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NSS Economics

Topic C Market and Price

Determining equilibrium market price

Q1.
(a) State the law of demand. (2 marks)
(b) A drug addict said, ‘I will buy the same amount of heroin (海洛英) regardless of the price.’ Is his
behaviour consistent with the law of demand? Explain. (4 marks)

Q2.
(a) A girl said, ‘I spend $1,000 buying Twins’ records every year.’ Draw a demand diagram to show her
demand for Twins’ records. (2 marks)
(b) Is her behaviour consistent with the law of demand? Explain. (4 marks)

Q3. In recent years, more and more Hong Kong people have gone to Shenzhen to shop on weekends. It has
been reported that the prices of goods are much lower there.
(a) State the law of demand. (2 marks)
(b) Explain whether the above phenomenon can be explained by the law. (4 marks)

Q4. In recent years, more and more people from the mainland of China have come to Hong Kong to shop.
This is because they believe that the quality of the goods sold in Hong Kong is far better than that in the
mainland.
(a) State the law of demand. (2 marks)
(b) Explain whether the above phenomenon can be explained by the law. (2 marks)

Q5.
a) What is the difference between quantity demanded and demand? (3 marks)
(b) Mr Chan and Miss Wong have the same quantity demanded for Good X at every price. Is it correct to
conclude that they have the same demand for Good X? Explain. (3 marks)

Q6.
(a) What is the difference between quantity supplied and supply? (3 marks)
(b) Firm A and Firm B have the same quantity supplied of Good Y at every price. Explain whether we can
conclude that they have the same supply of Good Y. (3 marks)

Q7. The following are the demand and supply schedules for Good X.
Unit price ($) 2 3 4 5 6 7
Quantity demanded (units) 90 76 65 52 43 35
Quantity supplied (units) 43 54 65 74 83 96
(a) Find the equilibrium market price and quantity transacted of Good X. (2 marks)
(b) Calculate the amount of excess supply at a price of $7. (2 marks)
(c) What is the quantity transacted at a price of $7? Explain. (2 marks)

Q8
The following are the demand and supply schedules for dictionaries.
Unit price ($) 100 150 200 250 300 350
Quantity demanded (units) 10 8 6 4 2 0
Quantity supplied (units) 2 4 6 8 10 12
(a) What are the equilibrium price and quantity transacted of dictionaries? (2 marks)
(b) Calculate the amount of excess supply at a price of $250. (2 marks)
(c) What is the quantity transacted at a price of $300? Explain. (2 marks)
Q9 To celebrate its 300th anniversary, a restaurant delivers 1,000,000 free lunch boxes every day. Explain
with the aid of a diagram why there is always one lunch box left. (6 marks)

Q10
Study the following table and answer the following questions.
Year 2004 2005
Price of an apartment $3,000,000 $1,500,000
Price of a car $600,000 $200,000
(a) Calculate the percentage changes of the nominal price of an apartment and a car between 2004 and
2005. (4
marks)
(b) Explain the change of the relative price of an apartment in terms of cars. Show your steps. (3 marks)

Q11
Study the following table and answer the following questions.
Year 2004 2005
Price of a can of pork luncheon meat $10 $11
Price of a can of Sichuan style sliced pork $5 $7
(a) Calculate the percentage changes in the nominal price of a can of pork luncheon meat and a can of
Sichuan style sliced pork between 2004 and 2005. (4 marks)
(b) Explain the change in the relative price of a can of Sichuan style sliced pork (in terms of cans of pork
luncheon meat) between 2004 and 2005. Show your steps. (3 marks)

Q12
The following shows John’s demand schedule for Good X.
Unit price ($) 50 100 150 200 250
Quantity demanded (units) 300 300 300 300 300
(a) Is John’s demand schedule consistent with the law of demand? Explain. (3 marks)
(b) The following shows the demand schedules of the other three people.
Unit price Joan’s quantity Joe’s quantity demanded Jane’s quantity
($) demanded (units) (units) demanded (units)
50 375 330 450
100 300 195 270
150 270 135 240
200 180 45 195
250 90 15 135
(i) Suppose the economy consists of only four people: John, Joan, Joe and Jane. Draw a table
showing the market demand schedule. (4 marks)
(ii) Which economic law is illustrated in the market demand schedule? State that law. (3 marks)
* (iii) Based on your answers in previous parts, is the satisfaction of the law of demand for every
person’s individual demand necessary for the law of demand to hold for the market demand? (4
marks)
(c) The following is an importing firm’s supply schedule for Good X.
Unit price ($) 50 100 150 200 250
Quantity supplied (units) 900 1,065 1,230 1,395 1,560
(i) Explain if the importing firm’s behaviour is consistent with the law of supply. (3 marks)
(ii) Suppose the firm is the only supplier of Good X. Find the equilibrium price and quantity
transacted of Good X. (2 marks)
 (iii) Suppose the firm sets the selling price at $150. Is there any excess demand or excess supply?
Calculate the amount of excess demand or excess supply. What will be the direction of future
price adjustments in order to clear the market? (4 marks)
Q13
The following shows Keung’s monthly supply schedule of sport shoes.
Unit price ($) 500 600 700 800 900
Quantity supplied (units) 1,000 2,000 3,000 4,000 5,000

