QB Ch1 (Eng) Output (Final)

Economics Inquiry for HKDSE – Microeconomics 1Chapter 1 Basic Economic Concepts

Multiple Choice Questions

|!|EM11001|!|

What is Economics?

A. It is a study of how people speculate in stock market.

B. It is a study of how politicians maximise their political interests.

C. It is a study of how the government improves the well-being of her citizens.

D. It is a study of how scarce resources are allocated to satisfy human wants.

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D

It is a study of how people make choices under scarcity.

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|!|EM11002|!|

Which of the following is included in the study of microeconomics?

A. The problem of inflation in Hong Kong.

B. The pricing decisions made by firms.

C. The problem of unemployment during recession.

D. The impact of revaluation of Renminbi on Hong Kong.

##

B

Microeconomics is a study about the behaviours of individuals and firms (e.g. the pricing behaviour

mentioned in option B). Options A, C and D should be included in the study of macroeconomics, which

analyses the operation of the economy as a whole.

##

|!|EM11003|!|

Which of the following is NOT included in the study of microeconomics?

A. how the price war among supermarkets affects individuals

B. how the spread of bird flu affects the market of fresh chicken

C. how an increase in money supply affects the economy

D. how a change in income level affects people’s consumption behaviour

© Aristo Educational Press Ltd. 1-1


##

C

Microeconomics analyses the behaviours of individuals and firms while macroeconomics analyses the

operation of the economy as a whole. An increase in money supply affects the economy as a whole, so

it is included in the study of macroeconomics.

##

|!|EM11004|!|

Which of the following is included in the study of macroeconomics?

A. the consumption decisions made by individuals

B. the production decisions made by firms

C. the pricing decisions made by tunnel companies

D. the decision of printing more money made by the government

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D

Macroeconomics analyses the operation of the economy as a whole. Printing more money affects the

economy as a whole.

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|!|EM11005|!|

Which of the followings is NOT included in the study of macroeconomics?

A. how the public assistance policies carried out by the government affect the economy

B. how the bad weather affects the price of wheat

C. how an increase in government expenditure affects the unemployment rate

D. how the policies implemented by the government affect the economic growth of the

economy

##

B

Macroeconomics analyses the operation of the economy as a whole. The impact of the bad weather on

the price of wheat is about the market of one good only (the wheat market), so it is included in the

study of microeconomics.

##



|!|EM11006|!|

Which of the following statements is CORRECT?

A. Wants arise because scarce resources are unevenly distributed.

B. Wants do not have to be supported by purchasing power.

C. Wants exist because of scarcity.

D. Wants are the same as demand.

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B

Wants are human desires. A person can still want a good even when he or she is not able to pay for it.

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|!|EM11007|!|

Which of the following is most likely an economic good?

A. water in the sea

B. sunshine

C. sand in the desert

D. fish sold in the market

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D

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

sufficient to satisfy all human wants. Since the quantity of fish available in the market is not sufficient

to satisfy all human wants, it is an economic good.

Options A, B and C are incorrect. Water in the sea, sunshine and sand in the desert are free goods as

their quantities are sufficient to satisfy all human wants. More of them are not preferred.

##

|!|EM11008|!|

Which of the following about scarcity is CORRECT?

A. Only poor people face scarcity.

B. Scarcity exists because human wants are limited.

C. Scarcity exists because the supply of resources is fixed.

D. People have to make choice because of scarcity.



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D

Scarcity refers to the situation in which the resources available are not enough to satisfy all people’s

wants. Therefore, people have to choose which wants to satisfy and which wants to give up.

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|!|EM11009|!|

Competition exists because of

A. limited resources.

B. unlimited wants.

C. scarcity.

D. discrimination.

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C

Scarcity exists when resources or goods are not enough to satisfy all people’s wants. Under scarcity,

people have to compete against each other for the resources or goods.

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|!|EM11010|!|

The existence of scarcity implies that

(1) the supply of resources is limited.

(2) choices have to be made.

(3) competition for goods is inevitable.

A. (1) only

B. (1) and (3) only

C. (2) and (3) only

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



##

C

When there is scarcity, people cannot satisfy all their wants with the limited resources available and

they have to choose which wants to satisfy and which wants to give up. Also, since the resources or

goods are not enough to satisfy all people’s wants, people need to compete against each other for them.

##

|!|EM11011|!|

Which of the following statements about choice is INCORRECT?

A. The rich have to make choices.

B. No choice has to be made if there is no scarcity.

C. People choose the option which has the lowest opportunity cost.

D. When there is no price competition, people do not need to make choice.

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D

Even when there is no price competition, there may be other forms of non-price competition. Whenever

the goods are scarce, competition and choices are inevitable.

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|!|EM11012|!|

Which of the following does NOT involve an opportunity cost?

A. Catherine uses the scholarship provided by the government to pay for the school fee, and the

scholarship can be used for that purpose only.

B. Peter decides to spend $500 on a wallet.

C. John spends two hours watching a film.

D. Simon goes out for dinner.

##

A

Opportunity cost of a choice is the highest-valued option forgone. If there is only one option available,

there is no choice and thus no opportunity cost. Since Catherine cannot use the scholarship in other

ways, there is no choice for her. No opportunity cost is therefore involved.

##



|!|EM11013|!|

Compared with an office assistant, a doctor is less likely to change his occupation because

A. the cost of being an office assistant is lower.

B. the cost for an office assistant to change his occupation is lower than that of a doctor.

C. a doctor has to spend a long time studying medicine.

D. an office assistant is not a professional.

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B

In changing occupations, an office boy forgoes his income as an office boy while a doctor forgoes his

income as a doctor. Since the wage of an office boy is generally lower than that of a doctor, an office

boy incurs a lower cost in changing his occupation. Moreover, since the income of a doctor is usually

much higher than the income that he can earn in other fields, this implies that a doctor incurs high cost

in changing his occupation.

##

|!|EM11014|!|

After graduation, Maggie wants to be a pilot most. Being a teacher would be her second choice.

However, she cannot be a pilot as she is shortsighted. Which of the following statements is

CORRECT?

A. Maggie’s cost of choosing to be a teacher is the income from being a pilot.

B. Maggie’s cost of choosing to be a teacher will not change even if her poor vision is cured.

C. An increase in the demand for pilots will raise Maggie’s cost of choosing to be a teacher.

D. Maggie’s cost of being a teacher will decrease.

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D

As being a pilot is not an option anymore, Maggie’s cost of being a teacher will become other lower-

valued option. Hence her cost of being a teacher will decrease.

