Queen’s College

Mock Examination 2020/2021

Economics 2 (70%)

Secondary 6 Date : 3 February 2021

Marker’s
Time allowed: 10:15 a.m. – 12:45 p.m. (2 hours 30 minutes) Use Only

Question-Answer Book
Question
This paper must be answered in English No.
Marks

A1 /3
2 /4
3 /5
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5 /6
6 /5
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INSTRUCTIONS
9 /5
(1)After the announcement of the start of the examination, you
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should first write your class, class number and block
number in the space provided on Page 1. Subtotal /44 (30%)
(2)This paper consists of two sections, A and B. Answer ALL
B 11 /14
questions.
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(3)Write your answers in the spaces provided in this Question-
Answer Book. Do not write in the margins. Answers
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written in the margins will not be marked.

(4)Extra supplementary answer sheets will be supplied on request.

Write your class, class number, block number, and question Subtotal /60 (40%)
number on each sheet, and staple them with this book.

(5)No extra time will be given to students for writing class, class
number, block number, and question number after the
‘Time is up’ announcement.

(6) Start each question (not part of a question) on a new page.

Put ‘X’ in the corresponding number box below. Total /104

Paper 1 Paper 2

[ ____/45 x 30 + ____/104 x 70] x 2

= ______ x 2

= _______ (Maximum Mark: 200)

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SECTION A (44 marks)

1. Some food delivery platforms charge a delivery fee for each order. Consumers need to pay more than
dine-in prices for the same food. Will the cost of ordering food on the food delivery platform be
necessarily higher than the cost of having the same food in the restaurant? Explain. (3 marks)

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2. In early 2020, 5G mobile communications services were launched in Hong Kong. All of the four
mobile network operators that have acquired 5G spectrum have been investing a lot of money in
building base stations to provide 5G services. The following shows the amount of Hong Kong 5G
spectrum acquired by the four mobile network operators in three auctions.

Operator Operator Operator Operator

A B C D
Amount of 5G spectrum acquired (MHz) 120 120 70 70
Spectrum utilisation fee (HK$ million) 571.53 533.03 385.03 401.53
(Source: Office of the Communications Authority, HKSAR Government)

(a) What is the market structure of the 5G mobile communications service market in Hong Kong?
State TWO features of this type of market structure. (3 marks)

(b) State the function of price illustrated in the above auctions. (1

mark)

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3. The following table shows the inputs and output of a mask factory.

Decrease in total
No. of absentees Machines (units)
output (units)
1 10 92
2 10 158
3 10 220
4 10 277
5 10 332

(a)State the law of diminishing marginal returns. (2 marks)

(b) Suppose the mask factory employs six workers only. Explain if diminishing marginal returns
occurs in the factory. (3 marks)

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4. Refer to the following news extract.

Chinese President Xi Jinping has appointed the Yangtze River Delta (YRD) region as
the showcase of the ‘dual circulation’ strategy. He urged the region to prioritise major
fields, including integrated circuits, biomedicine and artificial intelligence.
The four provincial-level regions in the YRD are teaming up to further integrate their
industrial chains to meet diversified domestic demands. For example, an auto parts
company has its manufacturing base located in Anhui Province, research and
development (R&D) centre based in Shanghai, and mold processing in Zhejiang
Province.

(a) In which type of production are Shanghai and Anhui Province engaged, respectively? (2 marks)

(b) What economic principle is illustrated by this practice? State ONE possible benefit from this
practice. (2 marks)

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5. The government of Country A provides subsidies to their firms that own production plants in Country
B. The measure is to encourage these firms to relocate their production lines back to Country A.
However, an economist said, ‘The government providing a per-unit subsidy to producers would worsen
efficiency.’ Do you agree? Explain your answer with the aid of a diagram. (6 marks)

Price
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6. Refer to Figure 1.
Figure 1
Price level
LRAS0
SRAS0

E0

AD0

Aggregate output
0

Suppose an economy initially operates at E0. With the aid of Figure 1, explain how market forces can
restore the aggregate output level to the full employment output level in the long run. (5 marks)

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7. The table below shows the year-on-year percentage change in the Composite Consumer Price Index
from 2018 to 2019.