(a) Is Keung’s supply of sport shoes consistent with the law of supply? Explain. (3 marks)
(b) The following shows the yearly supply schedules of sport shoes for the other two
suppliers.
Ling’s quantity supplied Chin’s quantity supplied
Unit price ($)
(units) (units)
500 500 1,000
600 1,000 2,000
700 1,500 3,000
800 2,000 4,000
900 3,000 5,000
(i) Among Keung, Ling and Chin, whose supply is the greatest? (1 mark)
(ii) Suppose there are only three producers: Keung, Ling and Chin in the market. Draw a table
showing the market supply schedule in a year. (4 marks)
(c) The following shows the market demand schedule for sport shoes in a year.
Unit price ($) 500 600 700 800 900
Market quantity demanded (units) 68,000 54,000 40,500 27,000 13,500
(i) Find the equilibrium price and quantity transacted of sport shoes. (2 marks)
(ii) Suppose the government sets the selling price of sport shoes at $800. Is there any excess demand
or excess supply? Calculate the amount of excess demand or excess supply. (3 marks)
(iii) Suppose the government changes the selling price of sport shoes to $600. Is there any excess
demand or excess supply? Calculate the amount of excess demand or excess supply. (3 marks)

What causes price to change?

Q14
Farmer A: When the price of beef increases, people will buy less of it.
Farmer B: No, I cannot agree with you. What I observed was that the price of beef and the quantity bought
increase at the same time.
Explain with the aid of separate diagrams why both of them can be correct. (6 marks)

Q15
A citizen: When the price of flats decreases, more people will buy flats.
A government official: Recently, the property market has been buoyant. Both the price and the quantity
transacted of flats have increased.
Can both of them be correct? (5 marks)

Q16
Peter: When the price of Good X increases, the price of Good Y increases.
Mary: I find something contradictory. When the price of Good A increases, the price of Good B decreases.
Is there any contradiction between the findings of Peter and Mary? Explain. (7 marks)

Q17
Fun: When my wage increases, I will buy more of Good A.
Keung: When my wage increases, I will buy less of Good A.
Does Fun’s and Keung’s behaviour violate the law of demand? Explain. (5 marks)

Q18
It has been reported that obvious wage inequality exists in public enterprises, where low-level workers are
said to be exploited by their superiors. Do you agree? (4 marks)

Q19
Explain with the aid of a diagram the effect of the construction of a new highway on the wage rate,
employment and the total wage income of construction workers. (6 marks)

Q20
Suppose the wage rate of teachers in Hong Kong is determined by market forces.
Explain with the aid of a diagram the effect of the implementation of small class teaching on the
employment and the total wage income of teachers in Hong Kong. (6 marks)

Q21
After the mainland of China joins the WTO, most goods can be exported directly from the mainland to
other regions and Hong Kong will no longer be an entrepot for the mainland. Explain with the aid of a
diagram how this will affect the total wage income and employment of local container truck drivers. (6
marks)

Q22
Suppose the European Union imposes very stringent trade restrictions on Chinese textile products. Explain
with the aid of a diagram how his will affect the wage rate, employment and the total wage income of
textile workers in Hong Kong. (6 marks)

Q23
With the improvement in transport system, travelling time between Hong Kong and Shenzhen has been
shortened. What change will there be in the price difference between a flat in the northern New Territories
and a flat in Shenzhen? (4 marks)

Q24
Beijing will host the 2008 Olympic Games. A lot of tourists are expected to visit Beijing during that period.
Explain with the aid of a diagram how this will affect the rental and the quantity transacted of hotel
accommodation services in Beijing. (4 marks)

Q25
Shanghai is going to hold the World Expo in 2010. A lot of tourists are expected to visit Shanghai during
that period. Explain with the aid of a diagram how this will affect the rental and the quantity transacted of
hotel accommodation in Hong Kong during the event. (4 marks)

Q26
Starting from September 2005, Hong Kong Disneyland is open to the public; the quantity transacted of
hotel accommodation services in Hong Kong rises by a large amount. Many hotels raised the salaries of
their staff.
(a) Explain the effects of the opening of Hong Kong Disneyland on the prices of hotel accommodation
services with the aid of a diagram. (4 marks)
(b) Explain why many hotels raised the salaries of their staff. (2 marks)

