Test 1 (q & Answers)

Hang Seng School of Commerce F.6 Economics Test 1 (Chapters 1 and 2) Date: October 6, 2006 Section A Multiple Choice Questions (8 marks) 1. Which of the followings are FALSE in a one-man economy? (1) There is no shortage. (2) There is no scarcity. (3) It requires a system of property rights. A. B. C. D.

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

2. An ad hoc theory is not a good theory because A. it is not refutable. B. it has limited generalization power. C. its variables are not observable. D. its assumptions may be unrealistic. 3. Which of the following statements about the production possibility curve (PPC) is CORRECT? A. PPC will shift leftward if resources available are not fully utilized. B. PPC will shift rightward if resources available are efficiently utilized. C. PPC is downward sloping because resources are not perfect substitutes. D. PPC will be a straight line if resources are perfect substitutes. 4. Which of the following statements about use value is CORRECT? A. The total use value of a free good is zero. B. The marginal use value of an economic good can be zero. C. A good has a high exchange value if it has a high use value. 1

D. When a good has a use value, it must have an exchange value. 5. The law of demand A. B. C. D.

is asserted. is proven to be true. is observable in the market. is not refutable by facts.

6. Suppose a typhoon destroyed half of the vegetables that are ready for harvest. The ________ of vegetables will __________ and the demand for corn will ______________ as a result. A. B. C. D.

total use value … decrease …… decrease marginal use value … decrease … decrease total use value … decrease …increase marginal use value … decrease …increase

7. Which of the following statements about price is FALSE? (1) It is the best criterion which determines who wins and who loses. (2) It is the marginal use value under all pricing systems. (3) It is the physical exchange rate of one good for another. A. B. C. D.

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

8. In April 2005, the Kowloon-Canton Railway Corporation (KCRC) introduced monthly pass for passengers of East Rail at $380 per month. Holders of the pass can have unlimited rides of East Rail at no extra charge. We can conclude that (1) a pass holder will have a higher consumer surplus than a passenger without the pass. (2) the number of rides per month for a pass holder will increase. (3) the pass holder’s total use value of traveling with East Rail is at least $380 per month. A. B.

(1) and (2) only. (1) and (3) only. 2

C. D.

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

Section B Short Questions (22 marks) 1. Define the following terms: (a) Production Possibility Curve (b) The postulate of maximization

(2 marks) (2 marks)

2. “A free good is a good with no demand and its use value is zero.” Do you agree? Explain. (8 marks) 3. The following table shows the marginal use value schedule of Nancy on lipsticks: Quantity 1 2 3 4 5

Marginal use value ($) 140 110 80 50 20

(a) Suppose lipsticks are sold at a uniform price of $75 each. How many lipsticks will Nancy buy? Explain your answer. (3 marks) (b) During the promotional period, lipsticks are sold at a reduced price of $60 per lipstick. However, they are sold as bargain packs with 5 lipsticks per pack. Will you suggest Nancy to buy the bargain lipstick packs or the lipsticks at regular price? Explain. (5 marks) (c) Suppose lipsticks are sold on an all-or-nothing basis and the quantity stipulated is 5 lipsticks. What is the all-or-nothing price per lipstick if the seller wants to extract Nancy’s consumer surplus completely? (2 marks) - END -

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Hang Seng School of Commerce F.6 Economics (2006-07) Test 1 (Chapters 1 and 2) Suggested Answers

1. 2. 3. 4.

Multiple Choice Questions (8 marks) C B D B

5. 6. 7. 8.

A C A C

Section B Short Questions (22 marks) 1 (a)

Production possibility curve shows all combinations of two goods that a country can produce, given the resources and the best technology available.

2 marks

1 (b)

The postulate of maximization is an assertion that individual will always maximize his or her self-interest.

2 marks

2

 Disagree

1 mark

 The demand for a good shows relationship between its price and the quantity demanded over a certain period of time, assuming other things being constant  A free good is a good whose supply is so abundant that it can satisfy all human wants for it; i.e., whose quantity demanded is not greater than quantity supplied even at a price of zero  It is only a good with no or zero marginal use value, given the amount we already have processed and no one is willing to incur a cost for it  However, it has positive total use value

2 marks

4

2 marks

2 marks 1 mark

P S A

Area 0AB= Total Use Value

0

D=MUV

B

5

Q

3(a)

 3 units

1 mark 2 marks

3 (b)

 Price represents the additional cost of purchase while MUV represents the additional benefit from the purchase. As long as P<MUV, Nancy should continue to buy lipsticks to maximize her net gain (consumer surplus).  Nancy should choose the option the yields higher consumer surplus

3 (c)

    

Consumer surplus = TUV-TEV Consumer surplus from buying bargain pack: $(400-60x5) = $100 Consumer surplus from purchase at regular price = $(330-225) = $105 Therefore, Nancy should choose to buy at regular price All-or-nothing price = AUV = $400/5 = $80

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1 mark each

2 marks