Marking Schemes

Paper 1

Question Question
Key Key
No. No.

L D (59%) 26. A (80%)

2. D (81%) 27. D (76%)
3. B (80%) 28. B (80%)
4. B (79%) 29. C (65%)
5. B (58%) 30. C (52%)

6. D (42%) 31. C (69%)

7. D (69%) 32. C (40%)
8. A (83%) 33. A (53%)
9. C (94%) 34. C (39%)
10. C (65%) 35. B (49%)

11. A (85%) 36. D (62%)

12. A (51%) 37. B {72%)
13. C (74%) 38. D (58%)
14. B (53%) 39. A (65%)
15. B (47%) 40. A (24%)

16. A (82%) 41. D (43%)

17. C (63%) 42. *
18. C (62%) 43. D (38%)
19. B (69%) 44. A (46%)
20. D (82%) 45. D (57%)

21. B (86%)
22. A (74%)
23. B (73%)
24. A (71%)
25. B (55%)

* This item was deleted.

Note: Figures in brackets indicate the percentages of candidates choosing the correct answers.

General note on item deletion

It is normal for the HK.BAAto delete a small number of items from its multiple-choice question papers if they
prove unsatisfactory. In practice, there are a number of reasons why this is considered necessary. By far the
most common reason for deleting an item is that the item fails to discriminate .between weak and able
candidates - in other words, the majority of the candidates involved had to rely on guesswork in answering that
question. If such an item is retained, the measurement process is rendered less effective. Where items have
been deleted in the live papers, they are still included in this series of publications. They are indicated as
deleted items. Such items may be discussed in the corresponding examination reports.

42
Paper2

These documents were prepared for markers' reference. They should not be regarded as sets of model
answers. Candidates and teachers who were not involved in the marking process are advised to interpret
their contents with care.

The answers provided in the marking scheme are for reference only. They are not the only possible
answers. Alternative answers are acceptable so long as they are well reasoned.

The examination emphasises the testing of the understanding of economic theories and the application of
the knowledge of economic analysis to practical problems. Candidates are advised to study this document
in conjunction with the examiner's comments on candidates' performance in this booklet.

For essay-type questions, candidates are expected to demonstrate an understanding of the question, an
ability to deploy relevant knowledge of the subject in response to the questions, and to present their
answers logically and coherently.

In questions asking for a specified number of reasons or examples etc. and a candidate gives more than the
required number, the extra answers should not be marked. For instance, in a question asking candidates to
provide two examples, and if a candidate gives three answers, only the first two should be marked.

The following symbols are used:

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

@ The number in front of the symbol indicates the marks for each point.

max Maximum mark for the question/sub-question

43
Section A

Marks
1. Full cost = monetary cost + time cost (3)
During holiday periods, although the monetary cost of travelling abroad (including air
ticket fares and hotel expenses) is usually higher than that during non-holiday periods, the
time cost (e.g., income foregone) may be a lot lower. If the time-cost saved outweighs the
extra monetary cost, then in terms of full cost travelling abroad during holiday periods
would be less expensive.

Marks
2. (a) Reasons:
- Peter wants to invite more investors to get new funds for expansion of his
business.
Peter can make use of different expertise from Paul and Mary in the new
markets.
- Any other relevant points.
[Mark the FIRST TWO points only.]

(b) Entrepreneurship, (2)

as she bears business risk.

Marks
3. Explanations:
Reduction of marketing and promotion costs, as the region would attract more buyers
for high-technology products/services.
Reduction of transportation cost, as transport network and other infrastructures would
develop more quickly, thus improving accessibility.
Reduction of average/marginal cost of recruiting more experienced and skilled
workers, as more of these workers would be attracted to the region.
- Any other relevant points.
[Mark the FIRST TWO points only.]

Marks
4. Factors:
Race, as there may be racial discrimination in the job market and some ethnic minority
groups may suffer a lower wage rate for the same job.
Gender, as sex discrimination may exist in the workplace. On average, female suffers
a lower wage rate for the same rank. @2
Physical attributes, as average income may be higher for people who are fitter, or max:4
taller, or better-looking since these people are more productive for certain jobs (e.g.,
sportsmen, fashion models).
Any other relevant points.
[Mark the FIRST TWO points only.]

44
 Marks
5. (a) Supply of medical staff may be inelastic because they require special training and (3)
qualification. Even if the government raises their wage rates sharply, the
percentage increase in the quantity supplied of medical staff would still be smaller
than the percentage increase in their wage rates.

(b) Unemployment rate= (number of unemployed people/ the total labour force) x (4)
100%
The number of unemployed people will not change while the labour force increases
as the retired staff is not in the labour force originally. The unemployment rate will
drop.

Marks
6. (a) No. The reduction in the profits-tax rate may induce firms to increase their (4)
investment expenditure, so they may end up earning higher profits (tax base).
Increase in profits tax revenue due to the increase in profits (tax base) may be
greater than the decrease in profit tax revenue due to the reduction in tax rate.