##



|!|EM11015|!|

Joanne has the following ways to spend two hours:

1. Watching a basketball match which costs her $140;

2. Earning $50 per hour as a waitress;

3. Earning $60 per hour for working at a supermarket.

What will be Joanne’s opportunity cost of watching the basketball match?

A. $120

B. $140

C. $240

D. $260

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D

The opportunity cost for Joanne to watch the basketball match = Price of the ticket (explicit cost) + the

highest-valued alternative use of the 2 hours (implicit cost) = $140 + $60 2 = $260.

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|!|EM11016|!|

Mrs. Tam owns a premise that is worth $1 million. She can use it to open her own boutique or rent it

out for $6,000 a month. She can also sell it and deposit the money in a bank. The saving rate is 6% per

annum. Mrs. Tam’s opportunity cost of using the premise to open her own boutique is

A. $5,000 a month.

B. $60,000 a year.

C. $6,000 a month.

D. $660,000 a year.

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C

Mrs. Tam’s opportunity cost of using the premise to open her own boutique is the highest-valued option

forgone, i.e. the rent that she receives from renting out the premise, which is $6,000 a month.

##



|!|EM11017|!|

Mr. Chow is choosing between a tour of Taiwan and a tour of Yunnan. The opportunity cost of

choosing the Yunnan tour will increase if

A. there is an earthquake in Yunnan.

B. the value of Renminbi increases, in terms of Hong Kong dollar.

C. the quality of the hotel that Mr. Chow stays during the Taiwan tour is poor.

D. the goods in Taiwan are cheaper because of deflation.

##

D

The opportunity cost of choosing the Yunnan tour is the Taiwan tour. As the goods in Taiwan become

cheaper, the value of visiting Taiwan increases. Hence, the opportunity cost of visiting Yunnan

increases.

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|!|EM11018|!|

A supermarket chain launches a promotion campaign that stamps are given to people who shop there.

People accumulate the stamps and use them to exchange for goods. Angel has 100 stamps. The

following is a list of goods that she can obtain with her stamps.

Items Number of stamps required Order of preference

A pack of orange juice 100 4

A box of chocolate 100 3

A box of cookies 100 2

A bottle of cooking oil 100 1

Which of the following is her opportunity cost of choosing a box of cookies?

A. a pack of orange juice

B. a box of chocolate

C. a pack of orange juice and a box of chocolate

D. a bottle of cooking oil



##

D

Opportunity cost of an option is the highest-valued option forgone. A bottle of cooking oil is her

highest-valued option forgone in choosing a box of cookies.

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|!|EM11019|!|

Jason has $200,000 savings. Below are Jason’s options of spending the money and his order of

preference.

First preference: Paying the down payment on a home mortgage.

Second preference: Buying a car.

Third preference: Lending the money to his friend and receiving interest in return.

Which of the following will lower Jason’s opportunity cost of using the money to pay the down

payment on a home mortgage?

A. The performance of the car is not as good as expected.

B. Jason’s friend is not able to pay interest to him.

C. The price of the property that he has bought decreases.

D. The house is not as comfortable as expected.

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A

The opportunity cost of using the money to pay the down payment on a home mortgage is buying a car.

The poor performance of the car lowers the value of buying the car, so the opportunity cost decreases.

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|!|EM11020|!|

Which of the following statements about opportunity cost is CORRECT?

A. When the value of an option increases, the opportunity cost of choosing that option

increases.

B. Opportunity cost does not exist in a barter economy.

C. If there is no choice, there is no opportunity cost.

D. When the value of options other than the highest-valued option forgone changes, the

opportunity cost of choosing an option increases.



##

C

Opportunity cost of a choice is the highest-valued option forgone. If there is no choice, nothing has to

be forgone when choosing an option. Therefore, there is no opportunity cost.

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|!|EM11021|!|

Samuel is planning what to do during the summer holiday. He can work as a waiter earning $8,000 or

as a salesperson earning $8,500. If he does not take up any summer job, he will take a computer course

which costs him $2,000. Samuel’s cost of taking the computer course is _____________.

A. $2,000

B. $8,500

C. $10,000

D. $10,500

##

D

Samuel’s opportunity cost of taking the computer course = Course fee paid (explicit cost) + the highest-

valued alternative use of the summer holiday (implicit cost) = $2,000 + $8,500 = $10,500.

##

|!|EM11022|!|

Mary is choosing between a trip to Japan and a trip to Korea. She finally decides to go to Japan. Which

of the following will affect Mary’s opportunity cost of going to Japan?

A. Air passenger departure tax increases.

B. She has to cancel her trip to Japan or Korea because of sickness.

C. The theme park in Korea that Mary plans to visit is closed for maintenance.

D. An earthquake happens in Japan.

##

C

The opportunity cost of going to Japan is the tour to Korea. The closure of the theme park in Korea

lowers the value of the tour to Korea, so the opportunity cost of going to Japan decreases.

##



|!|EM11023|!|

Miss Chan has bought a flat. Which of the following will affect the opportunity cost for her to live in

the flat?

A. Her neighbours always play mahjong loudly and this makes her unable to sleep well at night.

B. Another building is built in front of her building and blocks the view of her flat.

C. The property market is booming.

D. The property management of the housing estate she lives in is poor.

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C

If Miss Chan does not live in the flat, she can rent or sell it for money. This amount is her opportunity

cost of living in the flat. When the property market is booming, she can rent or sell her flat at a higher

price. Her opportunity cost of living in the flat therefore increases.

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|!|EM11024|!|

Joe received $3,000 from his father as a birthday present. He is now considering the following two

options of using the money: going to Thailand with his friends or saving it in a bank. His opportunity

cost of going to Thailand with his friends will change if

A. the trip is not as good as Joe has expected.

B. an infectious disease breaks out in Thailand.

C. the interest rate on savings increases.

D. there is typhoon in Thailand.

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C

Joe’s opportunity cost of going to Thailand is the interest that he can receive from depositing the money

in a bank. The increase in interest rate on savings means that Joe has to forgo more interest, so Joe’s

opportunity cost of going to Thailand increases.

##



|!|EM11025|!|

Amy is a student. She can do the following things at the weekend:

First choice: shopping

Second choice: watching a movie

Third choice: doing revision at home

If the movie is very boring, Amy’s cost of doing revision at home will _____________.

A. increase

B. decrease

C. remain unchanged

D. increase, decrease or remain unchanged

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C

The value of the highest-valued option forgone (shopping) does not change.

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|!|EM11026|!|

Which of the following is/are the opportunity cost(s) of showing “A Symphony of Lights” (幻彩詠香

江)?

