2019

PAPER 1
HONG KONG EXAMINATIONS AND ASSESSMENT AUTHORITY
HONG KONG DIPLOMA OF SECONDARY EDUCATION EXAMINATION 2019

ECONOMICS 1

8.30 am - 9.30 am (I hour)

INSTRUCTIONS

1. Read carefully the instructions on the Answer Sheet. After the announcement of the start of the
examination, you should first stick a barcode label and insert the information required in the spaces
provided. No extra time will be given for sticking on the barcode label after the 'Time is up'
announcement.

2. When told to open this book, you should check that all the questions are there. Look for the words 'END
OF PAPER' after the last question.

3. All questions carry equal marks.

4. ANSWER ALL QUESTIONS. You are advised to use an HB pencil to mark all the answers on the
Answer Sheet, so that wrong marks can be completely erased with a clean rubber. You must mark the
answers clearly; otherwise you will lose marks if the answers cannot be captured.

5. You should mark only ONE answer for each question. If you mark more than one answer, you will
receive NO MARKS for that question.

6. No marks will be deducted for wrong answers.

Not to be taken away before the

Hong Kong Examinations and Assessment Authority end of the examination session
All Rights Reserved 2019

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 HONG
2019-DSE
ECON Please stick the barcode label here.
NG2EXAM
PAPER

HONG KONG EXAMINATIONS AND ASSESSMENT AUTHORITY

Candidate Number
HONG KONG DIPLOMA OF SECONDARY EDUCATION EXAMINATION 2019

ECONOMICS PAPER 2
Question-Answer Book

10:15 am – 12:45 pm (2 hours 30 minutes)

This paper must be answered in English

INSTRUCTIONS

(1) After the announcement of the start of the examination, you

should first write your Candidate Number in the space
provided on Page 1 and stick barcode labels in the spaces
provided on Pages 1, 3, 5, 7, 9 and 11.

(2) This paper consists of three sections, A, B and C. Answer

ALL questions in sections A and B. Attempt any ONE
question in section C.

(3) Write your answers in the spaces provided in this

Question-Answer Book. Do not write in the margins.
Answers written in the margins will not be marked.

(4) Supplementary answer sheets will be supplied on

request. Write your candidate number, mark the
question number box and stick a barcode label on each
sheet, and fasten them with string INSIDE this book.

(5) No extra time will be given to candidates for sticking on

the barcode labels or filling in the question number boxes
after the ‘Time is up’ announcement.

 香 港考 試 及評 核 局 保留版權
Hong Kong Examinations and Assessment Authority
All Rights Reserved 2019

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 Section A (44 marks)

1. A country considers acquiring more land by reclamation for building residential flats. Explain whether the
opportunity cost of land reclamation will change if

(a) the maximum height of the buildings on the reclaimed land is limited to two storeys due to technical
reasons. (2 marks)

(b) there is a shortage of the materials for land reclamation. (3 marks)

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2. Li Ka Shing Foundation offered an unconditional cash gift of $5 000 to each 2018 HKDSE candidate living
in Yuen Long, Tuen Mun and Islands districts under the project ‘Decide Well, Spend Wisely’.

Statement A: The project can improve the public examination results of candidates in those districts.
Statement B: The project can improve equity in Hong Kong.

(a) Explain whether Statement A is a positive statement. (2 marks)

(b) Justify Statement B. (4 marks)

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 3. Give ONE example of public corporation in Hong Kong. With reference to your example, state TWO
advantages of providing the service by a public corporation instead of a private enterprise. (3 marks)

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4. Getting vaccinated is an effective way to prevent infection and protect oneself from flu viruses. Using the
concept of externality, explain why the government provision of subsidy on Seasonal Influenza Vaccination
(接種 季節 性 流感 疫 苗 ) may improve economic efficiency. (4 marks)

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5. Wong’s family and Chan’s family live next door to each other. State ONE economic concept involved in
each of following arrangements and explain why the arrangement is beneficial to both families.

(a) Mr Wong teaches the children from both families English while Mrs Chan teaches them Japanese.
(3 marks)

(b) On Christmas Eve, the two families buy food ingredients and cook together instead of buying and
cooking separately. (3 marks)
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 6. Study Tables 1 and 2 and answer the following questions.

Table 1: Change in composite consumer price index (CCPI)

Year 2016 Year 2017
+2.3% +1.7%

Table 2: Minimum wage rates per hour

Year 2016 Year 2017
$32.5 $34.5

(a) Based on Table 1, state the change in the general price level in 2017. (1 mark)

(b) On 1 January 2017, Siu Keung expected a +2.3% change of the CCPI in that year, and he lent a sum
of money to Kitman at 5% interest rate per annum. On 31 December 2017, Kitman repaid the sum
plus the interest to him. With reference to Table 1, explain whether Siu Keung would gain or lose.
(3 marks)

(c) Kitman has been receiving the minimum wage rate per hour. With reference to Tables 1 and 2,
explain how her real wage rate would change in 2017. (3 marks)
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7. The following is the balance sheet of a banking system.

Assets ($million) Liabilities ($million)

Reserves 300 Deposits 1 000
Loans 700
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Suppose the legal reserve ratio is 20% and the public holds $200 million cash.

(a) Calculate the excess reserves of the banking system. (1 mark)

(b) Suppose the public no longer holds cash and all banks lend out all excess reserves. Calculate the
maximum possible change in money supply. Show your workings. (4 marks)

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 8. The amount of resources in Country A is twice of that in Country B. Both countries allocate half of their
resources to produce cars and the other half to produce toys. The following are the total outputs of both
countries:
Cars (units) Toys (units)
Country A 100 100
Country B 100 60

(a) Explain whether Country B has

(i) an absolute advantage in producing cars.

(ii) a comparative advantage in producing cars.
(5 marks)

(b) Suppose the exchange ratio is 5 units of cars for 4 units of toys. Calculate the gain from trade for the
car-importing country when it imports 10 units of cars. Show your workings. (3 marks)
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END OF SECTION A

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Section B (60 marks)

9. A beauty queen in Hong Kong, Miss Amy Au, is famous for demonstrating the use of cosmetic products
with short videos on social media websites. She also sells Japanese cosmetic products on her website.

(a) Are the short videos on social media websites public goods or private goods? Explain. (3 marks)

(b) Apart from Japanese cosmestic products, she starts to sell Korean cosmetic products on her website.
To what type of expansion does this belong? Give TWO possible reasons for this type of expansion.
(3 marks)

She plans to hire two staff members to operate her website:

Personal assistant Video designer
Duties: Duties:
Arrange daily schedules and meetings Produce short videos to be uploaded in social media
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Salary: Salary:
$12 000 per month $1 000 per video

(c) From the viewpoint of Miss Amy Au, suggest ONE advantage and ONE disadvantage of the
payment method of the personal assistant. (2 marks)

(d) From the viewpoint of the employee, suggest ONE advantage and ONE disadvantage of the
payment method of the video designer. (2 marks)

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2019-DSE-ECON 2–10
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10
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10. The following table shows the changes in the individual income tax system in China effective from October
2018.
Range of monthly taxable income, in Renminbi (RMB)
Average tax rate Old brackets New brackets
3% Less than or equal to 1 500 Less than or equal to 3 000
10% 1 501 – 4 500 3 001 – 12 000
20% 4 501 – 9 000 12 001 – 25 000
25% 9 001 – 35 000 25 001 – 35 000
30% 35 001 – 55 000 Unchanged
35% 55 001 – 80 000 Unchanged
45% Greater than 80 000 Unchanged
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(a) Is the individual income tax in China progressive, proportional, or regressive? Explain your answer.
(2 marks)

(b) Suppose there is a deflationary (output) gap in China economy. With the aid of an AS-AD diagram,
explain how the above change of the individual income tax system would affect the deflationary
(output) gap in the short run. (7 marks)

(c) To achieve the same effect on the deflationary (output) gap as in part (b), an economist suggested the
government should lower the required reserve ratio of banks instead of implementing the above
change in tax system. Discuss the suggestion by giving ONE argument FOR and ONE argument
AGAINST it. (4 marks)

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12
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 11. The Guangzhou-Shenzhen-Hong Kong Express Rail Link (High Speed Rail) was launched in September
2018.

(a) Explain the effect of the launch of High Speed Rail on labour mobility of Hong Kong. (3 marks)

(b) During non-holidays, there are a lot of empty seats on some trains of the High Speed Rail. With the
aid of Figure 1, explain why the above situation may be inefficient. (4 marks)

Figure 1
Fares ($)

S
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D
Number of passengers
0

Suppose the fares of the High Speed Rail in terms of RMB are fixed. The fares of High Speed Rail tickets
sold in Hong Kong, in terms of Hong Kong dollar (HKD), will be adjusted according to the exchange rate of
RMB against HKD.

(c) ‘A depreciation of RMB against the US dollar (USD) will result in an increase in total revenue (in
terms of HKD) of High Speed Rail tickets sold in Hong Kong.’ With the aid of Figure 2, explain
under what condition this statement will be correct. (8 marks)

Figure 2
Fares (in terms of HKD)

Number of passengers
0

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2019-DSE-ECON 2–13 13

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2019-DSE-ECON 2–14
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14
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 12. A trade war broke out between China and the United States in 2018.

Source A: A graphic showing the major development of the trade war

April 2018:
The US planned to charge 25% tariffs on
imports from China worth USD 50 billion.

April 2018:
China planned to charge 25% tariffs on
imports from the US worth USD 50 billion.
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July 2018:
The US planned to impose an extra 10%
tariff on a list of USD 200 billion of
Chinese imports, which would rise to 25%
afterward.

July 2018:
China planned to impose an additional
retaliatory tariff on products originating
from the US (worth USD 60 billion).

Source B: Statistics of Hong Kong’s re-exports of goods

Value of goods

Re-exports Overall re-exports in 2017 Re-exports subject to tariffs under the trade war

From the
HKD 136.6 billion
Mainland HKD 277.5 billion
(two-round tariffs covering USD 250 billion Chinese products)
to the US

From the
HKD 11.7 billion
US to the HKD 73.2 billion
(first round tariffs covering USD 50 billion US products)
Mainland

Total HKD 350.7 billion

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2019-DSE-ECON 2–15 15

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 Source C: An extract of the United States-Hong Kong Policy Act
The US treats Hong Kong separately from China in economic and trade matters.