(b) Equality: The new tax is no longer proportional, meaning that it is inconsistent
with the equality principle.

Economy: The new tax system may incur a slightly higher administration cost,
rendering it less in line with the economy principle.
@2
Certainty: Both the new and old tax systems are equally well-defined and max:2
announced publicly, so the new one would be just as certain as the
old.

Convenience: There is no change in the method of tax collection, so the change in

tax system would have no effect on convenience.
[Mark the FIRST point only.]

45
 Marks
7. (a) (i) New M0 = $500 million+ $100 million+ $40 million= $640 million (2)

(ii) Banks do not hold excess reserves / there is sufficient demand for loans. (2)
There is no cash leakage.

(iii) Old Ms = $2 000 million + $ I 00 million = $2 I 00 million (4)

RRR = ($500 million- $100 million) / $2 000 million = 0.2
New Ms = $ 100 million + ($500 million + $40 million)/ 0.2
= $2800 million
.·. Ms increases by $700 million (= 2800 million- 2 I 00 million). 1

(b) MV = PY, where M: money supply, V: velocity of circulation of money, P: price (4)
level, and Y: output

Assume V and Y are both constant. Then when M increases, P would increase by
the same proportion.
OR
Assume V is constant. Then when the percentage increase in M is higher than that
in Y, P would increase as well.

Marks
8. (a) The opportunity cost of producing I Tin China= 5C (2)
The opportunity cost of producing I Tin Japan= 2C

(b) If each country specialises in producing the good in which the country has lower (3)
opportunity cost, then total world output would increase.
Japan would export toys, as it has a lower cost of producing toys than China.

(c) Range of TOT: 2.05C < IT< 4.95C (2)

1 Credits would also be awarded to those candidates who reasoned that the public's initial cash holding of $100 million might also be
deposited into the banking system to yield $500 million of additional deposits, resulting in an aggregate increase of $1200 million of
deposits and thus a net increase of $1 I 00 million of money supply. As a side note, for the topic of money and banking at the DSE level,
cash held by the general public should be treated as an exogenous variable (i.e., change of cash in public is assumed to be zero except under
other exogenous changes).
46
 Marks
9. Illustrate in the diagram:
- Rightward shift of AD (due to more visitors from the Mainland) (1)
- Rightward shift ofLRAS (due to faster development of the HK economy) (1)
- Correct position of P 2 (at E2), with a bigger horizontal shift in AD than in LRAS (1)

Price level

t P, - - - - - - - - - -

,...._
_______ ,...._
____ ..______ ---+ Output level
O
Y, --""7 Y2

47
Section B

Marks
10. (a) The cost of measuring the output of the foreign domestic helpers is too high / (2)
the work of domestic helpers is not standardised.

(b) The foreign domestic helpers will lose under unexpected inflation., (2)
as the purchasing power of their fixed wage would drop.

(c) Verbal elaboration:

At Q 1, marginal benefit is greater than marginal cost.2 (1)

Illustrate in Figure 2:
- correct position of minimum wage (1)
correctposition ofQ 1 (1)
correct position of deadweight loss (1)

Foreign Domestic Helpers in Hong Kong

Wage rates

~Shortage

► DeadweightLoss

o,'"---------....;Q_1 __________ ___,;=-~Quantity

Figure 2

2 The theocy oflabour market (i.e. value of marginal product) is not required.
48
 Marks
(d) Filipino maids working in the Mainland and Filipino domestic helpers in Hong (3)
Kong are in competitive supply.
If competition from the Mainland sharply reduces the supply of foreign domestic
helpers in Hong Kong, then shortage of such workers could still arise even at a
higher wage rate.

Illustrate in Figure 2:
Leftward shift of supply curve (1)
Correct position of shortage at the higher wage rate (2)

(e) Possible phenomena:

Employers may try to recruit domestic helpers from other countries to work in
Hong Kong.
- The minimum wage may be raised/ abolished by the govemment. 3

Marks
11. - General living standard:
The living standard would fall because the higher proportion of government
expenditure or resources/output devoted to national defence would not have much
to contribute to the living standard in general.
Overall the citizens would enjoy less goods and services. Since those males drafted
for military service are forced to leave their existing jobs, their household income
(and consumption) would fall.

- Aggregate output:
The SRAS curve would shift to the left, as less labour is available for production.
max: 10
The AD curve would also shift to the left, as the UN. embargo reduces exports from
Country Z.
As a result, aggregate output would fall.

- Balance of payments (BOP):

BOP would be worsened. ·
Export of goods would fall because of the embargo.
Export of services would also fall as fewer tourists would want to visit Country Z
because of the threat of war.
Foreign investors would withdraw their investments in Country Z, so capital may
flow out of the country.