Q27
In recent years, more and more parents have sent their children to international schools.
(a) Explain with the aid of a diagram how this has affected intakes at international schools. (4 marks)
(b) Explain how this has affected the demand for teachers in international schools. (2 marks)

Q28
Suppose the economy recovers and Hong Kong citizens’ purchasing power increases; at the same time, the
Hong Kong government is supplying more land in order to stabilise property prices. Explain why property
prices remain unchanged with the aid of a diagram. (5 marks)

Q29
After Bird Flu was brought under control, the government resumed imports of live poultry from the
mainland of China. Explain with the aid of a diagram why this would cause the price of local live poultry to
fall. (5
marks)

Q30
In recent years, there has been an improvement in telecommunications technology and the number of firms
providing international direct dialing (IDD) services has increased. On the other hand, business activities
with overseas corporations have increased. It has been reported that the price of IDD services has been
decreasing. Explain this phenomenon with a well-labelled diagram. (6 marks)

Q31
Owing to an ageing population and an overloaded public medical sector, many private clinic chains have
opened in recent years. At the same time, it has also been reported that the price of private medical services
has decreased at the same time. Explain this phenomenon with the aid of a diagram. (7 marks)

Q32
(a) Explain the law of demand. (2 marks)
(b) In the stock market, prices of stocks always increase with the volume of transactions. Is this a violation
of the law of demand? Explain with the aid of a diagram. (6 marks)
(c) Explain the differences between quantity transacted and quantity demanded. In what circumstance will
they be the same? Explain with the aid of a diagram. (6 marks)

Q33
(a) Explain the law of supply. (2 marks)
(b) After floods, the price of vegetables increases drastically while the quantity transacted decreases
drastically. Is this a violation of the law of supply? Explain with the aid of a diagram. (6 marks)
(c) Explain the difference between quantity transacted and quantity supplied. In what circumstances will
they be the same? Explain with the aid of a diagram. (6 marks)

Q34
Mr Yeung runs a printing factory which prints textbooks for local publishers in Hong Kong. Because of the
recent economic downturn, many students choose to buy used textbooks.
(a) What are the effects of the change in students’ behaviour on the equilibrium price, quantity transacted
and total revenue of new textbooks? Explain with a well-labelled diagram. (6 marks)
(b) What is the relationship between the demand for new textbooks and the demand for printing services?
(2 marks)
(c) Assume the price of printing services is fixed. What is the effect of the change in part (a) on the total
revenue of Mr Yeung’s printing factory? Explain with a diagram. (4 marks)

Q35
Mr Chan runs a cinema that screens Hong Kong films. In recent years, owing to the poor economic
environment and the widespread problem of movie piracy, the attendance rate at his cinema has been
decreasing. After launching a ‘buy tickets, get free drinks’ promotion scheme, the situation was still poor.
(a) What is the relationship between the demand for cinemas and movies? (2 marks)
(b) Explain with the aid of a diagram how the poor economic environment and the widespread problem of
movie privacy has affected the attendance rate and the total revenue at Mr Chan’s cinema. (6 marks)
(c) Explain with the aid of a diagram how the ‘buy tickets, get free drinks’ promotion scheme has affected
the attendance rate and the total revenue at Mr Chan’s cinema. (5 marks

Q36
Between 1998 and mid 2003, property prices have been falling in Hong Kong. At the same time, the
number of monthly property transactions has decreased.
(a) Explain with the aid of a diagram how the expectation of falling property prices may lead to the above
phenomenon and its effect on the total revenue of property developers in Hong Kong. (7 marks)
(b) Explain with the aid of a diagram how the phenomenon in (a) will affect the equilibrium price, the
quantity transacted and the total revenue of legal services in Hong Kong. (6 marks)
Q37
It has been reported that Hong Kong’s unemployment situation is improving. People believe that this
signals a broad-based economic recovery.
(a) Explain with the aid of a diagram how the above situations will affect the demand for consumer goods.
(3 marks)
(b) Explain with the aid of a diagram how the above situations will affect the supply of consumer goods.
(3 marks)
(c) Explain how the answers in (a) and (b) will affect the total revenue of consumer goods producers in
Hong Kong. (4 marks)
Q38
The KCRC is building a railway connecting Lok Ma Chau and Sheung Shui.
(a) How will this affect the prices of property in Lok Ma Chau? Explain with the aid of a diagram. (4
marks)
(b) Suppose the KCRC is permitted to import construction workers from the mainland of China to
complete the railway before the target date. How will the construction of the railway and the
importation of construction workers affect the wage rate of construction workers in Hong Kong?
Explain with the aid of a diagram.
(8 marks)
Q39
The MTRC is negotiating with the government to build the South Island Line and the West Island Line.
(a) Explain with the aid of a diagram how this will affect property prices in Western district. (4 marks)
(b) Suppose the MTRC is not permitted to import construction workers from the mainland of China.
Explain with the aid of a diagram how the building of the South Island Line and the West Island Line
will affect the wage rate and the employment of construction workers in Hong Kong. (5 marks)