Source D: Views on the trade war between China and the US

A delegate of
International Monetary
Fund People are very worried given the bilateral tension between the world’s two
largest economies.

A Hong Kong trading

firm owner
My business is suffering from a loss because my products exporting to the US
are charged by tariff! If the trade war continues, I need to find a way out!
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An economist

The trade disputes between China and the US will unavoidably affect the
unemployment rate of Hong Kong.

An investor in Hong
Kong stock market
Since the start of trade war, the Hang Seng Index has dropped by over 20%.
Donald Trump will make me lose a lot of money if he continues to take a hard
line on trade with China.

(a) Refer to Source A. One of the possible reasons behind the US’s imposition of tariffs is to reduce its
trade deficits with China.

(i) Indicate the change in the total market value (net-of-tariff) of Chinese goods exporting to the
US during the trade war in a demand-supply diagram. (3 marks)
(Hint: The tariff can be assumed to be per-unit for simplicity.)

(ii) Explain why the US may NOT succeed in reducing its trade deficits with China. (3 marks)

(b) Refer to Sources B and C. ‘Since Hong Kong-produced goods are NOT subject to higher tariff
during the trade war, the total exports of Hong Kong will NOT be affected’. Do you agree with this
statement? Explain. (3 marks)

For part (c), candidates are required to present their answers in an essay form. Criteria for marking will
include the use of sources and economic theories, relevant content, logical presentation and clarity of
expression.

(c) With reference to the above sources and your own knowledge in Economics, discuss the effects of
the trade war on Hong Kong, including:

- aggregate output,
- tax revenue, and
- other economic variable(s).
(13 marks)

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2019-DSE-ECON 2–18
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18
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END OF SECTION B

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 Section C (16 marks) Answer any ONE question.

13. Grape Limited is the only manufacturer of smartphones in a country. It adopts a uniform pricing.

Figure 3

Price ($)

MC1

D: Demand
MC: Marginal cost
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D1
Quantity
0

Figure 3 shows the market of Grape Limited’s smartphones.

(a) Explain how the profit maximising output and price are determined. Indicate the output and price as
Q1 and P1 respectively in Figure 3. (4 marks)

(b) Technology advance lowers the cost of electronic components of smartphones.

(i) Indicate the new output and price as Q2 and P2 respectively in Figure 3.

(ii) Discuss the effect of the above change on efficiency with the aid of Figure 3.
(5 marks)

(c) Grape Limited sells its smartphones to students with a 30% discount.

(i) Explain why this practice will constitute price discrimination.

(ii) Give TWO conditions that this type of price discrimination can be practised.
(4 marks)

(d) A major smartphone operating system provider, Lemon Corporation, requires any smartphone to pre-
install its web browser as a condition of licensing for its operating system. Name the anti-
competitive behaviour Lemon Corporation engages in. State TWO ways in which such kind of
behaviour will harm the consumers. (3 marks)

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 14. Figure 4 shows the production possibilities frontier of Country A (PPFA).

Figure 4
Good Y

50

45

40

35

30

25
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20

15

10

5
PPFA
Good X
0 5 10 15 20 25 30 35 40 45 50

Suppose initially the world price per unit of Good X is 2 units of Good Y.

(a) Explain which good Country A will export if it engages in international trade. (2 marks)

Suppose Country A engages in international trade and it always consumes 10 units of Good X.

(b) With the aid of Figure 4, calculate the total gain from trade of Country A. (5 marks)

(c) Indicate the volume of exports and imports of Country A in Figure 4. (2 marks)

The world price of Good X falls continuously.

(d) Explain whether the direction of trade will necessarily remain the same. (3 marks)

The leader of Country A decides to adopt a closed-door policy which forbids foreign trade, foreign tourists
and foreign workers working in Country A.

(e) Explain why economic growth in Country A will worsen. (2 marks)

(f) Other than the reasons about economic growth, explain why economic development in Country A
will worsen. (2 marks)

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END OF PAPER

Sources of materials used in this paper will be acknowledged in the HKDSE Question Papers booklet published by
the Hong Kong Examinations and Assessment Authority at a later stage.
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 Supplementary Answer Sheet
Answers written in the margins will not be marked. Question No. ____________

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2020-DSE
ECON

HONG KONG EXAMINATIONS AND ASSESSMENT AUTHORITY

'candidate Number' , IIIIIIII
HONG KONG DIPLOMA OF SECONDARY EDUCATION EXAMINATION 2020

ECONOMICS PAPER 2
Question-Answer Book

10:15 am -12:45 pm (2 hours 30 minutes)

This paper must be answered in English

INSTRUCTIONS

(1) After the announcement of the start of the examination, you

should first write your Candidate Number in the space
provided on Page 1 and stick barcode labels in the spaces
provided on Pages 1, 3, 5, 7, 9, 11 and 13.

(2) This paper consists of three sections, A, Band C. Answer

ALL questions in sections A and B. Attempt any ONE
question in section C.

(3) Write your answers in the spaces provided in this

Question-Answer Book. Do not write in the margins.
Answers written in the margins will not be marked.

(4) Supplementary answer sheets will be supplied on

request. Write your candidate number, mark the
question number box and stick a barcode label on each
sheet, and fasten them with string INSIDE this book.

(5) No extra time will be given to candidates for sticking on

the barcode labels or filling in the question number boxes
after the 'Time is up' announcement.

2020-DSE-ECON 2-1 20 IIIIII

* A 080 E 002 *
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 Section A (44 marks)

l. A free good must be free of charge. Do you agree? Explain your answer. (3 marks)

2. A chain restaurant providing Chinese cuisine set up a cake shop.

(a) Explain which type of expansion this was. (2 marks)

(b) List TWO possible motives for the above expansion. (2 marks) 1
S
(c) After the opening of 10 more restaurants, the ftrm found that its average cost decreased. State TWO Q)
..c
possible reasons for this. (2 marks)
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2020-DSE-ECON 2-2 21

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---------- ---- - ----------------------- - --------------.------------.----.------.--.---- -.--.----------

, -- ---.------- --------.------------------------ ------- -- - -----

3. Below are the gross domestic product (GDP) data of a country.

Real GDP growth rate

1
-
II)
~~----~------~----~~------_.TUne .Cl
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Q
:::::
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.9
(a) Identify the phase of business cycle which point A is in. (1 mark) ~
e
(b) Apart from increasing unemployment rate, list TWO general economic phenomena which occur at Jl
point A. (2 marks) .9

(c) State TWO losses to society caused by unemployment. (2 marks)

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 4. Study the following information of an economy.

Year Consumer price index (CPI)

2018 110
2019 117

(a) Calculate the inflation rate in 2019. (1 mark)

(b) Explain ONE difference between using CPI and GDP deflator to measure the change in the price
level. (2 marks)

(c) 'The continuous open market purchase of government bonds by the central bank is the cause of
inflation in the economy.' Justify the statement with reference to the classical quantity theory of ~
money. (4 marks) 03
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2020-DSE-ECON 2~ 23

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"

----_._ ... _--.--------------------------------------_ .. ----.------.---------------.-----.----.----------------------------------------._--------------------------

,

5. (a) What is the opportunity cost of holding money? Explain. (2 marks)

(b) Peter owes Mary $100 and he has no cash in his wallet. He suggests repaying Mary by a cash
coupon (with a face value of $100) issued by a supermarket chain. Give TWO economic reasons to
explain why Mary would refuse to accept the 'cash coupon as a repayment of Peter's debt. (4 marks)

1. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .... . ...... . . . . . . . . . . . . 1
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2020-DSE-ECON 2-5 24

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 6. Refer to Figure 1.

Figure 1
Price level

LRASo
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Suppose an economy initially operates at Eo. With the aid of Figure 1, explain how market forces can Q

restore the aggregate output level to the full-employment output level in the long run. (5 marks) 2
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2020-DSE-ECON 2-6 25

Provided by dse.life
 Please stick the barcode label here.

7. Suppose the outputs per unit of resources of Country A and Country B are as follows:
Toys (units) Cars (units)
Country A 10 OR 10
CountryB 20 )
OR 10

(a) Which good would Country B export according to its comparative advantage? Explain. (3 marks)

(b) Suppose Country A and Country B trade at an exchange ratio of 5 units of toys to 4 units of cars. A
transportation cost of 0.2 units of cars is required to exchange for 1 unit of toys and the cost is
equally shared by both countries. Calculate 'the gain per unit of export of Country B. Show your
workings. (3 marks)

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2020-DSE-ECON 2-7 26

Provided by dse.life
 8. Study the following balance sheet of the banking system in Country A.
Assets ($million) Liabilities ($million)
Reserves 1000 Deposits 4000
Loans 3000

Suppose the public always hold $800 million cash and the banking system does not hold excess reserves.

(a) Find the monetary base and money supply in Country A. (2 marks)

(b) Suppose fIrms withdraw $700 million from the banking system and remit the whole amount
overseas.

(i) Find the change in monetary base in Country A. (1 mark)

(ii) Calculate the maximum possible change in money supply in Country A. Show your
workings. (3 marks)

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END OF SECTION A

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2020-DSE-ECON 2-8 27

Provided by dse.life
 Please stick the barcode label here.

Section B (60 marks)

9. Ocean Park and Hong Kong Disneyland are the two large theme parks in Hong Kong.

(a) What is the market structure of the theme parK industry in Hong Kong? List TWO features of this
market structure. (3 marks)

The ftrst hotel in Ocean Park was launched in 2018 while the second hotel and the water park were
scheduled to be opened before 2021. It is expected that such infrastructure development can attract more
tourists to stay longer in Hong Kong.