2018 2019
2.4% 2.9%
(Source: Census and Statistics Department, HKSAR Government)

Suppose people did not expect any change in the price level from 2018 to 2019. Explain whether
each of the following persons would gain or lose when the change in the price level in the above
table occurred.

(a) On 1 January 2019, Wilson deposited a sum of money in a bank as a time deposit. (2 marks)

(b) On 1 January 2019, Mary purchased 1-year bonds of a Hong Kong company with a nominal
rate of return of 5% per year. (3 marks)

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8. The balance sheet of a country’s banking system is shown below.

Assets ($ million) Liabilities ($ million)
Reserves 3,000 Deposits 12,000
Loans 9,000
The public always holds $1,500 million cash, and excess reserves never exist in the country’s banking
system.

(a) Calculate the country’s monetary base and money supply. (2 marks)

(b) Suppose the country’s central bank adjusts the legal reserve ratio to 40%. Calculate the changes in
monetary base and money supply. Show your work. (3 marks)

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9. The table below shows the quantities of water bottles and paper Country A and Country B can
respectively produce with 1 unit of resources.

Water bottles (units) Paper (units)

Country A 9 OR 6
Country B 6 OR 12

(a) Explain whether Country A has a comparative advantage in producing water bottles. (3 marks)

(b) Suppose the transportation cost of each unit of paper traded is 1.2 units of water bottles. Is it
possible for these two countries have mutually beneficial trade? Explain. (2 marks)

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10. Nowadays, more and more Hong Kong residents invest in the US bonds market. Would this
investment behaviour affect the current account of the balance of payments account of Hong Kong?
Explain. (2 marks)

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Section B (60 marks)

11. Cathay Pacific Airways Ltd. (0293.HK) recorded a loss of $9.9 billion in the first half of 2020. It
announced a restructuring plan that would cut 8,500 jobs and reduce the salaries of the remaining
staff. Its subsidiary, Cathay Dragon, would cease operations and all staff of Cathay Dragon would be
dismissed. The following shows the history of Cathay Dragon:

(a) Based on the above information, to what type of business ownership do Cathay Pacific Airways.
and Cathay Dragon belong? Explain ONE difference between the two types of business
ownership. (4 marks)

(b) Cathay Pacific Airways took over Dragonair. State the type of expansion to which this belonged.
Suggest TWO possible motives for this expansion. (3 marks)

Due to COVID-19 epidemic, travel demand remained weak as a result of the continuation of Hong
Kong’s entry restrictions for non-residents, as well as immigration restrictions and quarantine
measures implemented by different countries and regions. The following shows the stock price of
Cathay Pacific Airways Ltd.

(c) WITHOUT using a diagram, explain the change in the stock price of Cathay Pacific Airways.
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(4 marks)

(d) Airlines need flight attendants, ground attendants and pilots to provide services. Which of the above.
occupations has the lowest occupational mobility? Explain your answer. (3 marks)

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12. Hit by the effects of COVID-19 pandemic on the economy, the United States has adopted certain
measures to boost the economy. The following shows the actions taken by the US Federal Reserve.

(a) Based on the quantity theory of money, explain how the measures mentioned above would help
boost the real output of the United States. State the assumption(s) needed to reach your
conclusion. (4 marks)

(b) Apart from the above measures, the US Congress also passed a stimulus package which will
provide up to USD1,200 in cash aid to each adult whose annual income is lower than USD99,000.
Should this cash payment be included in the calculation of Gross Domestic Product of the United
States in 2020? Explain. (2 marks)

Apart from COVID-19, another global economic incident, the Russia-Saudi Arabia oil price war was
also triggered in March 2020 which resulted in a sheer drop of oil price. Following this economic
conflict, the exchange rates of the Russian ruble were greatly affected, the exchange rate between the
Russian ruble (RUB) and the US dollar (USD) changed as follows:

Date Exchange rates

15/03/2020 USD 1 = RUB 73.238

31/03/2020 USD 1 = RUB 78.680

(c) Suppose US imports steel from Russia and the price of Russian steel (in terms of RUB) does not
change. With the aid of a diagram, explain under what condition would the above change in the
exchange rate lead to an increase in the US firms’ total expenditure (in terms of USD) on
Russian steel. (8 marks)

(d) Explain ONE function of money that the Russian ruble may be weakened as a result of this
event.
(2 marks)

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13. In 2020, Hong Kong was hit by outbreaks of the coronavirus (COVID-19). The following is some
information about Hong Kong during the epidemic.