(1) The money spent on buying equipment needed in the show.

(2) The time spent on preparing the show.

(3) The time spent on watching the show.

A. (2) only

B. (1) and (2) only

C. (1) and (3) only

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



##

B

Both the money spent on buying the equipment and the time spent on preparing the show have

alternative uses. They are therefore the opportunity costs of showing “A Symphony of Lights”.

(3) is incorrect. It is the cost of watching the show, not the cost of showing show.

##

|!|EM11027|!|

Amy has a day off and she is choosing between going to a sculpture exhibition and working as a tutor

to earn money. Which of the following will change her cost of going to the exhibition?

(1) The sculpture exhibition is too crowded.

(2) The hourly wage of tutors increases.

(3) Amy’s student is very naughty.

A. (1) only

B. (1) and (2) only

C. (1) and (3) only

D. (2) and (3) only

##

D

The income from working as a tutor is the opportunity cost of going to the sculpture exhibition.

For (2), the increase in the hourly wage of tutors raises the value of being a tutor. The cost of going to

the exhibition therefore increases.

For (3), the fact that the student is very naughty lowers the value of being a tutor. The cost of going to

the exhibition therefore decreases.

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|!|EM11028|!|

Christy likes to make dessert for her friends. Which of the following is/are the opportunity cost(s) of

making dessert for her friends?

(1) time spent on making the dessert

(2) money spent on buying the ingredients

(3) time spent on eating the dessert

A. (1) only

B. (1) and (2) only

C. (2) and (3) only

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

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B

For (1) and (2), the time and money spent have alternative uses, so they are the opportunity costs of

making dessert for her friends.

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|!|EM11029|!|

Ivy is having an examination tomorrow and she is choosing between studying at home and hiking with

friends. Her opportunity cost of studying at home will change if

A. it rains when she is hiking with friends.

B. she gets a poor result in the examination.

C. she falls asleep when she is studying at home.

D. she cannot finish revising the whole syllabus.

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A

Ivy’s opportunity cost of studying at home is hiking with friends. If it rains when she is hiking, the

value of hiking decreases and the opportunity cost of studying at home therefore decreases.

##



|!|EM11030|!|

John wants to take a course in his spare time. He is choosing between a computer course and a cooking

course. Which of the following will cause his opportunity cost of choosing the cooking course to

decrease?

A. The course fee of the cooking course increases.

B. The prospect of being a cook becomes worse.

C. The price of teaching materials for the cooking course increases.

D. Fewer computer application programmes are taught in the computer course.

##

D

The cost of choosing to take the cooking course is taking the computer course. The fact that fewer

computer application programmes are taught in the computer course lowers the value of taking the

course. Thus, the cost of taking the cooking course decreases.

##

|!|EM11031|!|

Which of the following statements about interest is CORRECT?

A. Interest does not exist in a barter economy.

B. Interest must exist in the form of money.

C. Interest is the cost of obtaining a good earlier.

D. Interest is the compensation paid to a depositor because of inflation.

##

C

Interest is the cost or price of earlier availability of resources. It is the premium for obtaining goods or

resources earlier as well as the premium for deferring present consumption of goods or resources.

##



|!|EM11032|!|

Martin and Simon are friends. As Simon needs money to buy new car, Martin lends him a sum of

money and earns interest in return. Which of the following statement(s) is/are CORRECT?

(1) Both Simon and Martin have positive time preference.

(2) Martin has negative time preference.

(3) The interest that Simon pays Martin must be in the form of cash.

A. (1) only

B. (2) only

C. (1) and (3) only

D. (2) and (3) only

##

A

When people are given a choice between present consumption and future consumption of the same

goods, they always choose to consume the goods sooner than later. This is known as “positive time

preference”. Because of this, people are willing to pay to obtain the goods earlier. Similarly, people are

willing to defer their consumption of the goods in return for a certain compensation made to them.

##

|!|EM01033|!|

Which of the following CANNOT be regarded as a good in economics?

A. clean water

B. free samples of shampoo

C. polluted air

D. singing of birds

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C

Goods are broadly defined as anything, including tangible goods and intangible services, which can

satisfy human wants. Polluted air cannot satisfy human wants, it cannot be regarded as a good in

economics. It is a “bad” in economics.

##



|!|EM11034|!|

Rubbish in the sea is NOT a good in economics because

A. no one is willing to pay for it.

B. its production does not involve any cost.

C. no one wants more of it.

D. it cannot satisfy people’s wants.

##

D

Goods are broadly defined as anything, including tangible goods and intangible services, which can

satisfy human wants. As rubbish in the sea cannot satisfy human wants, it is not a good in economics.

##

|!|EM11035|!|

Which of the following can be regarded as an economic good?

(1) free shampoo sample

(2) polluted water discharged from a factory

(3) water in the desert

A. (1) and (2) only

B. (1) and (3) only

C. (2) and (3) only

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

##

B


sufficient to satisfy all human wants. As the quantities of free shampoo sample and water in the desert

are not sufficient to satisfy all human wants, people prefer more of them. They are therefore economic

goods.

##



|!|EM11036|!|

Which of the following is NOT a free good?

A. free education provided by the government

B. water in the Yellow River

C. sand in the beach

D. trees in the tropical rainforest

##

A

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

to satisfy all human wants. The quantity of free education service provided is not sufficient to satisfy all

human wants, so more of it is preferred. Also, the provision of free education requires the use of scarce

resources. It is therefore not a free good, but an economic good.

##

|!|EM11037|!|

Which of the following is/are the feature(s) of free goods?

(1) They are free of charge.

(2) They are sufficient to satisfy all human wants.

(3) They have no alternative use.

A. (1) only

B. (1) and (2) only

C. (2) and (3) only

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

##

B

The quantity supplied of free goods is larger than that of quantity demanded at zero prices, so they are

sufficient to satisfy all human wants. They are free of charge because no one is willing to pay a price to

get them.

##



|!|EM11038|!|

Which of the following statement(s) about economic goods is/are CORRECT?

(1) People always prefer more of them.

(2) The quantity available is not sufficient to satisfy all people’s wants.

(3) Goods that are free of charge cannot be economic goods.

A. (3) only

B. (1) and (2) only

C. (2) and (3) only

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

##

B

Economic goods are goods that people prefer more of as the quantity available is not sufficient to

satisfy all human wants.

##

|!|EM11039|!|

Which of the following statements about free goods is CORRECT?