-ci (b) Other things being equal, what will be the effects of the infrastructure development on Hong Kong's -ci
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aggregate demand and long run aggregate supply in the future? How about on aggregate output? ~
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2020-DSE-ECON 2-9 28

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 (c) Instead of obtaining bank loans to finance the infrastructure development, it is suggested that Ocean
Park can be listed in the stock market and issue shares to raise capital. State TWO advantages of
issuing shares over obtaining loans from banks for raising capital. (2 marks)

(d) The contribution of the infrastructure development of Ocean Park to Hong Kong's GDP in 2019
could be smaller than the total amount invested in the two hotels and the water park. Explain why
the statement may be correct with TWO reasons. (4 marks)

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2020-DSE-ECON 2-10 29

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2020-DSE-ECON 2-11 30

Provided by dse.life
 10. The following source shows the current account data of the US in 2017 and 2018.

Year 2017 Year 2018

400
255 269
200
o i - - - r - - -- .....
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-400
-600
-800 -808
-1000 -891
o Balance on goods Ii3 Balance on services
(USD billion) (USD billion)

(a) (i) Describe the changes of current account data of the US in the above source. (2 marks)

(ii) 'Based on the above source, we can conclude that the current account deficit of the US in -ci
2018 necessarily increased.' Do you agree? Explain. (2 marks) ~~
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(l)

Donald Trump, the US president, once said that imposing tariffs would only increase the revenue of the .0
US goverrunent and the US consumers did not have to pay more for the imported goods. g
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(b) (i) With the aid of a supply-demand diagram, explain under ONE extreme condition that the
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(For simplicity, the tariff is assumed to be per-unit.) S

(ii) Indicate the tariff revenue (i.e. sellers' burden) in the same diagram. (1 mark) .s.S
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2020-DSE-ECON 2-12 31

Provided by dse.life
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(c) Economists argue that tariff may harm both the consumers and producers.

a So: the supply curve before tariff

SI: the supply curve after tariff

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2020-DSE-ECON 2-13 32

Provided by dse.life
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2020-DSE-ECON 2-14 33

Provided by dse.life
 11. Traffic congestion in the cross harbour tunnels during peak hours is a serious problem in Hong Kong. For
simplicity, the discussions below only focus on two cross harbour tunnels in Hong Kong, namely the Cross-
Harbour Tunnel (CHT &IT. ~) and the Western Harbour Crossing (WHC f§ ~).

Source A: Existing tunnel tolls for private cars

CHT (owned by the government) $20
WHC (owned by a private ftnn) $75

Source B: Traffic information during peak hours of the two tunnels

,.
Designed capacity per hour AC,tual number per hour Queue
CHT 2600 (cars) 4400-4600 (cars) 1500-3000 (metres)
,
WHC 4200 (cars) 3600-3800 (cars) o (metres)
Source C: An extract of a report on traffic congesti0n

Traffic congestion not only affects individual drivers, but also results in inconvenience to society as a
whole. Apart from the time wasted during congestion, people also need to allow extra time for the
journey to cater for the uncertainty in travelling time. The stop-and-go traffic pattern during congestion
increases the total operating costs of vehicles as more fuel would be consumed.

Source D: Percentage of vehicles crossing the harbour during peak hours (by types of vehicles)
Bus, 8.9%
L..-.,....,....,.....:::-_ _ _ _ Motorcycle,
4.5%
Goods
vehicle,
16.6%

Light bus,
1.5%

Taxi,12.6%
Private car,
56.0%

Source E: Average number of persons in each vehicle when crossing the harbour during peak hours
60

50

40

30

20
9.3
10
1.0 1.3 2.1 1.6
o
Motorcycle Private car Taxi Light bus Goods Bus
vehicle

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2020-DSE-ECON 2-15 34

Provided by dse.life
 Source F: Views on cross-harbour traffic in Hong Kong

A politician

Every citizen needs to travel across the harbour. An increase in tunnel tolls
affects everyone, especially the low-income group.

A government official

We cannot underestimate the difficulty in negotiating any adjustment in tunnel

toll ofWHC. The government has no right to object to the tolls set by WHC.

An environmentalist

Reducing traffic congestion in cross harbour tunnels is only one tiny step.
The root of the problem is that there are too many cars in Hong Kong.

A taxi driver

Channeling traffic to the under-utilised WHC benefits every road user and this
allows taxi drivers to have more businesses.

(a) Refer to Source A. State ONE advantage and ONE disadvantage of providing cross harbour
services by a private firm instead of the government. (2 marks)

(b) Refer to Source B. With the aid of a supply-demand diagram, explain the phenomenon in the CHT
(U ~) during peak hours. (4 marks)

(c) Refer to Source C.

(i) Explain, with ONE example, why there may be a divergence between private and social costs
during traffic congestion. (3 marks)

(ii) Explain why the situation in part (i) may result in inefficiency. (2 marks)

(d) According to Sources D and E, explain why private cars may be regarded as one of the major sources
of traffic congestion in the cross harbour tunnels. (2 marks)
(Assume that the number of persons using the cross harbour tunnels per day during peak hours is
constant.)

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2020-DSE-ECON 2-16 35

Provided by dse.life
 For part (e), candidates are required to present their" answers in an 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 cross-harbour~tunnel-toll adjustment proposals to relieve the problem of
congestion:
Proposal I The government raises the toll of the CHT (f-rr~) for private cars to $75_

Proposal II The toll of the WHC (j§ ~) for private cars is reduced to $20_

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:

the owners of the WHC company .

the politicians who are concerned about the income inequality in Hong Kong
the 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) i
(f) S
Suggest · ONE proposal, other than tunnel-toll adjustment, for relieving the traffic congestion Q)
problem_ Briefly explain how your proposal works_ (2 marks) ::
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2020-DSE-ECON 2-17 36

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2020-DSE-ECON 2-18 37

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2020-DSE-ECON 2-20 39

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END OF SECTION B

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2020-DSE-ECON 2-21 40

Provided by dse.life
 Section C (16 marks) Answer any ONE question.

12. ABC Electricity Limited, the sole supplier of electricity in Country A, adopts uniform pricing.

(a) If the marginal cost is constant, explain how the profit-maximising output of ABC Electricity
Limited will be determined. Indicate the output (QM), the price (PM) and the deadweight loss in
Figure 2. (5 marks)
Figure 2

Price

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~ (i) Indicate the after tax profit-maximising output (Qt) and price (Pt) in Figure 2. (2 marks) ~
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~ (ii) Explain whether economic efficiency would worsen as a result of the tax. (2 marks) ~

(c) ABC Electricity Limited charges users in the urban area $1 per unit of power consumed and users in
the rural area $1 .5 per unit of power consumed. Defme price discrimination and explain why this
price arrangement may NOT constitute price discrimination. (3 marks)

ABC Electricity Limited planned to install new equipment for electricity supply in the rural area and asked
the equipment providers to bid for the contracts. It was found that the two equipment providers in a region
agreed to take turns being the bid winner.

(d) (i) Which anti-competitive behaviour would the above case constitute? If the above case
happened in Hong Kong, which conduct rule of Competition Ordinance would be violated?
(2 marks)

(ii) State TWO ways the above behaviour would harm ABC Electricity Limited. (2 marks)

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2020-DSE-ECON 2-22 41

Provided by dse.life
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2020-DSE-ECON 2-23 42

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 13 . Refer to Figure 3. PPFA and PPFB are the production possibility frontiers of Country A and Country B
respectively. Eo is the consumption point of Country A without trade.

Figure 3
GoodY

100 PPFA

50

O~----------------------~~--------~GoodX

.....
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Assume the domestic cost of production of 1 unit of Good X in Country A is 1.5 units ofY at Eo. .s
(a) With reference to the domestic production costs of Country A and Country B, explain which country
[
0

will specialise in producing Good X. (3 marks) ..s

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(b) After Country A engages in trade with Country B, the consumption point of Country A is E1.

Indicate in Figure 3, ~

(i) the consumption possibility frontier (CPFA) of Country A (Hint: CPF A should pass through ~
E 1),

(ii) the production point (AT) of Country A after trade and explain your answer in terms of
terms of trade, and

(iii) the consumption possibility frontier (CPFB) and the production point (BT) of Country B after
trade.
(5 marks)

(c) Suppose Country B adopts artificial intelligence technologies in the production of Good Y, which
doubles her productivity of the good.

(i) Explain whether your answer in part (a) would be affected by the above change. (2 marks)

(ii) Give TWO reasons to explain why the adoption of artificial intelligence technologies may
boost economic development of Country B. (4 marks)

(iii) Apart from adopting artificial intelligence technologies, list TWO factors that may boost
economic growth. (2 marks)

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2020-DSE-ECON 2-25 44

Provided by dse.life
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2020-DSE-ECON 2-26 45

Provided by dse.life
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END OF PAPER

Sources of materials used in this paper will be acknowledged in the HKDSE Question Papers booklet published by
the Hong Kong Examinations and Assessment Authority at a later stage.
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2020-DSE-ECON 2-27 46

Provided by dse.life
 Supplementary Answer Sheet
Question No. - - - - - -

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••••• • ••••••••.•••••••••.•••••••••••••••••••••.•..•••.•••••••••••••••••••••••••••••••••••••••••••••••••••••••••.••..••••.••••••••••••••••••••••••.•••.••.••.....•• ,!:J

________ ______________ _______________ _______ __________ -- __ -.-0_- __ -_---------------------- ----.--------- --- -_____________________________________ . ________________
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2020-DSE-ECON 2-28 47

Provided by dse.life
 Marking Schemes
,
Paper 1

Question Question
Key Key
No. No.

l. B (77%) 26. A (43%)

2. B (80%) 27. e (53%)
3. B (49%) 28. D (51%)
4. D (64%) 2,9. A (31%)
5. e (40%) , 30. B (70%)

6. D (42%) 31. D (52%)

7. B (79%) 32. A (66%)
8. B (58%) 33. B (36%)
9. B (68%) 34. e (73%)
10. e (85%) 35 . B (71%)

II. A (34%) 36. e (56%)

12. D (39%) 37. D (51%)
13. D (79%) 38. A (68%)
14. A (62%) 39. D (67%)
15. D (63%) 40. A (54%)

16. A (78%) 41. e (57%)

17. D (62%) 42. e (71%)
18. e (87%) 43. A (46%)
19. C (77%) 44. A (70%)
20. C (60%) 45. B (69%)

2l. B (60%)
22. D (87%)
23. D (48%)
24. C (68%)
25. A (53%)

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

48

Provided by dse.life
Paper 2

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:

/ 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

49

Provided by dse.life
Section A

Marks
I. Yes. (I)
More of free good is not preferred. No one is willing to pay a price/give up resources for (2)
getting more free good.