Q40
During an economic downturn, the problem of unemployment has become more serious among unskilled
workers. Most are prepared to work in restaurants. However, the number of workers employed in
restaurants has recently decreased.
(a) What is the relationship between the demand for restaurant services and restaurant workers? (2 marks)
(b) With the aid of a diagram, explain why the number of workers in restaurants has fallen. (5 marks)
* (c) Despite the serious unemployment problem, a restaurant owner welcomes this change.
The restaurant owner says, ‘This brings benefits to consumers as food prices are lower.’
In light of your answer in part (b), explain with the aid of a diagram why the statement made by the
restaurant owner is correct. (5 marks)

Q41
In recent years, many doctors have resigned from public hospitals and started their own clinics. A study
revealed that as a result of this the workload at public hospitals has remained more or less the same while
the quality of public medical services declines.
(a) What is the relationship between the demand for medical services and the demand for doctors? (2
marks)
(b) Explain why the quality of public medical services is declining. (4 marks)
* (c) A private doctor says, ‘Despite the decline in the quality of public medical services, this benefits
patients by reducing the price of private out-patient services.’ In light of your answer in (b), explain
with the aid of a diagram why the statement made by the private doctor is correct. (5 marks)

Q42
In recent years, the number of tourists visiting Hong Kong from the mainland of China has been increasing.
It has been reported that tourists from the mainland of China are very concerned about the quality of goods.
They are willing to pay higher prices for quality goods.
(a) How will the increasing number of tourists from the mainland of China affect the total revenue of
retailers in the mainland of China? (5 marks)
(b) How will the above affect the rental rates of shop premises in the mainland of China? (5 marks)
(c) To improve Hong Kong’s international image, the government is devoted to combating the problem of
dishonest retailers. Explain whether this could effectively increase the total revenue of retailers in
Hong Kong. (6 marks)
* (d)Owing to recent disputes on textile products between the mainland of China and the European Union,
a lot of textile products have been shipped back to the mainland. Explain how this will affect the total
revenue of textile producers in Hong Kong. (4 marks)

Price elasticity of demand and supply

Q43
(a) What does the price elasticity of demand measure? (2 marks)
(b) Mary said, ‘I like reading very much. Even if the prices of books double, I will still spend the same
amount on them.’
What is Mary’s price elasticity of demand for books? Explain. (4 marks)

Q44
(a) What is a unitarily elastic demand? (2 marks)
(b) The following table is about Ming’s demand for bananas:
Price ($) 1 2 3 4 5 6
Quantity demanded (units) 6 5 4 3 2 1
Explain Ming’s price elasticity of demand for bananas. (6 marks)

Q45
The following table is about Alice’s demand for milk and rice:

Change in price Change in quantity demanded

Milk 10% 30%
Rice 20% 2%
(a) For which good does Alice have a higher price elasticity of demand? Show your steps. (3 marks)
(b) Suggest one reason to explain your answer in (a). (2 marks)

Q46
Suppose that MTR fares are fixed initially. With improvements in bus services (e.g., the introduction of air-
conditioned buses, installation of televisions and more comfortable seats), the MTRC finds that its total
revenue is falling.
(a) Explain why the revenue for the MTRC is falling with the aid of a diagram. (4 marks)
(b) To increase its revenue, the directors of the MTRC decided to raise MTR fares, but the total revenue
has turned out to be lower than before. Explain why this happened with the help of a well-labelled
diagram.
(4 marks)
Q47
Recently, owing to the discovery of bloodworms (紅蟲) at public swimming pools , several public swimming
pools have been temporarily closed for sterilisation and cleaning.
(a) Suppose the admission fee at public swimming pools is fixed. Explain how the discovery of
bloodworms will affect the total revenue of public swimming pools. (4 marks)
(b) In order to improve the service quality at public swimming pools, the government decides to raise the
requirements for lifeguards. The spokesperson for a lifeguard organisation said that the policy can
benefit lifeguards as a whole. Explain with the aid of a diagram why the spokesperson is correct.
 (Assume that the wage rate of lifeguards is determined by demand and supply.) (6 marks)

Q48
Recently, a price war between two big supermarkets in Hong Kong has broken out. The following is a
conversation between the managers of one of the supermarkets.
Manager A: ‘A cut in prices will cause a drop in our total revenue.’
Manager B: ‘But our total revenue will decrease if we don’t cut prices as the other supermarket has!’
Explain the situations in which the statement by each manager is correct with the help of separate diagrams.
(7 marks)