A. There are costs in using free goods.

B. Gifts of nature must be free goods.

C. The price of free goods must be zero.

D. People do not want any of the free goods.

##

C


to satisfy all human wants. As the quantity available is sufficient to satisfy all human wants, there is no

competition for free goods. People therefore do not need to pay a price to get them.

##



|!|EM11040|!|

Free shuttle bus service running between shopping malls and housing estates is

A. a free good because it is free of charge.

B. a free good because no one is willing to pay for it.

C. an economic good because it helps increase the number of people going to the shopping

malls.

D. an economic good because various resources are used in the provision of the free shuttle bus

service.

##

D

Those resources used in providing the free shuttle bus service have alternative uses and this means the

provision of the service involves an opportunity cost. Therefore, the free shuttle bus service is an

economic good.

##

|!|EM11041|!|

Many property agencies hire people to give out leaflets on prices of apartments for sale on the streets.

These leaflets are

A. free goods as no one wants to read them.

B. free goods as they are free of charge.

C. economic goods because they help boost the business of the property agencies.

D. economic goods because scarce resources are used to produce them.

##

D

The leaflets are produced using scarce resources with alternative uses and this means an opportunity

cost is involved in producing them. Thus, they are economic goods.

##



|!|EM11042|!|

The free newspapers distributed at the MTR stations are

A. free goods because MTR passengers do not pay for them.

B. free goods because every MTR passenger has the right to get them.

C. economic goods because there are always MTR passengers who want to get the free

newspapers but cannot get one.

D. economic goods because they can attract more people to take the MTR.

##

C

As the quantity available of those newspapers is not sufficient to satisfy all people’s wants, people

prefer more of them. Thus, they are economic goods.

##

|!|EM11043|!|

Sometimes there are free gifts inside magazines. Which of the following statements about these free

gifts is CORRECT?

A. The free gifts are free goods because nothing has to be forgone to get them.

B. The free gifts are economic goods because people have to pay for the magazines in order to

get them.

C. The free gifts are free goods because everyone who buys the magazines gets them.

D. The free gifts are economic goods because resources used to produce these free gifts have

alternative uses.

##

D

As costs are involved in providing the free gifts, they are economic goods.

##



|!|EM11044|!|

To encourage the public to do more exercise, the government of a country lets citizens use public

swimming pools free of charge. To society, the public swimming pool service is

A. a free good because water is a gift of nature.

B. a free good because the fee is waived.

C. an economic good because the government has to pay for the expenses involved.

D. an economic good because the maximum number of people who can use the public

swimming pool is limited.

##

C

As the provision of the service requires the use of scarce resources, it is an economic good.

##

|!|EM11045|!|

In some schools, students use the printing service without paying any fee. To society, the printing

service is a/an _________ because _____________.

A. free good … the school does not aim to maximise profit

B. free good … the printing service is free of charge

C. economic good … when one student is using the printing service, other students have to wait

D. economic good … paper and ink are needed for the provision of printing services

##

D

As scarce resources such as paper and ink are used in the provision of printing service, an opportunity

cost is involved. Thus, it is an economic good.

##



|!|EM11046|!|

When people buy cosmetics, free samples of related products are sometimes included. The free samples

are

A. economic goods because they can satisfy people’s wants.

B. economic goods because more of them are always preferred.

C. free goods because people do not pay for them.

D. free goods because no one is willing to pay for them.

##

B

As the quantity of free samples available is not sufficient to satisfy all people’s wants, people prefer

more of them. Thus, the free samples are economic goods.

##

|!|EM11047|!|

Some community service centres provide free tutorial classes to students in need. The free tutorial

service is

A. a free good because the students need not pay any tuition fee.

B. a free good because it does not have market value.

C. an economic good because the tuition fee has already been included in the membership fee.

D. an economic good because the tutors have positive time cost.

##

D

Since scarce resources are used in providing the free tutorial service, opportunity costs are involved

(e.g. the highest-valued alternative use of time of the tutors). Thus, it is an economic good.

##

|!|EM11048|!|

Water in the sea is _____________________ and the water in the desert is __________________.

A. a free good … an economic good

B. an economic good … a free good

C. a free good … a free good

D. an economic good … an economic good



##

A

In the sea, as the quantity of water available is sufficient to satisfy all people’s wants, more of it is not

preferred. Water in the sea is therefore a free good. In the desert, the quantity available of water is not

sufficient to satisfy all people’s wants. Water in the desert is therefore an economic good.

##

|!|EM11049|!|

After the Second World War, many people in Germany had to salvage construction materials from their

destroyed homes to reconstruct their homes. In this case, these building materials are

A. an economic good because costs are involved in obtaining them.

B. an economic good because these building materials were wanted by the Germans.

C. not an economic good because they did not have to pay money for them.

D. a free good because these materials have no alternative uses.

##

A

Since the amount of building materials was insufficient to satisfy all people’s wants in Germany, more

of these materials were preferred by the Germans. They were therefore willing to spend considerable

effort (e.g. effort in digging and cleaning them) to salvage them from the ruins.

##

|!|EM11050|!|

Which of the following is an example of production?

A. Crystal watches her favourite TV programme.

B. Alex washes his father’s car in order to get extra pocket money.

C. Cathy surfs on the Internet for entertainment.

D. Monica reads a novel.

##

B

Option B belongs to production as it is the process of turning inputs (e.g. labour) into goods and

services (car washing services).

##



|!|EM11051|!|

Which of the following is an example of consumption?

A. Annie makes sandwiches for sale.

B. Tim reads a book for his book report.

C. Ivy searches information on the Internet for her project.

D. Emily watches a movie with her friends.

##

D

Option D belongs to consumption as it is the process of using goods and services (the movie) to satisfy

human wants (entertainment) directly.

##

|!|EM11052|!|

Which of the following statements about the basic circular flow model is INCORRECT?

A. The household provides factors of production to the firm.

B. The household’s expenditure on goods and services may not be the same as the firm’s

revenue as the household may save.

C. The firm provides goods and services to the household and receives revenue in return.

D. The basic circular flow model shows the circular flow of goods and services and the circular

flow of money between the firm and the household.

##

B

In the basic circular model, it is assumed that neither the household nor the firm saves. The value of the

household’s expenditure must equal the firm’s revenue.

##



|!|EM11053|!|

Below is the circular flow model of a country.

Which of the following is included in Flow X?

A. factor income such as rent and wages

B. expenditure on goods and services for private consumption

C. final goods and services produced by firms

D. factors of production such as labour

##

B

Money flow refers to the circular flow of money. Flow X represents the household’s consumption

expenditure, flowing from the household to the firm.