2. (a) Lateral expansion (2)

because the firm expanded its production to related but not competitive products.

(b) Motives:
- market/product diversification
- economies of scale @I
- use of brand name } Max: 2
- any other relevant point
[Mark the FIRST TWO points only.]

(c) Reasons:
- share of advertising cost by a larger number of output
- bulk purchase of raw materials in production @1
- more extensive division of labour } Max: 2
- any other relevant point
[Mark the FIRST TWO points only.]

3. (a) Recession. (I)

(b) Phenomena:
- falling/negative real GDP growth rate OR falling real GDP level
- falling inflation rate OR deflation
- falling consumption/investment
- falling business confidence
- any other relevant point
[Mark the FIRST TWO points only.]

(c) Losses caused by unemployment:

- loss of output
- loss of human capital @l
- political and social unrest } Max: 2
- any other relevant point
[Mark the FIRST TWO points only.]

50

Provided by dse.life
 Marks
4. (a) Inflation rate = (I 17 - 110) / 110 x 100% = 6.36% (I)

(b) Differences:
- CPI only includes consumer goods while GDP deflator includes both consumer
goods and producer goods. @2
- The computation ofCPI is based on a fixed basket of goods (with weights which
Max: 2
would only be revised infrequently), while GOP deflator is based on variable }
baskets of goods (with weights varying from year to year).
- any other relevant point
[Mark the FIRST point only.]

(c) MV = PY, where M: money supply, V: velocity of circulation of money, P: price (2)
level and Y: output
Assume V and Y being constant.
A continuous increase in M (caused by the open market purchase) would result in a (2)
continuous increase in P, i.e. inflation.

5. (a) Nominal interest (rate) (I)

because, while holding money, one has to give up the opportunity to earn interest (1)
income by depositing the sum into banks or by using the sum to purchase interest-
earning assets like bonds.

(b) Reasons:
- Not generally accepted as a medium of exchange, as the coupon can only be used
in the supermarket chain but not in other shops.
- Not divisible as the coupon, is difficult to be broken down into smaller units to
facilitate exchange of cheaper goods.
- Not a good store of value, as the coupon becomes worthless in case the @2
supermarket chain closed down. Max: 4
- Not durable as banknotes, because the coupon is not waterproof and may be easily
damaged.
- Not a legal tender, as other people may refuse to accept the coupon as payment.
- any other relevant point
[Mark the FIRST TWO points only.]

51

Provided by dse.life
 Marks
6. Verbal elaboration:
The economy is facing an inflationary (output) gap. There would be an excess demand (4)
in the factor market, creating pressure for factor prices to adjust upward. As the costs of
production would rise, short run aggregate supply (SRAS) would fall over time, thus
restoring output to Y f in the long run.

Illustrate in the diagram:

- SRAS shifts leftward (1)

Price level
LRASo SRASI
,.'" '"
'" SRASo
'" '"
","'+--
'"
'" '"

ADo
OL------YJ...f-Y:..o-----~Aggregate output

7. (a) In country A, opportunity cost of producing IT = IC (3)

In country B, opportunity cost of producing IT = O.5C
Country B has a lower opportunity cost in producing T and would therefore export
T.

(b) Terms of Trade: IT:0.8C (3)

Gain from trade = 0.8C-0.5C-0.2C/2 = 0.2C

8. (a) Monetary base: $1000 million + $800 million = $1 800 million (1)
Money supply: $800 million + $4000 million = $4800 million (\)

(b) (i) Change in monetary base= -$700 million (1)

(ii) Change in money supply = ($300 million x _1_ + $800 million) - $4800 million (3)
0.25

= -$2800 million

52

Provided by dse.life
 Section B
Marks
9. (a) Oligopoly. (I)

Features:
- a few dominant sellers
- interdependency of pricing @I
- price and non-price competitions } Max: 2
- any other relevant point
[Mark the FIRST TWO points only.]

(b) Verbal elaboration:

When more tourists stay longer in Hong Kong, the tourist expenditure would increase, (5)
implying a rise in export of service. This would lead to an increase in AD.
On the other hand, the infrastructure development would expand the production capacity
of the economy in the future, leading to an increase in (future) LRAS.I
In the long run, aggregate output increases.

Illustrate in the diagram:

AD shifts to the right (I)
- LRAS shifts to the right (1)
- Y\> Yo (I)

Price level
LRAS o

O~----~-----I..-------+
Yo --+Yl
Aggregate
output

lOne can also argue that the new hotels and the waterpark may not be able to cause a significant increase in long run aggregate
supply, as such development has direct effect only on one single industry, which may be of minor importance relative to the
production capacity of the economy as a whole.

53

Provided by dse.life
 Marks
(c) Advantages:
- no interest obligation (I)
- no repayment obligation2 (1)
- any other relevant point
[Mark the FIRST TWO points only.]

(d) Reasons:
- Not all factor inputs used to build the infrastructure originated from Hong Kong. For (2)
example, some raw materials were imported.
- Some of the output might not be produced in 2019. For example, some has been (2)
already included as change in inventory/work in progress in previous years.
- any other relevant point
[Mark the FIRST TWO points only.]

10. (a) (i) Trade deficit increased while invisible trade surplus slightly increased. (2)

(ii) No. We also need the infonnation of external factor income flow (i.e. net income (2)
from abroad) and current transfers to draw the conclusion.

2 Under the current arrangement as specified by the Ocean Park Ordinance (Cap. 388), the Ocean Park as a public corporation
is not allowed to issue shares to raise capital. But such knowledge is not required to answer this hypothetical question.

54

Provided by dse.life
 Marks
(b) (i) Condition I: Ed infinite
Verbal elaboration:
When demand is perfectly elastic, the market price would not increase even after (2)
the imposition of tariff. Since a tiny increase in price would drop the quantity
demanded to zero, the supplier cannot shift the tax burden to the consumers at
all.

Illustrate in the diagram:

- horizontal demand curve P (I)
- upward shifting of (I)
supply curve

Po=Pll----r--r-----Do

o~--~-----------+Q

Condition II: Es zero

Verbal elaboration:
When supply is perfectly inelastic, the imposition of tariff would not cause the (2)
market price to increase. Given the quantity supplied is fixed, any increase in
price would only result in an excess supply.

Illustrate in the diagram:

- vertical supply curves P
(I)
(old and new)
- indication of per unit tax (I)

o
~--~-----------'Q

(ii) - correct amount of tax revenue indicated in the corresponding condition. (I)

55

Provided by dse.life
 Marks
(c) Before tariff Affer tariff (3)

Consumers' surplus - Area abc

Producers' surplus Area dfO Area hiO

(d) Advantage:
The government can earn the tariff revenue (while the government may not (1)
receive the quota rent).

Disadvantage:
The effect of tariff on import volume depends mor e on elasticity (while the effect (I)
of quota on import volume is certain).

[Mark the FIRST advantage and FIRST disadvantage only. ]

56

Provided by dse.life
 Marks
11. (a) Advantages:
more efficient management @1
easier to recruit experts
} Max: I
any other relevant point

Disadvantages:
higher toll as private firm aims at profit-maximisation @l
less information for future planning
} Max: 1
any other relevant point

[Mark the FIRST advantage and FIRST disadvantage only.]

(b) Verbal elaboration:

When the price is set below the equilibrium (Le., market-clearing) level, there is an (2)
excess demand.

Illustrate in the diagram:

vertical supply curve (1)
correct position of shortage (I)
p

D
~----~--------~Q

57

Provided by dse.life
 Marks
(c) (i) The drivers using the tunnel would have adve~?e effects on other drivers without (3)
paying compensation to the parties bei!lg affected. These adverse effects can be
viewed as an external cost, which the drivers would not consider when making
their driving decisions. .
The example of external cost includes extra time for journey to cater for
uncertainty/extra operating cost in the stop-and-go traffic.

(ii) The above case implies that marginal social cost i~ larger than marginal social (2)
benefit. The tunnel is 'over-used'; the quantity o(cars using the tunnel exceed
its efficient level.

(d) Private cars consist of more than half of the tunnel traffic (from Source D) and the (2)
average number of persons in the vehicles is very low (from Source E).

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

Marks Performance
2 • theories.
Support arguments with the source/data and appropriate economic

•• Present relevant material.

Present well-organised and coherent answers without repetition of ideas.
• Use language that expresses ideas clearly andfluently with appropriate use
of words/terms/symbols.
1 •Present arguments with some support of the source/data and economic
theories.

••
Present some irrelevant material.
Present answers in a less organised way with some repetition.
• Use language that conveys a clear message with some inappropriate use oj
words/terms/symbols.
0 • Present arguments with no support of the source/data and economic
theories.
• Present material unrelated to the gist of the question.
• Present inconsistent arguments.
• Express limited ideas with inaOf)rooriate use ofwords/terms/svmbols.
The maximum marks for content is 12 marks

58

Provided by dse.life
 Answers may include the following:

WHC company:
CHT and WHC are substitutes. A rise in toll of CHT would increase the demand of
WHC. With the same toll and higher quantity, the total revenue of WHC must rise.
WHC company would prefer Proposal I.

WHC is a private firm who would be profit-maximising when it freely sets its price at
$75. Charging less would yield less profit (unless the government pays a subsidy for
it). Therefore, WHC company would NOT prefer Proposal II.

Income inequality:
'Toll-as-regressive-tax' argument: tunnel toll is regressive in nature - although both the
rich and the poor pay the same amount of toll, the toll consists of a smaller percentage
of the income of the rich than that of the poor. Since an increase in such a regressive
'tax' would worsen the income inequality and Proposal I is NOT preferred, while a
decrease of such a regressive 'tax' would improve the income inequality and Proposal
II would be preferred.