Q49
Recently, Sing Tao News Corporation launched Hong Kong’s second free newspaper, and this has been
criticised by the newspaper publishing industry. Some people from the newspaper industry point out that
free newspapers will drive out some traditional newspapers which have limited capital.
Explain with the aid of a diagram if the above statement is related to the price elasticity of supply of
traditional newspapers. (6 marks)

Q50
Although the price of chocolates and potato chips has increased, the revenue from chocolates increases but
the revenue from potato chips decreases. Explain with the aid of a diagram this phenomenon with the tool
of price elasticity of demand. (8 marks)

Q51
When both the wage rate and the rental rate increase, a firm’s total labour cost decreases but the total rental
cost increases. Explain the phenomenon with the concept of price elasticity of demand. (8 marks)

Q52
The longan (龍眼) harvest is good this year and its price decreases sharply. Suppose the demand for longan is
inelastic.
(a) Explain with the aid of a diagram the change in consumers’ total expenditure. (5 marks)
(b) Explain the change in the price of dried longan. (3 marks)

Q53
The price of vegetables has increased sharply due to bad weather. Suppose the
demand for vegetables is elastic.
(a) Explain how this will affect the income of vegetable farmers. (3 marks)
(b) Explain how this will affect the price of meat. (3 marks)

Q54
The business of Mr Wong’s restaurant is so bad that there are many vacant seats. He then promotes his shop
by providing free bird’s nest to customers. He discovers that a long queue forms outside his restaurant at
meal time.
(a) Explain why this happens with a well-labelled diagram. (4 marks)
(b) In order to compensate for his expenditure by providing free bird’s nest, Mr Wong increases the price of
 the food and finds the queue outside the shop shorter. Will he be successful in raising his total revenue?
Explain with the aid of a diagram. (5 marks)

Q55
The number of people applying for tutorial classes at a tutorial school has increased drastically after the
launching of a promotion emphasising tutorial classes taught by ‘famous teachers’. The number of
applicants has also exceeded the limit set by the government.
(a) Explain the above phenomenon with the aid of a diagram. (5 marks)
(b) In order to reduce the financial burden of students and their parents, the tutorial school reduces its
tuition fee. Explain with the aid of a diagram how its total revenue will change. (3 marks)

Q56
Suppose the public’s income has greatly decreased; at the same time, Dr Chan and Dr Lee find that there
are no more patients queuing outside their clinic and they now have to wait a longer time before the next
patient comes.
(a) Explain why this happens with a well-labelled diagram. (5 marks)
(b) To attract more patients, they lowered their price for general consultation (普通科門診). However, their
total revenue has decreased. Explain why. (4 marks)

Q57
In recent years, Hong Kong people have become fond of reading books. The number of people visiting the
Hong Kong Book Fair has increased year by year.
(a) Explain with the aid of a diagram how the above situation will affect the total revenue of publishers. (6
marks)
(b) In order to increase readership, a publisher launches a ‘buy books, get roasted geese’ promotion
campaign. Explain whether this campaign can raise the publisher’s total revenue. (3 marks)

Q58
Karen is the owner of a boutique. To increase the total revenue, Karen lowers the prices of her products.
Knowing this, the nearby boutiques also lower the price of their products.
Will Karen’s total revenue increase in this situation? Explain. (5
marks)

Q59
Business at Fun’s fruit juice shop has been so bad that she has been suffering losses for a long time. In
order to improve the situation, she has decided to adjust prices. Explain whether Fun can increase income
by adjusting prices only under the following situations.
(a) The price elasticity of demand for fruit juices is equal to one. (3 marks)
(b) The price elasticity of demand for fruit juices is equal to two. (3 marks)

Q60
(a) What does the price elasticity of supply measure? (2 marks)
* (b)Is the price elasticity of supply the same as the slope of the supply curve? Explain with an example.
(4 marks)
Q61
(a) What is unitarily elastic supply? (2 marks)
* (b) The following table concerns Ming’s supply of bananas.
Price ($) 1 2 3 4 5 6
Quantity supplied (units) 10 20 30 40 50 60
Explain Ming’s price elasticity of supply of bananas. (2 marks)

Q62
Study the following table.