3 More people may quit their jobs and take care of their children or the elderly on a full-time basis.
49
 Marks
12. (a) Reasons:
- Sellers provide heterogeneous services, e.g., rooms with different size/features.
Market information is imperfect, e.g., information about the quality of services.
@2
Price searcher / under competition there are different prices, e.g., different
hotels charge different room rates for similar rooms. · max:4
- Any other relevant points.
[Mark the FIRST TWO points only.]

(b) Functions:
- Unit of account: The price of the hotel accommodation service is expressed in (2)
terms of RMB.
Medium of exchange: RMB serves as a medium to facilitate people's buying (2)
and selling of services in the website.
[Mark the FIRST TWO points only.]

(c) Export ofservices / net exports. (1)

(d) During 2015-16, RMB depreciated against USO. Under HK's linked exchange rate
system, the value of HKD would follow that of USD, so RMB depreciated against
HK.Das well.
max: 6
Depreciation of RMB implies that goods in HK became more expensive in terms of
RMB. Therefore fewer mainland tourists would come to HK, and those who came
would spend less in HK. As mainland visitors were the major source of tourists in
HK, a significant drop in ''total tourism expenditure associated to inbound tourism"
would result.

50
 Marks
13. (a) (i) Potential output would drop as the working-age population gradually decreases. (2)
(from 5.36M in 2014 to 4.76M in 2054)

(ii) The fiscal balance may be worsened. (3)

Government revenue may drop, as the working-age population, which accounts for a
major portion of taxpayers, drops.
Government expenditure may increase, as the government spends more on medical
services and transfer payments to the growing old-age population.

(b) (i) Subsidy:

Labour productivity would rise as improved technology or higher quality of capital (2)
goods would result in an increase in output per unit labour.

(ii) Importing more workers:

Uncertain. Labour productivity would increase if the imported workers are more (3)
productive on average than the existing local ones.

(c) Nursing, because (4)

the demand for medical service would rise as a result of the aging population, and the
demand for nurse is the derived demand for medical service. The expected future income
of a nurse should thus be higher (than that of someone working in primary education).

51
Section C
Marks

14. (a) Price fixing. (I)

[Mark the FIRST point only.]

Potential loss to consumers:

- higher price
- lower output
- lack of choices to consumers @l
- loss in consumer surplus max:2
- (price) competition restricted
- any other relevant point
[Mark the FIRST TWO points only.]

(b) - Due to interdependence among firms in an oligopolistic market, whenever a firm

changes its prices, all others would follow promptly. As a result, prices set by
different firms in the market would end up being the same.
@2
Strong demand for high-quality petrol products, such as Ron 98. This justifies the max:2
supply of only one, the most expensive type of petrol.

Any other relevant point

[Mark the FIRST point only.]

52
 Marks
(c) Illustrate in the diagram:
Correct position of MR (1)
Correct position of QM (I)
Correct position of PM (1)

(d) Illustrate in the diagram:

Correct position ofMC 2 (1)
Correct position of P2 and Q2 (1)
Correct position ofDL (1)

Price($)
DL:~

(e) Case I: Yes, because the costs of serving the elderly or non-elderly are the same for the (3)
same bus service, but the elderly are being charged a lower fare. 4

Case 2: No, as ALL customers enjoy the same discount and thus face the same pricing (2)
· strategy, OR the market is not separated.

4 Candidate may argue that public transportation services for the elderly are subsidized by the HK government, so that the bus company has
not practised price discrimination.
53
 Marks
15.

PPFA
J- __ ...__.__ ...... __ _,,._ ...... _....., __ ...illl~eoodx
100

Illustrate in the diagram:

(a) - Correct position of production possibility frontier of Country B (PPFa) (1)

(b) - Country A has absolute advantage in producing Good X. (I)

- With the same amount of resources (30 units), Country A can produce a larger
quantity of Good X (60 units) than Country B (30 units)
- With the same amount of resources (50 units), Country A can produce a larger Anyone
quantity of Good X (100 units) than Country B (50 units). @2
- Country A can produce 1 unit of X with fewer units of resources (0.5 units of
resources) than Country B (I unit ofresources).

Illustrate in the diagram:

(c) (i) - Correct position of production point of Country B (Pa) (I)

(ii) - Correct position of consumption possibility frontier of Country B (CPFa) (1)

- Correct position of consumption point of Country B after trade (Ca) (1)

(iii) - Correct position of consumption possibility frontier of Country A (CPF.A) (1)

- Correct position of volume of import of Country A (1)
- Correct position of volume of export of Country A (I)

54
 Marks

(d) (i) Uncertain, because per capita GNI would fall while life expectancy may rise.5 (3)

(ii) Uncertain, because while per capita GNI may increase, average year of schooling (3)
and/or average life expectancy may drop.

5 It may be argued that the effect on life expectancy would become significant only in the long term, so that the (immediate) GNI effect
should dominate in the current period.
55