'Rich-driving-private-cars' argument: Mainly the rich travels with private cars while
the poor mainly uses public transport to cross the harbour. So the adjustment of tolls
on private cars mainly affects the rich but only have little effect on the poor. It implies
that increasing the toll would lead to a more even distribution of income and Proposal
I would be preferred.

Government revenue and / or expenditure:

Given the situation with excess demand, the increase in toll for CHT may only reduce
the amount of excess demand without changing the quantity transacted, resulting in a
higher total revenue. Therefore, Proposal I would be preferred.

If the demand of CHT is inelastic (due to its superior location/lack of substitutes), the
increase in toll would lead to an increase in total revenue. Therefore, Proposal I would
be preferred.

In order to induce WHC to cut its toll, the government may need to compensate the
company for its losses by providing subsidies or tax benefits. As a result, such transfers
from the government to WHC would reduce the net revenue of the government. 3
Therefore, Proposal II would NOT be preferred.

3 Strictly speaking, such transfers should be treated as negative taxation rather than expenditure.

59

Provided by dse.life
 Taxi drivers:
Since private car trips and taxi trips are substitutes, the increase in toll of private car
may lead to an increase in demand for cross-harbour-taxi-trip. As some private car
drivers are priced out by the higher toll and there would be fewer vehicles in the
tunnels. The overall improvement in traffic condition will induce a higher demand
for taxi trips (as trips are faster on average) and the cost of operation will be lowered
because of less stop-and-go traffic pattern will be observed. Taxi-drivers would
therefore prefer Proposal I.

Environmentalists:
Some private car drivers are priced out by the higher toll and they may switch to
public transport which implies more efficient use of tunnels and roads in general.
Less congestion also implies less stop-and-go traffic and less air pollution.
Environmentalists would thus prefer Proposal I.

Marks
(f) Proposal:
- Building a new tunnel: This would solve the overall shortage of cross-harbour
capacity.
- Subsidising the use of public transport (MTRlbus/ferry): This may discourage the @2
use of private cars, reducing the number of cars on road. Max: 2
- Heavier first registration fee on private cars: This may reduce the number of cars
on road.

60

Provided by dse.life
Section C
Marks
12. (a) Verbal elaboration:
The profit-maximising output is determined by the condition: marginal revenue (MR) (1)
=marginal cost (MC).

Illustrate in the diagram:

- horizontal MC (I)
- correct position of MR (I)
- correct position ofQm and Pm (1)
- correct position ofDL (I)

~----;-----~-----MC

(b) (i) Illustrate in the diagram:

- correct position ofP t (=P m) (1)
- correct position of Qt (=Qm) (I)

(ii) No, since imposition of the lump-sum tax would not affect either demand or marginal (2)
cost, output and deadweight loss would remain unchanged.

(c) Price discrimination is defined as charging different consumers different prices for the same good (3)
produced with same costs. In this case, the production cost may not be the same. The instaIIation
cost and maintenance cost for rural area might be higher so it may lead to a higher price.

(d) (i) Bid-rigging. (2)

It violated the first conduct rule.

(ii) Harm:
- higher price/cost
- lower quality
- fewer choices
- any other relevant point
[Mark the FIRST TWO points only.]

61

Provided by dse.life
 Marks
13. (a) The opportunity cost producing IX in Country A = .l.5Y (3)
The opportunity cost of producing IX in COl:mtry B = ~ = O.SY
100

Since Country B has a lower opportunity cost of producing good X, it would specialise in
producing good X.

(b) Good Y

100---

O~----------------------~~~-------'GoodX

Illustrate in the diagram:

- correct position of CPFA (1)
- correct position of AT (I)
- correct position ofCPFs (1)
- correct position of BT (I)

Verbal elaboration:
Terms of trade would be equal to the slope of PPF Aat point AT (which is the same as the (1)
slopes ofCPFA and CPFs).

62

Provided by dse.life
 Marks
(c) (i) No. The opportunity cost of producing IX in Country B would become lV, which (2)
is still lower than that of Country A.

(ii) Reasons:
- Artificial intelligence technology could increase the per capita GDP as labour
becomes more productive with better technology.
Artificial intelligence technology may improve medicine production and surgery
2@
procedures and improve citizens' average life expectancy.
max: 4
- Artificial intelligence technology may increase the expected average years of
schooling with more effective self-learning software and lower the cost of
education in the future.
- any other relevant point
[Mark the FIRST TWO points only.]

(iii) Factors:
- Subsidise information technology/engineering department in the universities to
boost the research and development.
- Provide tax allowances on education to increase the future productivity of labour.
- any other relevant point
[Mark the FIRST TWO points only.]

63

Provided by dse.life
 2021 -DSE
ECON
PAPER 1

HONG KONG EXAMINATIONS AND ASSESSMENT AUTHORITY

HONG KONG DIPLOMA OF SECONDARY EDUCATION EXAMINATION 2021

ECONOMICS PAPER 1

8.30 am - 9.30 am (I hour)

INSTRUCTIONS

1. Read carefully the instructions on the Answer Sheet. After the announcement of the start of the
examination, you should first stick a barcode label and insert the information required in the spaces
provided. No extra time will be given for sticking on the barcode label after the ‘Time is up’
announcement.

2. When told to open this book, you should check that all the questions are there. Look for the words
‘END OF PAPER’ after the last question.

h 3. All questions carry equal marks.

4. ANSWER ALL QUESTIONS. You are advised to use an HB pencil to mark all the answers on the
ii Answer Sheet, so that wrong marks can be completely erased with a clean rubber. You must mark the
answers clearly; otherwise you will lose marks if the answers cannot be captured.
:!
II 5. You should mark only ONE answer for each question. If you mark more than one answer, you will
i: receive NO MARKS for that question.

6. No marks will be deducted for wrong answers.

Not to be taken away before the

end of the examination session

2021-DSE-ECON 1-1

i'
There are 45 questions in this paper. Choose the BEST answer for each question.

1. Refer to the following statements made by Peter and Mary.

Peter: As a developed economy, Hong Kong’s Gini coefficient is too high.

Mary: Hong Kong’s Gini coefficient is the highest in Asia.

because is
statement

A. Peter’s ... positive ... most people agree with it

B. Peter’s ... normative ... it is inconsistent with the real world data
C. Mary’s ... positive ... it can be rejected by fact
D. Mary’s ... normative ... value judgment is involved in the statement

2. In response to the shortage in face mask market, the Government distributes free reusable CuMask to all
Hong Kong citizens.

This is an example of using to solve the problem of

A. government command ... ‘how to produce’

B. government command ... ‘for whom to produce’
C. market mechanism ... ‘how to produce’
D. market mechanism ... ‘for whom to produce’

3. After graduating from secondary school, Paul considers whether to become a full-time Key Opinion Leader
(KOL) in social media channels or to become an e-sports player.

Which of the following will lower Paul’s cost of being a full-time KOL after his graduation?

(1) Paul receives sponsored video equipment for KOL.

(2) The e-sports team offers a lower basic salary to Paul.
(3) The risk of social media channels being attacked by hackers increases.

A. (1) and (2) only

B. (1) and (3) only
C. (2) and (3) only
D. (1), (2) and (3)

4. Because of COVID-19, normal schooling was disrupted, Most schools used video communication
software, such as Zoom and Google Meet, to conduct online lessons, Suppose the school campus was re-
opened and face-to-face lessons were allowed.

Which of the following would be the LEAST important factor for teachers to choose between online lessons
and face-to-face lessons?

A. The risk of contracting CO VID-19 for teachers is lower when they conduct online lessons.
B. Teachers have no idea what their students are doing during online lessons because students may
turn off their cameras.
C. Teachers have already spent a lot of time learning how to use the video communication software
to conduct online lessons.
D. The eyesight of teachers may be worsened by the intensive use of the video communication
software in conducting online lessons.

2021-DSE-ECON 1-2

4
 5.
Factory A Factory B
Number of workers employed 90 78
Working hours per worker/month 125 155
Total output/month 79 850 82 800
Percentage of output with quality below standard 37% 11%

Refer to the above table. Which of the following can best explain the difference in quality of the outputs
between Factory A and Factory B?

A. Factory A employs less labour service than Factory B.

B. Factory A practises a higher degree of division of labour than Factory B.
C. The degree of mechanisation of Factory A is higher than that of Factory B.
D. Factory A uses piece rate while Factory B uses time rate.

6. Li & Fung (Stock Code: 00494) announced a privatisation of its company, cancelling its listing status at the
stock exchange in Hong Kong. Which of the following statements about Li & Fung is correct after the
change?

A. The firm can enjoy a lower profits tax rate.

B. The firm can still issue shares to raise capital.
C. The owners will become personally liable for legal charges against the firm.
D. The firm will no longer exist when one of the owners goes bankrupt.
r
»

J
I
I 7. The salespersons in a luxury brand product shop are paid with the following arrangement.

I Monthly salary: HKS12 000

Target bonus: Bonus will be given when
sales target is attained.

From the viewpoint of the shop, which of the following are possible reasons of the above arrangement instead
of time rate only?

(1) The salespersons’ productivity will be higher.

(2) The cost of monitoring service quality will be lower.
(3) There is a possibility of earning a higher monthly salary.

A. (1) and (2) only

B. (1) and (3) only
C. (2) and (3) only
D. (1), (2) and (3)

2021-DSE-ECON 1-3

5
Study the following diagram and answer Questions 8 and 9.

Market Shares (%) of China’s Online Food Delivery Sector in 2017

’Others •
13.2%- Ele.me tSTFS
Baidu Waimai
Ele.me
36.5% Meituan Dianping
■ Meituan Dianping <, j
33%
’iiilill'lb!
Baihu Wai maj h

!. • !..; i •’ ’ i I •

8. Ele.me acquired Baidu Waimai in 2017. Which of the following could be the motive(s) behind the
acquisition?

(1) to enjoy economies of scale

(2) to spread risk by business diversification
(3) to have a greater influence on the market price

A. (1) only
B. (1) and (2) only
C. (1) and (3) only <
D. (2) and (3) only

9. Based on the information in the above diagram, we can conclude that the market structure of online food
delivery sector in China in 2017 could be regarded as because.