Change in price Change in quantity transacted

Good A +100% +30%
Good B +100% -30%
Suppose the above changes are caused either by a change in demand or a change in supply. Find and
explain the price elasticity of demand or supply for Good A and Good B. (6 marks)

Q63
Newspaper A cuts its price by $1 in order to attract more customers. Suppose the prices of other
newspapers remain unchanged. Explain the following phenomenon with separated well-labelled diagrams:
(a) the total revenue of Newspaper A which cuts its price increases; and (6 marks)
(b) the total revenues of other newspapers drop. (6 marks)

Q64
The total revenue at Magazine Company A increases when it raises its price in response to an increase in
costs. However, Magazine Company B, which follows and raises its price, suffers a drastic decrease in total
revenue. Explain the above phenomena with separate diagrams. (12 marks)

Q65
After the disastrous tsunami in Southern Asia, the number of visitors to Thailand decreased sharply.
(a) Explain with a well-labelled diagram why there was a sharp decrease in the number of visitors to
Thailand.
(4 marks)
(b) Explain why there was an increase in the demand for travel insurance after the tsunami. (4 marks)
(c) What would the changes be in the quantities transacted, the equilibrium prices and the total revenues of
the following companies after the tsunami?
(i) a travel agency (5 marks)
* (ii) an airline company (5 marks)
(d) A person in Hong Kong said he would travel to Thailand as frequently as he did before the tsunami.
What is his price elasticity of demand for travel in Thailand? Explain with the aid of a diagram. (4
marks)

Q66
After the terrorist attacks in London, the number of public transport passengers decreased drastically.
(a) Explain with the aid of a diagram why the total revenue of public transport providers decreases due to
the terrorist attacks even when the fare is fixed. (4 marks)
(b) What will be the effect of the terrorist attacks on the following producers?
(i) Travel agencies specialising in tours to Britain; (2 marks)
(ii) Firms producing bomb-detecting equipment (2 marks)
(c) A British government official said that he would not avoid using public transport after the terrorist
attacks. Explain this official’s price elasticity of demand for public transport. (3 marks)
Q67
Assume that the coffee price of Café X is fixed initially. After the opening of Café Y, the total revenue of
Café X decreases sharply.
(a) Explain how the opening of Café Y affects the revenue of Café X. (3 marks)
(b) After increasing the coffee price, Café X finds that its revenue has decreased. Explain this phenomenon
with the aid of a diagram. (5 marks)
(c) Suppose the demand for Café Y’s coffee is elastic. In each of the following cases, explain, with
diagrams, how the equilibrium price, quantity transacted and total revenue of Café Y’s coffee will be
affected.
(i) Café X increases the price of its coffee. (7 marks)
(ii) The price of coffee beans increases sharply. (8 marks)
(d) Suppose Café Y plans to seek out more coffee bean sources. Explain how this plan will affect the price
elasticity of supply of Café Y’s coffee. (2 marks)
Q68
Suppose the prices of lemons and lemon tea and the total revenue of a restaurant increase drastically after a
report is published stating that drinking lemon tea can help prevent cancer.
(a) Explain how will this affect the restaurant’s total revenue. (5 marks)
(b) Suppose the demand for lemon tea is elastic. Explain how the following situations will affect the sales
of lemon tea:
(i) The harvest of lemons is good; (4 marks)
(ii) The harvest of tea is bad. (4 marks)

Q69
In recent years, more and more Hong Kong people have gone to Shenzhen to shop on weekends. It has
been reported that the prices of goods are lower in Shenzhen.
(a) The sales revenue of retailers in the northern New Territories, such as Sheung Shui and Fanling, has
greatly decreased over the same period.
(i) Explain with the aid of a diagram why this has happened. (3 marks)
(ii) What is the impact on the equilibrium rental rate of the shops in the area and the total rental
income from them? (4 marks)
(b) In order to compete with retailers in Shenzhen, retailers in Hong Kong have lowered the price of their
goods. Explain with the aid of a diagram under what conditions their attempt to raise total revenue will
be successful. (4 marks)
*(c) Many people propose imposing a departure tax as a solution. Suppose every person leaving Hong
Kong by land had to pay a departure tax of $20.
Assume consumers consider only the total expenditure of the goods they may purchase in Shenzhen
plus the departure tax and that of the same goods in Hong Kong. Explain why the departure tax will
not be successful in raising the sales revenue of retailers in Hong Kong. (4 marks)

Q70
In recent years, more and more Hong Kong people have gone to Shenzhen to shop on weekends. It has
been reported that the prices of goods are lower in Shenzhen.
(a) The sales revenue of retailers in the northern New Territories, such as Sheung Shui and Fanling, has
greatly decreased over the same period.
(i) Explain with the aid of a diagram why this has happened. (3 marks)
(ii) What is the impact on the equilibrium rental rate of the shops in the area and the total rental
income from them? (4 marks)
(b) In order to compete with retailers in Shenzhen, retailers in Hong Kong have lowered the price of their
goods. Explain with the aid of a diagram under what conditions their attempt to raise total revenue will
be successful. (4 marks)
(c) Many people propose imposing a departure tax as a solution. Suppose every person leaving Hong
Kong by land had to pay a departure tax of $20.
(i) What will be the effect of the departure tax on the demand for goods in Shenzhen? (1 mark)
(ii) What will be the effects of the departure tax on the price and the quantity transacted of goods in
Shenzhen? Answer with the aid of a diagram. (4 marks)