Source A: Hong Kong’s economic performance

2019 Q3 2019 Q4 2020 Q1 2020 Q2

GDP (year-on-year
percentage change in -2.8% -3.0% -8.9% -9.0%
real terms)
Private consumption
expenditure (year-on-
-3.3% -2.9% -10.1% -14.2%
year percentage
change in real terms)
(Source: Census and Statistics Department, HKSAR)

Source B: A news excerpt about the surgical mask market in Hong Kong

The outbreak of COVID-19 has brought upon unprecedented challenges, and is expected to
have a lot of negative impacts on different industries (E.g tourism). However, the surgical
mask market seems to be an exception. According to a study led by HKU infectious disease
expert Prof Yuen Kwok-yung, wearing surgical masks can significantly reduce the non-
contact transmission of the deadly COVID-19 virus…

Before the outbreak of COVID-19, there was no local production of surgical masks in Hong
Kong. By the third wave of the epidemic in August, more than 60 local manufacturers were
producing surgical masks.

The following shows the average selling prices of a box of surgical masks (50 pieces) in
Hong Kong:

Source C: A news excerpt about the Hong Kong government mandating the wearing of masks
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The government announced that effective from 23 July 2020, everyone must wear a mask
when they are in indoor or outdoor public places, or on public transportation. The fixed
penalty for violating the regulations is $2,000. “We still do not know when a COVID-19
vaccine will be ready, if people do not wear masks in public places, there is a chance of
worsening the COVID-19 epidemic,’ an expert said…

Source D: Percentage change in the number of visitors to Hong Kong (compared with the same
month of the previous year)

Source E: Premises required to suspend operation during the COVID-19 epidemic

Amusement game Mahjong-tin kau Places of public

Fitness centres
centres premises entertainment
Nightclubs or Places of
Party rooms Karaoke places Bathhouse
clubs amusement

Source F: Views on the HKSAR Government’s relief measures in response to COVID-19

The owner of a small and If the government is willing to cut the profits tax rates,
medium enterprise this will be a positive help for my companies that are
on the verge of business contraction and closure during
the epidemic.
A politician The government’s cash payout will benefit all people
who receive the cash, especially the low-income
citizens.
A government official Cutting the profits tax rates may have a positive effect
on government tax revenue, while the cash payout has
a negative effect on the treasury.
Accountants The negative effects of COVID-19 on the economy
may last for several years. Cutting the profit tax rates
may bring a lot of uncertainty to the future budget
position of HKSAR.
An unemployed If a government policy can directly benefit me, I will
grassroots citizen certainly support it.
Workers in Hong Kong I can also benefit from the government’s
implementation of relief measures for enterprises.

(a) Refer to Source A, In the second quarter of 2020, which phase of a business cycle was Hong
Kong most probably in? Apart from the information about the growth rates of GDP and private
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consumption expenditure in this phase, give TWO general economic phenomena which occur in
this phase. (3 marks)

(b) Refer to Source B. With the aid of a supply-demand diagram, explain the condition for the change
in the market price of surgical masks described in Source B. (6 marks)

(c) Refer to Source C.