##

|!|EM11054|!|

Which of the following statements is CORRECT?

(1) With specialisation, living standard of all people will be improved.

(2) Without specialisation, exchange cannot take place.

(3) With specialisation, more goods can be produced.

A. (1) only

B. (3) only

C. (1) and (3) only

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


Household Firm

Money flow

Real flowFlow X


##

B

When people specialise in producing the goods or services which they can produce at a lower

opportunity cost, the total output of the economy will be higher than when no specialisation takes

place.

(1) is incorrect. Specialisation without exchange may not be able to improve living standard of all

people. People need exchange so that they can obtain everything they need.

##

|!|EM11055|!|

Suppose there are only two people in the economy. Maggie can produce 4 units of clothes or 8 units of

hats in an hour and Andrew can produce 10 units of clothes or 4 units of hats in an hour.

From the above information, Maggie should specialise in producing ______________ and Andrew

should specialise in producing _______________.

A. clothes … clothes

B. hats … clothes

C. clothes … hats

D. hats … hats

##

B

Maggie has an opportunity cost (1 unit of hats = 0.5 unit of clothes) lower than Andrew (1 unit of hats

= 2.5 units of clothes), so she should specialise in producing hats.

Andrew has an opportunity cost (1 unit of clothes = 0.4 unit of hats) lower than Maggie (1 unit of

clothes = 2 units of hats), so Andrew should specialise in producing clothes.

##

|!|EM11056|!|

Positive statements are statements that

A. describe what it is, it was or it will be and does not involve any value judgment.

B. describe what ought to be.

C. describe what is the best.

D. describe one’s belief.



##

A

Positive statements are statements that describe what it is, with no value judgment.

##

|!|EM11057|!|

Normative statements are statements that

(1) describe what ought to be.

(2) describe whether a situation is desirable or not.

(3) involve value judgment.

A. (1) only

B. (1) and (3) only

C. (2) and (3) only

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

##

D

Normative statements are statements that describe what ought to be. They involve value judgment on

what is desirable or the best.

##

|!|EM11058|!|

John said, “The government should increase the payment of the Comprehensive Social Security

Assistance.”

May said, “When there is inflation, the poor suffer as the purchasing power of the money they hold is

lower than before.” Which of the following statements is CORRECT?

A. John’s statement is a normative statement while May’s is a positive statement.

B. John’s statement is a positive statement while May’s is a normative statement.

C. Both John’s and May’s statements are normative statements.

D. Both John’s and May’s statements are positive statements.



##

A

John’s statement contains the word “should” which involves value judgment on what is desirable, so it

is a normative statement. May’s statement describes what it is which does not involve value judgment,

so it is a positive statement.

##

|!|EM11059|!|

Statement 1: When bird flu breaks out, the government should ban the sale of chicken.

Statement 2: When bird flu breaks out, the demand for chicken decreases.

Statement 1 is a __________________ and statement 2 is a _____________________.

A. positive statement … normative statement

B. normative statement … positive statement

C. positive statement … positive statement

D. normative statement … normative statement

##

B

Statement 1 contains the word “should” which implies value judgment on what is the best, so it is a

normative statement. Statement 2 describes what it is and does not involve value judgment, so it is a

positive statement.

##

|!|EM11060|!|

Which of the following is a positive statement?

A. The government should raise the unemployment benefit.

B. Extending opening hour of a restaurant raises the cost of operation.

C. When the scale of production increases, more workers should be employed to ease the

burden of existing workers.

D. Using machines to produce goods is the best way to minimise the production cost.



##

B

The statement describes what the situation is and does not involve value judgment, so it is a positive

statement.

##

|!|EM11061|!|

Which of the following is an example of normative statement?

A. Parents should not buy luxuries for their children.

B. Prices of goods and services usually fall during economic recession.

C. The price of crops usually increases during the drought.

D. The Hong Kong Government provides 12-year free education to her citizens.

##

A

The statement contains the phrase “should not” which implies value judgment on what is desirable, so

it is an example of normative statement.

##



Short Questions

|!|ES11001|!|

(a) Define scarcity. (2 marks)

(b) “If the demand for a good is very small, it cannot be scarce.” Do you agree? Explain. (3 marks)

##

(a) Scarcity refers to the situation in which the resources available are not enough to satisfy all

people’s wants. (2 marks)

(b) No. (1 mark)

Although the demand for the good is very small, the quantity available may be insufficient to

satisfy all human wants. (2 marks)

##

|!|ES11002|!|

“If the government allocates goods and services to citizens equally, the problem of scarcity does not

exist.” Do you agree? Explain. (3 marks)

##

No. (1 mark)

Scarcity refers to the situation in which the resources available are not enough to satisfy all people’s

wants. (1 mark)

Even when goods and services are equally distributed among citizens, resources are still insufficient to

satisfy all human wants. There is still scarcity. (1 mark)

##

|!|ES11003|!|

(a) What is scarcity? (2 marks)

(b) “If the supply of a good is limited, it must be scarce.” Comment on the statement. (4 marks)



##

(a) Scarcity refers to the situation in which the resources available are not enough to satisfy all

people’s wants. (2 marks)

(b) If the quantity of a good available is not sufficient to satisfy all human wants, it is a scarce good.

If the quantity of a good available is sufficient to satisfy all human wants, it is not a scarce good.

(2 marks)

Whether the supply of a resource is limited or not, it is scarce when it is not enough to satisfy all

people’s wants. On the other hand, even if a resource is limited in supply, it may not be scarce if it

is enough to satisfy all people’s wants. (2 marks)

##

|!|ES11004|!|

(a) Define opportunity cost. (2 marks)

(b) Mary is given a coupon of $1,000 from a department store. Is there any opportunity cost to Mary

of using the coupon? (5 marks)

##

(a) Opportunity cost of a choice is the highest-valued option forgone. (2 marks)

(b) Uncertain. (1 mark)

If the coupon is transferable, Mary can sell it to others. Her opportunity cost of using the coupon

is the income from selling it (highest-valued option forgone). (2 marks)

If the coupon is not transferable, no opportunity cost is involved in using the coupon because

there is no option that has to be given up. (2 marks)

##



|!|ES11005|!|

A company is going to spend $200 million on one of the following projects. The projects are arranged

according to its order of preference as below:

Order of preference Projects

1 Constructing a residential building

2 Constructing a commercial building

3 Constructing a golf course

Explain whether the opportunity cost of constructing a commercial building will change in the

following situations.