Q71
In recent years, more and more parents have let their children join overseas study tours during the summer
holidays. Some parents have even said that the quality of education and the educational system abroad are
far better than that in Hong Kong. They therefore suggest that the government privatise education in Hong
Kong.
(a) The number of participants in summer activities in Hong Kong falls drastically.
 (i) Suppose the price of those summer activities is fixed. Explain the above phenomenon with the aid
of a diagram. (3 marks)
(ii) Explain how this will affect the total revenue for organisers of summer activities in Hong Kong. (2
marks)
(b) Several travel agencies in Hong Kong plan to increase the price of study tours. Explain under what
situation(s) they can increase their total revenue by increasing prices. (6 marks)

Q72
Pizza Hut and Spaghetti House are two chain restaurants selling Italian dishes in Hong Kong. Suppose
Hong Kong has suffered from an economic downturn and the total revenue for Pizza Hut fell.
(a) (i) Suppose the prices at Pizza Hut remain unchanged initially. Explain why its total revenue has
fallen.
(3 marks)
(ii) In order to attract more customers, Pizza Hut later cuts its food prices (e.g. the lower-price set
meals). But the sales manager still finds the sales revenue lower than the period before the
economic downturn. Explain with a well-labelled diagram why this happened. (6 marks)
(b) (i) After Pizza Hut cuts its food prices, the Spaghetti House also experiences a decrease in its sales
revenue. Explain with a diagram. (4 marks)
(ii) Suppose the sales manager of Spaghetti House cuts the prices of its food. Will he be successful in
raising total revenue for his company? Explain with the aid of a diagram. (5 marks)

Q73
Recently, several pay TV operators have entered the market for pay TV in Hong Kong. They have offered
various promotional packages to attract customers.
(a) Suppose the fee for Cable TV services remains unchanged. Explain how the above phenomenon will
affect its total revenue. (4 marks)
(b) Suppose that Cable TV plans to integrate with TVB to produce and provide more TV programmes in
order to raise competitiveness. Explain under what situation(s) the total expenditure on pay TV
services in Hong Kong will increase. (7 marks)

Q74
Suppose the government has decided to reduce the supply of public housing permanently in the future. This
will be achieved by a reduction of the supply in public rental housing and Home Ownership Scheme (HOS)
(居者有其屋計劃) flats.
(a) (i) What will be the immediate effect of this policy on the demand for private housing units? (3 marks)
(ii) Assume the supply of private housing is fixed. What are the immediate effects on the equilibrium
price, the quantity transacted and the total revenue from private housing units? Explain with the
aid of a diagram. (4 marks)
(b) Suppose the government sells some newly built HOS flats. What will be the change in your answer in
(a)(ii)?
Explain with the aid of a diagram. (5 marks)
(c) Suppose the government converts the newly completed HOS flats into public rental housing instead. It
also increases the amount of housing loans to the public.
(i) What will be the change in your answer in (a)(ii)? Explain. (5 marks)
* (ii) What will be the effect on the number of people who are waiting for public rental housing?
Explain.
(5 marks)

Q75
Suppose the government decides to reclaim the whole of Victoria Harbour to build more housing units to
resolve Hong Kong’s housing problems.
(a) (i) What are the immediate effects of this policy? (4 marks)
(ii) Explain with the aid of a diagram the immediate effects of this policy on the total revenue of
private developers. (6 marks)
(b) Suppose the government sets the rental rate of public housing units according to demand and supply.
 Apart from the reclamation of Victoria Harbour, the government also decides to reclaim Victoria Peak
to provide more public housing units. Explain under what situation(s) this policy will lead to an
increase in the government’s rental income. (8 marks)
(c) Apart from your answer in (b), suggest a method the government can use to increase rental income. (2
marks)

Q76
In recent years, the number of people using Bluetooth mobile phones (具備藍芽功能的流動電話) has been
increasing.
(a) Explain how this will affect the total revenue of non-Bluetooth mobile phone producers. (7 marks)
(b) Suppose the cost of producing Bluetooth mobile phones increases.
(i) Explain with the aid of a diagram how this will affect the total revenue of non-Bluetooth mobile
phone producers. (6 marks)
(ii) Explain how this will affect the total revenue of Bluetooth mobile phone producers. (6 marks)
(c) Must the demand for mobile phones increase with income? (3 marks)

Price controls, quotas, taxes and subsidies

Q77
Study the following demand and supply schedules of a good.
Unit price ($) Quantity demanded (units) Quantity supplied (units)
70 10 22
60 14 20
50 18 18
40 22 16
30 26 14
(a) What is a price ceiling? (2 marks)
(b) If the government imposes a price ceiling of $60, find and explain the market price and quantity
transacted.
(4 marks)