(i) Explain how people not wearing masks can cause a divergence between private and social
costs. (2 marks)

(ii) Explain how the fixed penalty will affect economic efficiency. (2 marks)

(d) Refer to Source D and E. WITHOUT the use of any diagram, explain how the situation described
in the two sources will affect Hong Kong’s aggregate output in the short run. (3 marks)

For part e, 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.
(e) Suppose there are two proposals for boosting Hong Kong’s economy:
Proposal I Cutting the profits tax rates currently levied on the profits made
by companies in Hong Kong by half

Proposal II Paying out $10,000 to every Hong Kong permanent resident

aged 18 or above

With reference to the above sources and your own knowledge in Economics, discuss which
proposal, Proposal I or II, each of the following groups of stakeholders would prefer:

 owners of Hong Kong enterprises

 politicians who are concerned about income inequality in Hong Kong
 government economists who are concerned about government revenue and/or expenditure
 ONE other group of stakeholders

(Hint: You may discuss the reasons why one group of stakeholders would prefer a certain proposal
OR why that group would not prefer the other proposal.)
(14 marks)

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Supplementary sheet 2 Class : ___________ No. ______

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2020/21 S6 Mock Examination Economics 2 Answers

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Section A (44 marks):

1. No. (1)
The time cost of a person having food in the restaurant may be higher than the delivery fee he
pays. In this case, the full cost of ordering food on the food delivery platform will be lower. (2)

2. Oligopoly (1)
- several dominant sellers
- interdependence of firms
- homogeneous or heterogeneous products
- barriers to entry
- imperfect information
- price searcher
- non-price competition
(Mark the FIRST TWO points only, 1 mark each)

(b) Rationing function (1)

3. The law states that in short run, when a variable factor is added continuously to a given
quantity of fixed factors, the marginal return or marginal product (of the variable factor)
will eventually decrease, holding technology constant. (2)

(b)
No. of workers who are Marginal product
present (units)
1 —
2 55
3 57
4 62
5 66
6 92 (2)
Since the marginal product increases when more workers are present, diminishing
(1)
marginal returns does not occur in the factory.

4. (a) Shanghai engages in tertiary production (R&D). (1)

Anhui engages in secondary production (manufacturing). (1)

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(b) Regional division of labour / Specialisation (1)

Possible benefit:
 Total output increases if different regions specialise in producing goods that
they have comparative advantages.
 Average cost of production can be reduced as output increases. The firms can
enjoy economies of scale.
(Any ONE of the above or other relevant answer. 2 marks)

5. Yes (1)
Verbal elaboration:
When the government provides a per-unit subsidy to producers, the quantity transacted
will increase and the price will decrease. (1)
As the output is higher than the efficient output level, marginal cost is higher than
(1)
marginal benefit. Deadweight loss exists.

Illustrate in the diagram:

(1)
- downward shift of the supply curve
(1)
- price decreases and quantity transacted increases (1)
- correct position of deadweight loss

Price

S0
Deadweight loss
S1

P0

P1

D
Quantity
0 Q0 Q1

6. Verbal elaboration:
As aggregate output is lower than the full employment output level (Yf), a deflationary
(output) gap exists. (1)
The surplus in the factor market reduces factor prices and costs of production. (1)
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The short run aggregate supply increases. (1)
In the long run, aggregate output increases and is restored to Yf. (1)
Indicate on the diagram:
 Rightward shift of SRAS curve (1)

Price level
LRAS0
SRAS0

SRAS1

E0

E1

AD0

0 Aggregate output
Y0 Yf

7. (a) Wilson would lose. (1)

The unexpected inflation would lower the real value (purchasing power) of the principal
and interest received from the time deposit. (1)

(b) Mary would lose. (1)

The actual real rate of return on bonds (2.1%) would be lower than the expected real rate
of return (5%). (2)

8. (a) Monetary base = $(1,500 + 3,000) million = $4,500 million (1)

Money supply = $(1,500 + 12,000) million = $13,500 million (1)

(b) Change in monetary base = $(4,500 – 4,500) million = $0 (1)

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(1)
New money supply = + $1,500 million = $9,000 million
(1)
Change in money supply = $(9,000 – 13,500) million = –$4,500 million

9. (a) The opportunity costs of producing 1 unit of water bottles of the two countries are as
follows:
Country A：0.67 (= 6/9) units of paper (1)

Country B：2 (= 12/6) units of paper (1)

Since Country A’s opportunity cost of producing 1 unit of water bottles is lower, it has a
(1)
comparative advantage in producing water bottles.