(a) Playing golf becomes the most popular sport. (5 marks)

(b) The price of residential buildings goes up rapidly. (3 marks)

##

(a) Uncertain. (1 mark)

If the highest-valued option forgone remains the option of constructing a residential building, the

cost does not change. This raises the value of constructing a golf course only. (2 marks)

If the increase in the value of constructing a golf course makes it the most preferred option, the

highest-valued option forgone becomes constructing golf course. The cost will then change.

(2 marks)

(b) The opportunity cost of constructing a commercial building will change (increase). (1 mark)

It is because the value of the highest-valued option forgone (constructing a residential building)

changes. The increase in the price of residential building raises the value of constructing a

residential building. Therefore, the cost of constructing a commercial building will increase.

(2 marks)

##



|!|ES11006|!|

Mr. Chan has a dinner with his friends in a restaurant. Explain whether his opportunity cost of having

dinner in the restaurant will change under the following situations.

(a) The food was not as good as Mr. Chan expected and Mr. Chan was dissatisfied with the dinner.

(3 marks)

(b) The cook spent one hour more than usual preparing the meal. (3 marks)

##

(a) His opportunity cost will not change. (1 mark)

It is because the poor quality of food lowers the value of having the dinner only, but the value of

the highest-valued option forgone does not change. (2 marks)

(b) His opportunity cost will change (increase). (1 mark)

Because of the longer preparation time, his time cost of having dinner increases. (2 marks)

##

|!|ES11007|!|

“Miss Lee buys a property and uses it for a coffee shop business. Since she owns the property, she does

not need to pay rent. There is no cost for her to use the property for a coffee shop business.” Do you

agree with this statement? Explain. (3 marks)

##

No. (1 mark)

A cost is involved in using the property for a coffee shop business. The opportunity cost of using the

property for a coffee shop business is the highest-valued option forgone (e.g. income that can be

received from renting or selling it out). (2 marks)

##

|!|ES11008|!|

During an economic recession, many students prefer to continue their studies instead of working.

Explain the phenomenon with the concept of opportunity cost. (5 marks)



##

Opportunity cost is the highest-valued option forgone. (1 mark)

The opportunity cost of continuing their study is the income received from working. (2 marks)

During economic recession, wages usually decrease. This lowers the income from working. Therefore,

the opportunity cost of continuing their study decreases. (2 marks)

##

|!|ES11009|!|

Pauline is planning to join one of the tours as shown below during the holiday.

Order of preference Destination

1 Thailand

2 Korea

3 Taiwan

(a) What is Pauline’s opportunity cost of joining a tour of Korea? (2 marks)

(b) If the tour of Thailand is full, how will this affect Pauline’s opportunity cost of joining a tour of

Korea? (2 marks)

##

(a) Pauline’s opportunity cost of joining a tour of Korea is a tour of Thailand which is the highest-

valued option forgone. (2 marks)

(b) If the tour of Thailand is full, it is no longer an option for Pauline anymore. The opportunity cost

of joining a tour of Korea changes to a tour of Taiwan. (2 marks)

##



|!|ES11010|!|

Grace is a student. She can choose to learn one of the following during her leisure time. Her order of

preference is shown below.

The first choice: piano

The second choice: violin

The third choice: flute

(a) What is Grace’s opportunity cost of learning piano? (2 marks)

(b) If Grace discovers that playing violin is not enjoyable at all, will this affect her opportunity cost of

learning piano? Explain. (3 marks)

##

(a) Grace’s opportunity cost of learning piano is learning violin. (2 marks)

(b) Grace’s opportunity cost will change (decrease). (1 mark)

The value of the highest-valued option forgone (learning violin) changes. If Grace discovers that

playing violin is not enjoyable at all, this lowers the value of learning violin. Opportunity cost of

learning piano will therefore decrease. (2 marks)

##

|!|ES11011|!|

Mrs. Wong is a doctor and she employs a domestic helper to do the housework and take care of her two

children. Explain with the concept of opportunity cost why she employs a domestic helper instead of

doing the housework herself. (6 marks)



##

Mrs. Wong’s opportunity cost of doing the housework herself is the income earned as a doctor.

(2 marks)

Mrs. Wong’s opportunity cost of leaving the housework to the domestic helper is the wage paid to the

domestic helper. (2 marks)

Mrs. Wong’s opportunity cost of doing the housework herself is higher than that of leaving the

housework to the domestic helper. Therefore, Mrs. Wong chooses to employ a domestic helper to do

the housework. (2 marks)

##

|!|ES11012|!|

Mr. Lee attends a communication skills class every Saturday night. Each lesson costs him $500 and the

fee is non-refundable. He decides not to attend the class this week and goes to watch a movie instead.

The price of the movie ticket is $100.

(a) What is Mr. Lee’s opportunity cost of watching the movie? (2 marks)

(b) If the movie is boring and Mr. Lee falls asleep when he is watching the movie, will Mr. Lee’s

opportunity cost of watching the movie change? Explain your answer. (3 marks)

##

(a) The opportunity cost of watching the movie is the cost of the movie ticket ($100) and the value of

attending the class ($500). (2 marks)

(b) Mr. Lee’s opportunity cost of watching the movie will not change. (1 mark)

The value of the highest-valued option forgone (attending the communication skills class) does

not change. This only affects the value of watching the movie. (2 marks)

##

|!|ES11013|!|

Fiona and Yuki are both top models.

(a) Explain whether their opportunity costs of being a model are the same. (2 marks)

(b) Suppose an economic downturn leads to the same reduction in income for both. Explain whether

both will quit their jobs as a model at the same time. (4 marks)



##

(a) Their costs may not be the same. (1 mark)

This is because their highest-valued option forgone may not be the same. For example, their

qualifications may be different and they may give up different jobs. (1 mark)

(b) No, they may not quit at the same time. (1 mark)

As long as being a model is the highest-valued option, they will stay in the business. (1 mark)

Their incomes may be different. For example, being a model may still be the highest-valued

option for Fiona but not for Yuki; OR (2 marks)

Their costs may be different. For example, the value of being a model may become less than the

cost for Fiona but this may not be the case for Yuki. (2 marks)

##

|!|ES11014|!|

The Hong Kong Brands and Products Expo is being held every year. Exhibitors often offer free food

samples to buyers. Explain whether these food samples are free good? (4 marks)

##


to satisfy all human wants. (1 mark)

The food samples are not free goods. (1 mark)

Their quantity available is not sufficient to satisfy all human wants; OR (2 marks)

More of them are preferred; OR (2 marks)

Provision of them requires the use of scarce resources which have alternative uses. (2 marks)

##

|!|ES11015|!|

Recently, the Hong Kong Government launches the Government Wi-Fi Programme. People can enjoy

free wireless Internet access (WiFi) services in many public libraries. Are the free WiFi services free

goods? (4 marks)



##



The free WiFi services are not free goods. (1 mark)

Their quantity available is not sufficient to satisfy all human wants; OR (2 marks)


Provision of them requires the use of scarce resources which have alternative uses. (2 marks)

##

|!|ES11016|!|

Kenneth receives a scholarship from the university. He uses the money to pay for the tuition fee.