A. monopolistic competition ... market information about the food delivery services was imperfect
B. monopolistic competition ... there were price and non-price competitions among the service
providers
C. oligopoly ... service providers considered the reactions of other major providers in making
decisions
D. oligopoly ... a few service providers had significantly larger market shares than others

10. Because of the outbreak of COVID-19, the government of a country announced a temporary ban of dine-in
services in restaurants. Which of the following statements about restaurants under the temporary ban is
correct?

A. If the expected sales revenue generated from takeaway food exceeds the variable cost of running
a restaurant, the restaurant will continue to operate.
B. With the extremely high cost of breaking the rental contract, the fixed rental will affect whether
the owners continue to operate their restaurant.
C. A decrease in prices of takeaway food will necessarily decrease the sales revenue of the
restaurants.
D. Unpopular restaurants will close down before popular ones.

2021-DSE-ECON 1-4

6
 11. The following table shows the production plan of a firm which employs two factors only, namely labour
and machinery.

Labour (units) Machinery (units) Total output (units)

I 2 10
2 2 25
3 2 45
4 2 Q.
5 2 Q2

Suppose the above data illustrates the law of diminishing marginal returns. Which of the following figures
are consistent with the law?

(1) Qi = 60; Q2 = 70
(2) Qi=40;Q2 = 30
(3) Qi=65;Q2 = 85

A. (1) only
B. (3) only
C. (1) and (2) only
D. (2) and (3) only

12. The following table shows the cost-output relationship of a price-taking firm.

s Quantity (units) Average cost ($)

5 1 5
2 4
3 4
4 4.5
5 6

Based on the above table, when the market price falls from $6 to $4, we can conclude that

A. the firm starts to enjoy economies of scale.

B. the total cost of the firm will decrease from $30 to $12.
C. the profit of the firm will decrease by $6.
D. the quantity supplied will decrease from 5 units to 3 units.

13. The demand for can be regarded as a derived demand for

A. mobile phones ... earphones

B. laptops ... batteries
C. music videos ... singers
D. game programmers ... online games

2021-DSE-ECON 1-5

7
14. When Good X and Good Y are , a decrease in the supply of Good X will result in an increase
in the Good Y.

A. substitutes ... supply of

B. substitutes ... quantity supplied of
C. complements ... demand for
D. complements ... quantity supplied of

15. When a per-unit sales tax is imposed on a good, which of the following combinations may result in the
consumers’ tax burden exceeding the producers’ tax burden?

(1) elastic demand; elastic supply

(2) elastic demand; inelastic supply
(3) inelastic demand; elastic supply
(4) inelastic demand; inelastic supply

A. (2) only
B. (1) and (3) only
C. (2) and (4) only
D. (1), (3) and (4) only

16. Refer to the following demand-supply schedules of Good X.

Price ($) Quantity demanded (units) Quantity supplied (units)

80 100 80
90 100 90
100 100 100
110 100 110
120 100 120
130 100 130

If a $ 10 per-unit subsidy is provided to the producers of Good X,

(1) the total revenue including the subsidy will remain unchanged,
(2) the subsidy benefit will be received entirely by the producers,
(3) the total expenditure of consumers on Good X will reduce by $1 000.

A. (1) and (2) only

B. (1) and (3) only
C. (2) and (3) only
D. (1), (2) and (3)

2021-DSE-ECON 1-6

8
 17. Refer to the following demand-supply diagram of Good Y.

Price

Pi

P2 -

D
0
> Quantity

If the government lowers the price ceiling of Good Y from Pi to P2,

A. the producer surplus will decrease.

B. the consumer surplus will increase.
C. the total social surplus will remain unchanged.
D. the excess supply of Good Y will be eliminated.

18. Refer to the following news.

In order to reduce pollution, the government imposes a production tax on all kinds of motor vehicles
,1 (except electric vehicles).
$
JI As a result, the price of gasoline changes by 22% and its quantity transacted changes by 35%. Which of the
following statements is correct?

is
I'
A. The demand for gasoline is elastic.
B. The demand for gasoline is inelastic.
C. The supply of gasoline is elastic.
D. The supply of gasoline is inelastic.

19. Since most schools deliver their lessons online, more students need to buy tablet computers. The marginal
cost of the last unit of tablet computers will and the producer surplus will.

A. decrease ... increase

B. decrease ... decrease
C. increase ... increase
D. increase ... decrease

2021-DSE-ECON 1-7

9
 A

20. Initially a country imposes an effective quota on coffee bean production.

If now more people like to drink coffee, which of the following statements about coffee bean market are
correct?

(1) The total expenditure will increase.

(2) The deadweight loss will increase.
(3) The consumer surplus will increase.

A. (1) and (2) only

B. (1) and (3) only
C. (2) and (3) only
D. (1), (2) and (3)

21. Refer to the following policy proposals in Hong Kong.

Proposal (1): providing a cash subsidy for those who have been on the waiting list for public housing
over five years
Proposal (2): raising the eligible age for the Elderly Comprehensive Social Security Assistance
Scheme from 60 to 65
Proposal (3): raising the standard tax rate of the salaries tax

Which of the above proposals will reduce the Gini coefficient based on post-tax post-social transfer monthly
household income in Hong Kong?

A. (1) and (2) only

B. (1) and (3) only
C. (2) and (3) only
D. (1),(2) and (3)

22. The following table shows the information about two top-tier football leagues.

Average annual income of the players

Football league Defensive players Attacking players
England £2 751 537 £3 839 875
Italy £1 536 945 £2 625 975

Which of the following is/are possible reason(s) for the income differences among players?

(1) The television broadcast revenue generated by the top-tier football league in England is higher than
that in Italy.
(2) The price level in England is higher than that in Italy.
(3) The commercial values of attacking players are higher than those of defensive players since attacking
players are more popular.

A. (1) only
B. (2) only
C. (3) only
D. (1), (2) and (3)

2021-DSE-ECON 1-8

10
 f

MUNSA.MG COLLEGE LIBRARY

23. A production chain of Good X in an economy is shown below.

$1 200
($ 100 sales tax Local
$200 $400 inclusive) consumers
----------- ►
Local
importers Local
raw
materials supermarkets
Foreign
Local / $500 tourists
farmers $600

increase in inventory
$50

The contribution of the above production chain to the economy’s gross domestic product at factor cost is

A. $1400
B. $1450
C. $1500
D. $1 550

24. Refer to the gross domestic product (GDP) data of an economy.

j?;
:3
Growth rate (relative to previous year)
i
Nominal GDP 0
!5-
Real GDP -1.2%
Per-capita nominal GDP -3.5%

Compared to the previous year, the general price level has and population has in the
economy in the current year.

A. increased ... increased

B. increased ... decreased
C. decreased ... increased
D. decreased ... decreased

2021-DSE-ECON 1-9

11
25. Suppose the unemployment rate of an economy is 8%. Which of the following would increase the
unemployment rate?

(1) 15% of the new graduates could not find jobs successfully.
(2) Some employers closed down their local businesses and migrated to other countries.
(3) Some of the part-time workers lost their job due to automation of production.

A. (1) and (2) only

B. (1) and (3) only
C. (2) and (3) only
D. (1), (2) and (3)

26. The per-capita real GDP of a country would understate the general living standard because

A. it includes the value of non-consumption goods.

B. it does not consider the size of population.
C. it does not reflect the increasing crime rate in society.
D. it does not include all non-marketed goods.

27.

Price level
SRASo SRASi

0 ■►Output level

Which of the following is a possible reason of the above shift of the short run aggregate supply curve?

A. The cost of production increases due to an increase in global demand for oil.
B. The profitability of firms increases with the rise in price level, since the difference between
output prices and input prices increases.
C. An increase in interest rate leads to an increase in cost of investment.
D. The operation of labour market resumes to normal after a massive labour strike.

2021-DSE-ECON 1-10

12
 28. Study the following diagram.

Price level
LRAS

SRAS
C0

E
‘AD

Aggregate output
0 Yi

The initial equilibrium point of an oil importing country is at E. If the new long run equilibrium point is at
C, which of the following is a possible reason for the change in the equilibrium point?

A. There is an increase in oil prices.

B. There is a decrease in production subsidy.
C. The public tends to save less.
D. The government increases the salaries tax rate.

P 29. The outbreak of COVID-19 results in a significant decline in employment level and the volume of exports
J of a country.

if Which of the following policies can most likely relieve the above two problems?
J A. The central bank reduces the discount rate.
f B. The government distributes cash to citizens aged 18 years old or above.
C. The government imposes ‘employment support scheme’ to industries that are adversely affected.
D. The country devalues its currency against the currencies of its major trading partners.

2021-DSE-ECON 1-11

13
30. Study the following news extract about Bitcoin (th $$ ® ).

In 2018, Kentucky Fried Chicken Canada launched ‘Bitcoin Bucket’. The company set up a Facebook
live feed, displaying the number of bitcoins needed to pay for the meal as in the picture below. The
‘Bitcoin Bucket’ could only be purchased online and would be delivered to the buyers’ home later.

__ ‘ I

• -<

H1 0.0011204
■

J
'I

In the above case, Bitcoin performed as a

(1) medium of exchange

(2) unit of account
(3) standard of deferred payment

A. (1) and (2) only

B. (1) and (3) only
C. (2) and (3) only
D. (1), (2) and (3)

31. The table below shows the monetary data of a country.

Money supply $250 million

Legal tender held by public $50 million
Required reserve ratio 20%

Excess reserves $10 million

Which of the following statements are correct?

(1) Monetary base is $100 million.

(2) Actual reserves are $40 million.
(3) The maximum amount of deposits after credit creation is $250 million.

A. (1) and (2) only

B. (1) and (3) only
C. (2) and (3) only
D. (1),(2) and (3)

2021-DSE-ECON 1-12

14
 32. Jack wants to deposit $400 000 for 5 months, Which of the following financial institutions in Hong Kong
can accept his deposit?