(b) No. (1)

This is because the transportation cost (1.2 units of water bottles) of each unit of paper
traded is higher than the potential gain from trade (1.5 units of water bottles – 0.5 units
of water bottles = 1 unit of water bottles). (1)

10. Yes. (1)

The nominal interest generated from the bond is a factor income from abroad which is
included in the current account. (1)

Section B (60 marks):

9. (a) Cathay Dragon is a private limited company. (1)

Cathay Pacific Airways is a public limited company / listed company. (1)

Differences between a private limited company and a public limited company:

 A private limited company can have 50 shareholders at a maximum while a
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public limited company can have an unlimited number of shareholders.
 A public limited company can invite public subscription for its shares while a
private limited company cannot.
 Shareholders of a private limited company must seek approval from the board
of directors when they sell their shares to outsiders. Shares of a public limited
company are freely transferable.
 A private limited company does not need to disclose its financial accounts to
the public, while a public limited company is required to disclose its financial
accounts to the public.
(Any ONE of the above. 2 marks)

(b) Horizontal expansion (1)

Possible motives:
 Increase market share
 Reduce competition
 Enjoy economies of scale
 More efficient use of resources
(Any TWO of the above or other relevant answer. 1 mark × 2 = 2 marks)

(c) When the travel demand decreased, people expected the demand for airline services to
decrease. (1)
Investors expected Cathay Pacific Airways to earn less profit than before and distribute
less in dividends to shareholders. (1)
Their demand for the stock of Cathay Pacific Airways decreased. (1)
As a result, the stock price of Cathay Pacific Airways decreased. (1)

(d) Pilots have the lowest occupational mobility. (1)

Their skills and knowledge are highly specific and not easily transferable to other
industries. (2)

10. (a) QTM: MV = PY, where M = money supply, V = velocity of circulation of money, P =
price level and Y = real output, assuming V is constant. (2)

The actions taken by the US Federal Reserve would increase the money supply of the

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United States. (1)
When the percentage increase in the price level (P) is lower than that in the money
supply (M), an increase in the money supply (M) will lead to an increase in real output
(Y). (1)

OR
When the price level (P) remains unchanged, an increase in the money supply (M) will
lead to an increase in real output (Y) by the same percentage. (1)

(b) No. (1)

This is because no production was involved. (1)

(c) Indicate on the diagram:

 Price decreases and quantity demanded increases (1)
 Correct label of the area of increase and decrease in expenditure (1)
 Increase in expenditure > Decrease in expenditure (1)

Unit price
(in USD)

Increase in expenditure

Decrease in expenditure

P0

P1

0 Q0 Q1
Number of
Russian steel

Verbal elaboration:
Russian ruble depreciated against USD
(1)
Since the price of Russian steel in terms of RUB does not change, the price of Russian
steel in terms of USD becomes cheaper and US would import more Russian
steel.
(1)
If the demand for Russian steel is elastic,
(1)
The percentage increase in quantity demanded is greater than the percentage decrease in
price, US firms’ total expenditure on Russian steel will increase. (2)

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(d) Store of value: As the Russian ruble depreciated against other foreign currencies, its
purchasing power would drop in terms of the quantity of foreign goods and services
bought.
(Accept other reasonable answers with an explanation, e.g., standard of deferred payment
or medium of exchange.) (2)

11. (a) Recession (1)

General economic phenomena:
 Rising unemployment rate
 Decreasing level of investment
 Falling general price level
 Worsening business confidence
 Any reasonable answers
(Any two of the above, 1 marks each)

(b) Verbal elaboration:

Due to the outbreak of COVID-19, the demand for surgical masks increased. (1)
As the number of local manufacturers increased, the supply of surgical masks increased.
If the increase in demand is greater than the increase in supply, the price of surgical (1)
masks would increase.
(1)

Indicate on the diagram:

 Rightward shift of demand curve
(1)
 Rightward shift of supply curve
(1)
 Rightward shift of demand curve is greater than supply curve, causing the price to
increase
(1)

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Unit price ($)
S1
S2

P2
P1

D2

D1
0 Quantity

(c)
(i) When someone does not wear a mask and causes other people to be infected with the
virus, but this person does not give any compensation, external cost exists. (2)