(a) Is there any opportunity cost involved when Kenneth uses the scholarship to pay for the tuition

fee? Explain. (3 marks)

(b) Explain why the scholarship is not a free good. (3 marks)

##

(a) Yes. (1 mark)

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

If Kenneth uses the scholarship to pay for the tuition fee, he has to forgo the opportunity to spend

the money in other ways, like taking a trip or buying other things. (1 mark)

(b) 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)

The quantity of scholarship available is not sufficient to satisfy all students’ wants; OR (2 marks)

More scholarship is preferred; OR (2 marks)

The provision of scholarship requires the use of scarce resources which have alternative uses.

(2 marks)

##

|!|ES11017|!|

Statement 1: Rainfall is a free good.

Statement 2: Rainfall is an economic good.

Explain in what situation each of the above statements is true. (6 marks)



##



In places with abundant rainfall such as the tropical rainforest, the quantity of rainfall is sufficient to

satisfy all human wants. Rainfall is a free good there. (2 marks)



In places that suffer from drought such as the Sahara, the quantity of rainfall is not sufficient to satisfy

all human wants. Rainfall is an economic good there. (2 marks)

##

|!|ES11018|!|

Mrs. Tong is the owner of a coffee shop. She buys the ingredients and prepares cakes and drinks

herself. She employs a waitress to help her serve customers. Explain the economic role(s) performed by

Mrs. Tong using the circular flow model. (3 marks)

##

Mrs. Tong performs the role of the firm. (1 mark)

She employs factors of production (the waitress, ingredients) and supplies goods and services (the

cakes and drinks, catering service). (2 marks)

##

|!|ES11019|!|

Mr. Wan is the owner of a bookstore. He employs Timothy as the shop assistant. In order to increase

the competitiveness of his bookstore, he provides free delivery service to his customers.

(a) Explain whether the free delivery service is a free good. (4 marks)

(b) Explain the economic role(s) performed by Mr. Wan with the circular flow model. (3 marks)



##

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


The free delivery service is not a free good. (1 mark)

Its quantity is not sufficient to satisfy all human wants; OR (2 marks)

More of it is preferred; OR (2 marks)

Provision of it requires the use of scarce resources such as labour. These resources have

alternative uses. (2 marks)

(b) Mr. Wan performs the role of the firm. (1 mark)

He employs factors of production (e.g. labour, books, etc) and provides services (book retailing)

to the household. (2 marks)

##

|!|ES11020|!|

Explain whether the following statements are positive or normative.

(a) If the Organization of the Petroleum Exporting Countries (OPEC) raises the supply of oil, the

price of oil will fall. (3 marks)

(b) The government should build more public housing estates. (3 marks)

##

(a) It is a positive statement. (1 mark)

The statement describes what it is and does not involve value judgment. (2 marks)

(b) It is a normative statement. (1 mark)

It is because the statement contains the word “should”, which implies value judgment on what is

desirable. (2 marks)

##

|!|ES11021|!|

Statement 1: Policies should be carried out to ease the problem of income inequality.

Statement 2: The problem of income inequality is getting worse.

Explain whether the above statements are positive or normative. (6 marks)



##

Statement 1 is a normative statement. (1 mark)



Statement 2 is a positive statement. (1 mark)

The statement describes what it is and does not involve value judgment. (2 marks)

##

|!|ES11022|!|

Janice said, “I am too fat.”

Jill said, “I am fatter than you.”

Explain which of the statements is a positive statement and which is a normative statement. (6 marks)

##

Janice’s statement is a normative statement. (1 mark)

It describes what it ought to be and involves value judgment on what is desirable or the best (“too fat”

means she should be thinner). (2 marks)

Jill’s statement is a positive statement. (1 mark)

It describes what it is and does not involve value judgment (whether she is fatter than Janice can be

verified by measuring their weight). (2 marks)

##



Long Questions

|!|EL11001|!|

A cosmetics chain store is going to spend $10 million on one of the following:

First choice: Opening a new branch

Second choice: Hiring Ann Poon, a pop star, as a spokesman

Third choice: Advertising on television, magazines and newspapers

(a) (i) State the definition of opportunity cost. (2 marks)

(ii) What is the opportunity cost of opening a new branch? (2 marks)

(b) If the new branch makes a loss, would it affect the cost of opening a new branch? (3 marks)

(c) (i) What are free goods? (2 marks)

(ii) The cosmetics chain store sometimes offers free skin tests to the customers. Explain whether

the test is a free good. (3 marks)

(d) Suppose Ann Poon, the pop star, has signed a contract with another competing cosmetics chain

store to be its spokesman and she cannot be the spokesman of the company. Explain how it would

affect the cost of opening a new branch. (3 marks)

##

(a) (i) Opportunity cost of a choice is the highest-valued option foregone. (2 marks)

(ii) The opportunity cost of opening a new branch is the choice of hiring a pop star as the

spokesman. (2 marks)

(b) It would not affect the cost of opening a new branch. (1 mark)

It is because the value of the highest-valued option forgone (hiring a pop star as the spokesman)

does not change. It would only decrease the value of opening a new branch. (2 marks)

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

sufficient to satisfy all human wants. (2 marks)

(ii) No, the free test is not a free good. (1 mark)

Its quantity is not sufficient to satisfy all human wants; OR (2 marks)

More of it is preferred; OR (2 marks)

The provision of it requires the use of scarce resources which have alternative uses.(2 marks)



(d) Since the option of hiring Ann Poon as a spokesman is no long available, the cost of opening a

new branch becomes the option of advertising on television, magazines and newspapers, which is

now the highest-valued option forgone. (3 marks)

##

|!|EL11002|!|

Mr. Cheung is a minibus driver. As he owns a minibus, he does not need to rent a minibus from others.

