers after theyplaced orders by telephone or through the Internet. After experiencing heavy losses, adM@rt tried to cut losses byreducing the level of operation, and was faced with the following paradox: the total loss roughly equalled the totalrevenue regardless of the level of sales. What is paradoxical here is not that total loss equalled total revenue, but theratio of loss to revenue, i.e., the loss ratio, remained roughly constant over a wide range of sales volume : adM@rtlost $1.00 for $1.00 of revenue, and another major similar operator in the United States lost 40 cents on the dollar,also at varying levels of sales.

(a) Grouping together the goods adM@rt sold or treating them as one good, draw its average and marginal costcurves, and the demand curve and the marginal revenue curve facing adM@rt to show the constant loss ratio

as described. (4 marks)

(b) Did adM@rt come closer to being a competitive firm than a monopolistic firm ? Why ? What was the natureof the products adM@rt was selling ? (3 marks)

(c) In its range of sales volume, was adM@rt operating at constant, increasing, or decreasing cost ? Why ?(3 marks)

[NOTE : Don’t use a supplementary answer sheet unless you have fully utilized this page and the next page.]

Marks

2001-AL-ECON 1B&C–20 – 18 –

Paper/Section IC

Question No. 9 (Continued)

END OF SECTION C