(ii) The penalty increases the private cost of people not wearing masks, reducing the number
of people not wearing masks towards the efficient level. (1)

The gap between marginal social benefit and marginal social cost will thus be narrowed. (1)

(d) A sharp decrease in visitors will reduce Hong Kong’s export of services, net exports and
aggregate demand will both decrease. (1)

Suspending operation of some businesses is a temporary supply shock which will reduce
short run aggregate supply (1)

In the short run, Hong Kong’s aggregate output will decrease (1)

(e) Marks award for effective communication (EC: max 2 marks)

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Marks Performance
Supports arguments with the source / data and appropriate economic
theories.
Presents relevant material.
2
Presents well-organised and coherent answers without repetition of
ideas.
Uses language that expresses ideas clearly and fluently.
Presents arguments with some support of the sources / data and
economic theories.
Presents some irrelevant material.
1
Presents answers in a less organised way with some repetition.
Uses language that conveys a clear message with some inappropriate
use of words / terms / symbols.
Presents arguments with no support of the source / data and economic
theories.
Presents material unrelated to the gist of the question.
0
Presents inconsistent arguments.
Expresses limited ideas with inappropriate use of words / terms /
symbols.

The maximum marks for content is 12 marks.

Answers may include the following:

Owners of Hong Kong enterprises:

They would prefer Proposal I because cutting profits tax rates can increase the after-tax
profits of a company. Due to the reduction in the number of visitors and the level of
private consumption expenditure, a lot of businesses, especially for those tourism related
industries and compnies in HK may suffer from loss. Reducing the profit tax rates act as
a transfer payment to those businesses. The reduction in the revenue casued by the
decrease in the demand for goods and services can be compensated. This can prevent
companies on the verge of business contracture bankruptcy from closing.

Cash-payout scheme to Hong Kong permanent resident may not benefit the owners of
enterprises directly. Since HK business prospect is quite pessimistic as people still do not
know when the epidemic will come to an end. Paying out $10,000 to residents may not
induce an increase in private consumption expenditure as people may tend to increase the
saving for precaution (E.g people may be afraid of being laid off in the future). As a
result, private consumption expenditure may not increase and the sales of the enterprises
may not be boosted. Therefore, Proposal II is not preferred.

Politicians who are concerned about income inequality in Hong Kong:

They would prefer Proposal II. Although both the rich and the poor receive the same
amount of money, however, because the $10,000 cash takes a higher proportion of

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disposable income of low-income people than that of high-income earners, the income
gap narrows and income inequality improves.

Cash payout scheme can directly increase the disposable income of the low income
group. However, reducing the profit tax rates may not benefit the low income group in
the end. Although the business owners can enjoy a higher after-tax profit, they may still
reduce the number of workers to cut cost due to the lack of business confidence. As a
result, those grassroots citizens may still suffer. Therefore, proposal I is not preferred.

Government economists who are concerned about government revenue and/or

expenditure:
They would prefer Proposal I because when profits tax rates are reduced, profits tax
revenue will be reduced (effect 1). At the same time, cutting tax rates will increase
corporate’ investment incentive, which may increase corporate profits and profits tax
revenue (effect 2). If effect 2 is greater than effect 1, the government’s profits tax
revenue will increase.

They would not prefer Proposal II because this will increase government expenditure,
and the process of distributing cash also involves additional administrative expenses.

OR

They would prefer proposal 2. This is because the payout of $10,000 cash is a one-off
measure, and the total amount is foreseen before the payout is given out. However, the
reduction in profit tax rates could be continuous. It is very difficult for the government to
increase the profit tax rates again in the future. Since the negative effects of COVID-19
on the economy may last for several years, this may lead to a budget deficit or an
increase in budget deficit in the near future.

Workers in Hong Kong:

They would prefer Proposal I, because cutting the profits tax rates will increase corporate
investment, and the derived demand for labour will also increase, which will increase
employment opportunities. The wage rate and the total wage earnings will thus increase.

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Grassroots citizens:

They would prefer Proposal II because cutting the profits tax rates will not directly
benefit them, but the $10,000 cash payout can directly increase their disposable income
and increase their consumption and living standards.

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