(a) What is Mr. Cheung’s cost of driving his minibus? (2 marks)

(b) Suppose his minibus is very old and it has to be repaired frequently. Will his cost of driving his

minibus change? Explain. (3 marks)

(c) Under what condition will Mr. Cheung’s cost of driving his minibus increase? Explain. (4 marks)

##

(a) Mr. Lee’s cost of driving his minibus is the income that he can obtain from renting out his

minibus. (2 marks)

(b) Mr. Cheung’s cost of driving his minibus will increase. (1 mark)

Since the spending on repairs and maintenance is positively related to the frequency of driving the

minibus, Mr. Cheung’s cost of driving his minibus will increase. (2 marks)

(c) If the rent of minibus increases, Mr. Cheung’s opportunity cost of driving his minibus will

increase. (2 marks)

When he chooses to drive the minibus himself, he gives up more rental income. (2 marks)

##

|!|EL11003|!|

Simon has $4 million and his order of preference for spending the money is as follows:

First choice: Buying a flat in Ho Man Tin

Second choice: Buying a car

Third choice: Buying a yacht

(a) What is Simon’s opportunity cost of buying a flat in Ho Man Tin? (2 marks)



(b) (i) If the performance of the car is much better than expected, how will this affect Simon’s

opportunity cost of buying a flat in Ho Man Tin? (2 marks)

(ii) After Simon bought the flat in Ho Man Tin, the MTR Corporation announced that the Ho

Man Tin MTR station would be built. Property prices in Ho Man Tin rise thereafter. Will this

affect Simon’s opportunity cost of living in the flat? Explain. (3 marks)

(c) Free newspapers are provided in the estate where Simon lives. Are these free newspapers free

goods? Explain. (1 mark)

(d) Residents of the estate said, “More bus routes running between Ho Man Tin and different places

should be provided.” Explain whether this statement is positive or normative. (3 marks)

##

(a) Simon’s opportunity cost of buying a flat in Ho Man Tin is the option of buying a car. (2 marks)

(b) (i) Simon’s opportunity cost of buying a flat in Ho Man Tin will increase. (1 mark)

It is because the value of the highest-valued option forgone (buying a car) changes. The fact

that the car is much better than expected raises the value of buying the car, so the

opportunity cost of buying a flat in Ho Man Tin will increase. (2 marks)

(ii) The cost of living in the flat is the highest-valued option forgone of living in the flat.

(1 mark)

For example, the cost may be the income that he can receive from selling the flat. (1 mark)

The increase in the price of properties in Ho Man Tin raises his cost of living in the flat.

(1 mark)

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


The free newspaper is not a free good. (1 mark)

The quantity of newspapers is not sufficient to satisfy all human wants, OR (2 marks)

More newspapers are preferred; OR (2 marks)

The production of newspapers requires the use of scarce resources such as paper. These resources

have alternative uses. (2 marks)

(d) It is a normative statement. (1 mark)



##



|!|EL11004|!|

Study the following information.

Modern Magazine

New subscribers can get one of the following free gifts:

1. $500 supermarket cash coupon

2. 100 ml Perfect Moisturiser

3. A toaster

(a) (i) State the definition of a free good. (2 marks)

(ii) “Since the gifts are given to new subscribers free of charge, they are free goods.” Do you

agree with the statement? Explain. (3 marks)

(b) Samantha is a new subscriber of Modern Magazine. Her order of preference is as follows:

First choice: 100 ml Perfect Moisturiser

Second choice: A toaster

Third choice: $500 supermarket cash coupon

(i) Explain whether an opportunity cost is involved in getting the Perfect Moisturiser. (3 marks)

(ii) If the toaster is out of stock, how will this affect Samantha’s opportunity cost of choosing the

Perfect Moisturiser? (2 marks)

(c) Explain the economic role(s) performed by Samantha in this case using the circular flow model.

(3 marks)

##

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

sufficient to satisfy all human wants. (2 marks)

(ii) No. (1 mark)

Their quantity is not sufficient to satisfy all human wants; OR (2 marks)


The production of free gifts requires the use of scarce resources which have alternative uses.

(2 marks)



(b) (i) An opportunity cost is involved in getting the Perfect Moisturiser. (1 mark)

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

Samantha’s opportunity cost of choosing the Perfect Moisturiser is a toaster. (1 mark)

(ii) If the toaster is out of stock, it is no longer an option for Samantha. Her opportunity cost of

choosing the Perfect Moisturiser changes to the $500 supermarket cash coupon. (2 marks)

(c) Samantha performs the role of the household. (1 mark)

She buys final goods and services (magazine) from the firm (magazine publishing company).

(2 marks)

##

|!|EL11005|!|

Alex said, “I am planning to get married this December. I want to buy a new apartment which costs 3

million dollars. Can I borrow one million dollars from you for the down payment?”

Alex's mother said, “Sure. I can lend you the money. But you have to pay back the full amount ten

years later as I need it for retirement.”

(a) (i) What is interest? (2 marks)

(ii) What is the interest rate when Alex’s mother lends to Alex? Does it indicate anything about

Alex’s time preference? (3 marks)

(b) Suppose a bank offers an investment product which guarantees a 10% annual rate of return.

Explain whether this will affect Alex’s mother’s cost of lending to Alex. (5 marks)

(c) Suppose Alex finally buys a flat near the LOHAS Park MTR station. He finds that the frequency

of the trains running between the LOHAS Park and other stations is low. A member of the

Democratic Party says, “There should be a greater frequency of the train service.” Explain

whether the comment made by the member of the Democratic Party is a positive or a normative

statement. (2 marks)



##

(a) (i) Interest is the cost or price of earlier availability of resources; OR (2 marks)

Interest is the premium for obtaining goods or resources earlier as well as the premium for

deferring present consumption of goods and resources. (2 marks)

(ii) The interest rate is zero as Alex has to pay back the principal only. (1 mark)

However, the zero interest rate does not indicate that Alex has a zero time preference.

(1 mark)

Alex still has a positive time preference as he still prefers earlier availability of the

apartment (he has the option of waiting until he can save enough for the down payment.) (1

mark)

(b) Uncertain. (1 mark)

Alex’s mother’s cost of lending the one million dollars to Alex is the highest-valued option

forgone of the money. (1 mark)

Since we are not given the information of other alternatives, we are not sure whether the

availability of this investment product will affect her cost or not. (1 mark)

If all other investment opportunities offer annual rates of return less than 10%, the availability of

this investment product will raise her cost of lending to Alex. (1 mark)

If there exist other investment opportunities with annual rates of return more than 10%, the

availability of this investment product does not affect her cost. (1 mark)

(c) The comment is a normative statement. (1 mark)

This is because the statement contains the word “should”, which implies value judgment on what

is desirable. (1 mark)

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Date post:	22-Jan-2016
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QB Ch1 (Eng) Output (Final)

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