(1) a restricted licence bank

(2) a virtual bank which is classified as a licensed bank
(3) a deposit-taking company

A. (1) and (2) only

B. (1) and (3) only
C. (2) and (3) only
D. (1), (2) and (3)

33. The diagram below shows the money demand and money supply curves of an economy. The original
equilibrium point is at E.

Nominal
interest rate Msi MsO M$2
sA

B
E
C
► XMd2
3 Mdo
5
IF Mdi
> Quantity of money
0
*J
If

£ Suppose the stock market becomes more volatile. At the same time, the central bank decides to redeem
government bonds from the public. The new equilibrium point will be at.

A. A
B. B
C. C
D. D

34. Suppose the actual inflation rate and the nominal interest rate are -1% and 3% respectively. Which of the
following statements are correct?

(1) The cost of holding cash is 3%.

(2) The expected real interest rate is higher than the nominal interest rate.
(3) The actual real rate of return on holding cash is 1%.

A. (1) and (2) only

B. (1) and (3) only
C. (2) and (3) only
D. (l),(2)and (3)

2021-DSE-ECON 1-13

15
35. Which of the following would offset the effect on aggregate output of an expansionary fiscal policy?

A. The public held more cash.

B. The use of electronic wallets became more popular.
C. The interbank rate decreased.
D. The government increased quota on the importation of foreign domestic helpers.

36. Due to the COVID-19 outbreak, most of the flights were cancelled, leading to a significant drop in the
number of tourists visiting Hong Kong. At the same time, many employees in Hong Kong were forced to
take no pay leave.

Which of the following diagrams can best describe the consequence of the above incidents?

A. B.
Price Level SRAS2 Price Level SRAS2
SRASi SRASi

<—>ADi
xAD2
•ADi ‘AD2

* Output Level Output Level

0 0

C. D.
Price Level Price Level
▲ LRASi LRAS2 LRAS2 LRASi

ADi
AD2 ADz
^ADi

> Output Level 0 + Output Level

0

37. Which of the following policies may narrow a deflationary (output) gap and reduce the budget deficit at the
same time?

A. an open market purchase of government bonds

B. an increase in income tax allowance
C. a reduction in transfer payment
D. an increase in required reserve ratio

2021-DSE-ECON 1-14

16
 38. Study the following diagram.

Growth rate (%)

Money supply

General price level

> Year

According to the quantity theory of money, which of the following statements is correct?

A. Real output is increasing.

B. Nominal output is decreasing.
C. Money supply is decreasing.
D. The velocity of circulation of money is decreasing.

i *
3 39. Study the following diagram.

Percentage change in real GDP

3
«•J
If

s
A
average
C growth rate

> Year

Which of the following are the features of an economy when it is operating at point A?

(1) Labour supply is increasing.

(2) Purchasing power of money is decreasing.
(3) Government expenditure is increasing.
(4) Business confidence of companies is increasing.

A. (1) and (3) only

B. (1) and (4) only
C. (2) and (3) only
D. (2) and (4) only

2021-DSE-ECON 1-15

17
40. Suppose a government finances its expenditure by collecting tax from the households and the amount of
expenditure equals the amount of tax collected. The effect on aggregate demand will be.

A. expansionary
B. contractionary
C. neutral
D. indeterminate

41. Mr Li is a major shareholder of a Hong Kong listed company which makes huge profits. He has sold some
of his residential properties, and received rental income from some leased commercial buildings.

According to the above information, which types of tax does Mr Li need to pay to the Hong Kong
government?

(1) profits tax

(2) stamp duty
(3) property tax

A. (1) and (2) only

B. (1) and (3) only
C. (2) and (3) only
D. (1),(2) and (3)

42. Refer to the following statistical data about Hong Kong.

2020 first quarter 2020 second quarter

(year-on-year change) (year-on-year change)
Exports of goods -9.7% -2.5%
Exports of services -37.5% -47.5%
Imports of goods -10.7% -7.4%

Imports of services -26.2% -44.6%

Based on the above information, we can conclude that

A. Hong Kong had an invisible trade deficit in 2020 second quarter.

B. Hong Kong’s net exports in 2020 second quarter was lower than that in 2019 second quarter.
C. Hong Kong’s exports of goods in 2020 second quarter was lower than that in 2020 first quarter.
D. Hong Kong’s total imports of goods and services in 2020 second quarter was lower than that in
2019 second quarter.

2021-DSE-ECON 1—16

18
 43. Both Country A and Country B produce only toys and computers. The table below shows the amount of
inputs required by Country A and Country B in the production of toys and computers.

1 unit of toys 1 unit of computers

Country A 2 5
Country B 2 2

Based on the above information, which of the following statements is correct?

A. Country A has an absolute advantage in the production of computers over Country B.

B. Country B has no comparative advantage in producing any goods as its opportunity cost of
producing toys equals that of producing computers.
C. If a transportation cost of 1 unit of computers is required to trade 1 unit of toys, it is impossible
to have mutually beneficial trade.
D. It is impossible to have mutually beneficial trade as the two countries have equal productivity in
producing toys.

44. Suppose the world price of soybeans is $20. A small open economy imposes a per unit tariff of $5 on
imported soybeans. The diagram below shows the economy’s supply and demand curves of soybeans.

Price ($)

S
>
J
5
r
J
I*
30
**
25
20 +

D
0 >Quantity (Units)
20 30 50 60

Which of the following statements about soybeans is correct?

A. The total revenue of domestic producers is $400 after the imposition of tariff.
B. The total import value inclusive of tariff is $500.
C. If the tariff is raised to $ 15, this economy will become an exporter of soybeans.
D. If the tariff is abolished, the total import value will be $400.

2021-DSE-ECON 1-17

19
45. Study the following table.

Exchange rate
3 December 2019 HKD 1 = RMB 0.902
3 December 2020 HKD 1 = RMB 0.923

On 3 December 2019, Mr Chan exchanged a total of RMB 300 000 from Hong Kong dollar and deposited
the sum to a bank as time deposits at an annual interest rate of 0.8%. Suppose he withdrew the sum on 3
December 2020 and exchanged it back to Hong Kong dollar.

From the above transactions, Mr Chan

A. lost about HK$4 967

B. lost about HK$7 570
C. gained about HK$6 300
D. gained about HK$8 515

END OF PAPER

Sources of materials used in this paper will be acknowledged in the HK.DSE Question Papers booklet published
by the Hong Kong Examinations and Assessment Authority at a later stage.

2021-DSE-ECON 1-18

20
 Please stick the barcode label here.
2021-DSE
ECON
PAPER 2

Candidate Number
HONG KONG EXAMINATIONS AND ASSESSMENT AUTHORITY

HONG KONG DIPLOMA OF SECONDARY EDUCATION EXAMINATION 2021

ECONOMICS PAPER 2
Question-Answer Book

10:15 am - 12:45 pm (2 hours 30 minutes)

This paper must be answered in English

INSTRUCTIONS
r (1) After the announcement of the start of the examination, you
should first write your Candidate Number in the space
•? provided on Page 1 and stick barcode labels in the spaces
! !J‘ provided on Pages 1, 3, 5, 7, 9 and 11.
J

£
£
(2) This paper consists of two sections, A and B. Answer ALL
questions in sections A and B.

(3) Write your answers in the spaces provided in this

Question-Answer Book. Do not write in the margins.
Answers written in the margins will not be marked.

(4) Supplementary answer sheets will be supplied on request.

Write your candidate number, mark the question number
box and stick a barcode label on each sheet, and fasten
them with string INSIDE this book.

(5) No extra time will be given to candidates for sticking on the

barcode labels or filling in the question number boxes after
the ‘Time is up’ announcement.

2021-DSE-ECON 2-1 21 IIIIHIII

*A080E002*
 Section A (44 marks)

1. The following is the advertisement of an online food delivery firm for recruiting riders.

Riders Wanted !!!

Earn great money Bring vour own equipment

• High salary for each delivery! • A smartphone
• Keep 100% tips from customers • A motorcycle with the necessary safety equipment

(a) From the viewpoint of the riders, state TWO disadvantages of the above arrangements. (2 marks)

(b) Explain whether the smartphones and motorcycles of the riders are consumer goods or capital goods.
(2 marks)

(c) After employing more riders, the firm found that its system was overloaded and the marginal product
nd of riders dropped. State the law that explains this phenomenon and briefly explain why such law can nd
<u <D
* be applied in this case. (5 marks) *
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2021-DSE-ECON 2-2 22
 Please stick the barcode label here.

2. Refer to the following taxi fare arrangement.

xi
Original fare (whole day)
Q u
T* First 2 kilometres $30
rt
E Every subsequent 200 metres $2 g
V <D
Xi

c Suppose a late-night surcharge of $20 will be added to the original fare on any taxi trips from 1:00 am to C

5:59 am. How will this surcharge affect the average travel distance of taxi passengers during late-night? £
£
co Explain. (4 marks) C/3

.£ -S
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£ &
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5 .E ,g
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Answers written in the margins will not be marked.

23
2021-DSE-ECON 2-3
 3. In 1992, Cathay Pacific Airways acquired an air-catering company which was renamed as Cathay Pacific
Catering Services (H.K.) Limited (CPCS). CPCS provided around thirty million meals for various airlines
in 2019.

From the viewpoint of Cathay Pacific Airways, name the type of the above integration and give TWO motives
for this type of integration. (3 marks)

<D <L>

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so £
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4. Give TWO reasons to explain why the smartphone market is NOT perfectly competitive. (4 marks)

Answers written in the margins will not be marked.

24
2021-DSE-ECON 2-4
 Please stick the barcode label here.

5. Mr Chan, a Hong Kong retired footballer, was employed as a consultant by a football club in the United
Kingdom in January 2020. Seven months later, he quitted his position and returned to Hong Kong.

(a) Explain whether the salary received by Mr Chan from the football club in the United Kingdom would
be included in the calculation of

(i) gross domestic product (GDP) in Hong Kong. (2 marks)

o (ii) gross national income (GNI) in Hong Kong. (3 marks) T3

0)

rt CC
E (b) If Mr Chan could choose to receive his salary in either British Pound (GBP) or US Dollar (USD), g
Q <D
JD which currency would you recommend him to choose? Explain your answer. (2 marks) -O

a c
>
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cb oh
rt
g GJ

3 Q
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■£
3 c
i .S
o S
C
£ £
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£
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25
2021-DSE-ECON 2-5
 6. The following table shows the balance sheet of a banking system.

_____ Assets ($ million)_____ Liabilities ($ million)

Reserves 600 Deposits 1 500
Loans 900

Initially the banks hold excess reserves of $300 million and the public always holds $100 million cash. 73
73
V <V

co
(a) Find the required reserve ratio. (1 mark) co
E E
<u <D
(b) Suppose the required reserve ratio is reduced by 5% and banks lend out all excess reserves. Calculate -O

c the new money supply after the credit creation/contraction. Show your workings. (3 marks) a
rE
£ £
c.
g
■§) OD
co a
£ E
<D
x: x:
c
c a
£ E
£ £
12 12
o aj
£ *
c/>
e a
< <

Remark: In the live paper, there was a typo in the information about loans for Question 6. The calculation of
candidates was not affected. The question in this Question Papers booklet has been rectified.

Answers written in the margins will not be marked.

2021-DSE-ECON 2-6 26
 Please stick the barcode label here.

7. In a country, most of the prisoners in a correctional institution (£B^fc#f) use cigarettes as a medium of
exchange, but citizens in society refuse to settle payment by using cigarettes. Apart from not being generally
acceptable, explain with TWO reasons why cigarettes are NOT a good form of money in society.
(4 marks)

O
nd
<D

S3
E E
o
x>
•g
c c
= s
is £
> > .E
’I
£ 03
E E
o
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3 .E 8. Suppose the outputs per unit of resources of Country A and Country B are as follows. c
c a
I s Rice (units) Wheat (units)
Q
e
I Country A 10 OR 4
V 2 52
0) aS
£ Country B 6 OR 3 £
fZ)
C C
<
Find the range of terms of trade over which exchange between these two countries is mutually beneficial.
Show your workings. (3 marks)

Answers written in the margins will not be marked.

27
2021-DSE-ECON 2-7
 9. A small open economy imports junk food from other countries although such food is also produced by local
manufacturers. During economic recession, local people consume more junk food. To improve public health,
the government imposes an effective quota on the imported junk food.

(a) Explain whether junk food is a normal good or an inferior good in the economy. (2 marks)

(b) With respect to the imposition of an effective quota during economic recession, indicate the amount
of quota as Qa and the final equilibrium point as Ea in Figure 1. (4 marks)

-d T3
Q Price ($) <u
* Figure 1: Local junk food market
A &
s £
<D
Q
X) -O
So
a a

*
.san So: local supply of junk food before recession .san
Do: local demand for junk food before recession
S Pw: world price of junk food E
o

.s g
a
c <D
Q
£ tJ
’E
£ Pw £
12
<D
£ £
C Do a
< <
Quantity
0

END OF SECTION A

Answers written in the margins will not be marked.

28
2021-DSE-ECON 2-8
 Please stick the barcode label here.

I Do not write on this page.

5
i
J*
Answers written on this page will not be marked.
i

29
2021-DSE-ECON 2-9
 Section B (60 marks)

10. Masks have become a daily necessity as it is compulsory for people to wear masks in many public areas.

(a) ‘Compulsory mask wearing creates a larger burden to the low-income group than the high-income
group.’ Justify the statement. (2 marks)

(b) The Government distributed ‘CuMask’ to citizens in Hong Kong for free.

r-.. i-

hI • . .Wf ■

II
*6
<D
I
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<D

£
E £
<D
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F—■«

£
.s(/>on
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Explain whether the ‘CuMask’ is a
=
£
C

c/i

c3 C3
E £
<D (i) free good. (2 marks) o
•5
.£ (ii) public good. (2 marks) .£
c
<D
c
o
s
£w To stabilise the supply of surgical masks in Hong Kong, the Government has launched the ‘Local Mask 'S £
Production Subsidy Scheme’, which provides subsidy to local mask producers. £2
* £
t/2
With the aid of a diagram, explain under what condition the total expenditure of consumers on surgical c
3 (c)
masks will decrease because of the subsidy. (7 marks)
<
(For simplicity, the subsidy is assumed to be a per unit one.)

(d) Wearing surgical mask can reduce the chance of contracting diseases for an individual and can prevent
spreading diseases to others as well. In terms of externality, explain how the subsidy could improve
economic efficiency. (4 marks)

Answers written in the margins will not be marked.

30
2021-DSE-ECON 2-10
 Please stick the barcode label here.

T3 T3
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e
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£ £
£ 12
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31
2021-DSE-ECON 2-11
xj -o
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x:

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c C
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32
2021-DSE-ECON 2-12
 11. There exists a deflationary (output) gap in Country F.

Figure 2
Price level

SRASo

ns ns
<u <u
c3 £
£ E
o o
js
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c a
•=
ADo £
Vi
c Aggregate output .S
i 'oh 0 on

J E E
(D
Jf Q

*• c
(a) Define deflationary (output) gap and show the gap in Figure 2. (2 marks) .s
1 c a
<D
/ t:
i
»
»
I£2 (b) A natural disaster has struck Country F. A large number of factories have closed down temporarily.
Many people have lost their jobs and become pessimistic about their future.
£
u?
D
* £
c With the aid of Figure 2, explain why the natural disaster would lead to a wider deflationary (output) a
< gap in Country F. (7 marks) 3
(c) Without using a diagram, explain how the central bank of Country F could use an open market
operation to narrow the deflationary (output) gap. (4 marks)

Answers written in the margins will not be marked.

2021-DSE-ECON 2-13 33
xi
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E E
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c c

£
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05
£ E
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34
2021-DSE-ECON 2-14
 nzJ
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£ £
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X

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£
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C/3

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2021-DSE-ECON 2-15 35
 12. The declining labour force would be one of the problems of Hong Kong in the future.

Source A: Some information about Hong Kong’s fertility

Broadly speaking, Hong Kong’s fertility showed a declining trend over the past three decades. The birth
rate was 16.8 per 1 000 population in 1981 and 7.7 per 1 000 population in 2017.

Source B: Projection of the manpower situation in Hong Kong

Population Total labour force Labour force participation rate#

Year
(million) (million) (%)
2016@ 7.34 3.62 59.2
2021 7.61 3.68 58.6
2026 7.83 3.59 55.5
2031 8.00 3.51 52.9
-o 2036 8.14 3.49 51.7 -a
<L> <D
* c5
£ # labour force participation rate = total labour force I population aged 15 and above £
<D <D
@ actual figure 43
o
c a

co Source C: Composition of non-labour force * in Hong Kong in 2016 s

co
.£ .S
on on

E £
o Others Home-makers <D
£ •5
17% 16% c
.£
c c
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£
co C/O
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Students
Retired 33%
34%

* Non-labour force = population - total labour force

A person who is neither employed nor unemployed would be regarded as outside the total labour force,
i.e. non-labour force.

Answers written in the margins will not be marked.

36
2021-DSE-ECON 2-16
 Source D: Highlight of a report on manpower to the Legislative Council

• To relieve manpower shortage and to supplement skills not readily available in the market, local
employers can import workers through different schemes.
• For higher-skilled professionals, the annual number of imported professionals (via different schemes)
was 67 656 in 2018.
• For lower-skilled workers, employers can import them through the Supplementary Labour Scheme
(SLS). Under this scheme, restrictions are placed to protect the local workers. For example, wages
of imported workers cannot be lower than the median wage of local workers in such positions.
• Total number of imported workers under SLS was 3 225 in 2018 and a high portion of them worked
in elderly care service industry.
• Despite the importation of workers, there were still unfilled vacancies of2 630 in elderly care service
industry.

O
(a) Refer to Source A. In terms of the cost of child-raising, explain the trend of Hong Kong’s fertility.
E (2 marks) E
V CD
-O

c (b) Refer to Sources B and C. Suggest TWO possible reasons to explain the opposite trends of the c
projected population and projected total labour force. (2 marks)
£
c .E
I
(c) Refer to Source D. With the aid of a supply-demand diagram, explain the phenomenon ‘despite the
) C3 G3
E importation of workers, there were still vacancies in elderly care service industry’. (7 marks) E
<L> <D
.G
■s
C
5 (d) Refer to Source D. Assume imported workers will have an initial contract of two years. Which ONE
I c G
o component of the current account of Hong Kong might be affected after the importation of workers? <D
iB .E
Explain. (3 marks)
SI
12
£
<D
£ Please turn to page 20 to answer Questions 12(e) & 12(f).
tn I
C c
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Answers written in the margins will not be marked.

37
2021-DSE-ECON 2-17
 Questions 12(e) & 12(f) are printed on page 20.

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38
2021-DSE-ECON 2-18
 Questions 12(e) & 12(f) are printed on page 20.

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39
2021-DSE-ECON 2-19
 12. (cont’d)
For part (e), candidates are required to present their answers in an essay form. Criteria for marking will include
the use of sources and economic theories, relevant content, logical presentation and clarity of expression.

(e) Suppose the Government has two strategies to address the problem of declining labour force.

Strategy I: Providing extra childcare service and cash to parents in order to increase the
birth rate
Strategy II: Expanding the existing schemes in order to import more workers

With reference to Sources A-D and your own knowledge in Economics, discuss the effects of each
strategy on the following variables in order to evaluate the two strategies.
- aggregate output
- government expenditure
- average labour productivity
(14 marks)
(Hint: One of the strategies may have different short-term and long-term effects on some of the above
*8 -d
variables.)
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40
2021-DSE-ECON 2-20
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2021-DSE-ECON 2-21 41
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2021-DSE-ECON 2-22 42
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END OF PAPER

Sources of materials used in this paper will be acknowledged in the HKDSE Question Papers booklet published by
the Hong Kong Examinations and Assessment Authority at a later stage.
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202I-DSE-ECON 2-23 43
 Supplementary Answer Sheet

Question No.

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2021 -DSE-ECON 2-24 44

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