Q78
Since the price of private housing is higher than the equilibrium price, there are vacant flats in the private
housing market. Suppose the price of private housing remains unchanged. Explain with the aid of a
diagram how the improvement in the quality of Home Ownership Scheme flats will affect the number of
vacant private flats.
(6 marks)
Q79
Study rooms in public libraries are provided to students for free. Yet the number of seats is fixed. Explain
with the aid of a diagram why long queues are found outside the study rooms. (4 marks)

Q80
An economist says, ‘If the wage rate is fixed, unemployment will be worse when there is an economic
downturn.’
(a) Explain this statement with the aid of a diagram. (4 marks)
(b) Draw another diagram to explain how the development of the West Kowloon Cultural District would
help reduce unemployment. (4 marks)

Q81
Kenneth is hired as a teacher in a government school after graduation. Yet most of Kenneth’s former
classmates who have searched for teaching posts in government schools have been unsuccessful.
(a) Explain why this happens with a well-labelled diagram. (5 marks)
(b) One of his former classmates says to Kenneth, ‘If the government lowers the wage rate of teachers, I
will have a better chance of getting a teaching post.’
Is he correct? Explain with the aid of a diagram. (5 marks)

Q82
Suppose after the introduction of superstores, the rental of stalls in the markets of public estates remains
unchanged. Later, the Housing Authority finds that the vacancy rate of the stalls has increased.
(a) Explain this phenomenon with a well-labelled diagram. (5 marks)
(b) In order to increase the total rental income from the stalls in markets, the Housing Authority lowers the
rental of the stalls. However, the total rental income has instead decreased. Explain with the aid of a
diagram why this happens. (4 marks)

Q83
* Suppose after incinerators are built, the rental of flats in a private housing estate drops drastically while
the vacancy rate remains at zero. On the other hand, the rental of flats in a public housing estate remains
unchanged while the vacancy rate increases.
Suppose the rentals of flats in private housing estates and public housing estates are uniform. Explain the
above phenomena with separate diagrams. (20 marks)

Q84
Suppose the government imposes a price floor on automobiles. Explain with the aid of a diagram how the
provision of a subsidy will affect the quantity transacted of automobiles. (7 marks)

Q85
Explain with the aid of a diagram the effects of the abolition of an effective quota on the market price,
quantity transacted and the total revenue of the sellers. (6 marks)

Q86
Explain the effects of the abolition of an effective import quota on the market price, quantity transacted and
total revenue of domestic producers. (5 marks)

Q87
Study the following information regarding the imported bananas of a country:
Unit price ($) 1 2 3 4 5 6
Quantity supplied (units) - before the policy 100 200 300 400 500 600
Quantity supplied (units) - after the policy 100 200 300 300 300 300

* (a) Name and explain the government policy exhibited in the above data. (4 marks)
(b) Suppose the country’s demand for imported bananas is inelastic and the policy effective. Explain how
the policy will affect the total value of bananas imported. (6 marks)

Q88
Study the following information regarding the market for imported cigarettes.
Unit price ($) 30 31 32 33 34 35 36 37
Quantity demanded (units) 20 18 16 14 12 10 8 6
Quantity supplied (units) 1 2 4 6 8 10 12 14

Assume currently there is a per-unit sales tax of $2 on cigarettes. If the government removes the sales tax,
calculate:
(a) the loss in tax revenue collected by the government. (3 marks)
(b) the change in importers’ net revenue. (3 marks)

Q89
* Study the following table.
Quantity demanded of bananas Quantity supplied of bananas
Unit price of bananas ($)
(units) (units)
6 102 186
5 114 142
4 128 128
3 142 114
2 186 102
(a) What is a sales tax? (2 marks)
(b) Suppose the government imposes a $2 per-unit sales tax on banana producers. Explain in detail how
will this affect the market price and quantity transacted of bananas. (10 marks)

Q90
(a) What is price elasticity of demand? (2 marks)
(b) Give one example to illustrate that inelastic demand does not necessarily imply a smaller share of the
tax burden for producers. Explain with the aid of a diagram. (4 marks)

Q91
(a) What is price elasticity of supply? (2 marks)
(b) Must the seller’s tax burden be smaller than the consumer’s tax burden if the price elasticity of supply
is greater than one? (4 marks)

Q92
* A government economist said, ‘In order to reduce the fiscal deficit (財政赤字), we have to increase taxes. We
have to impose the tax only on those goods with a small price elasticity of demand or price elasticity of
supply to minimise any reduction in the trade volume.’
Do you agree with him? Explain with the aid of two separate diagrams. (8 marks)

Q93
Although the government heavily subsidises the production of Good A, consumers still complain that the
price remains high and that their benefits from the subsidies are very small. Explain this phenomenon with
a well-labelled diagram. (6 marks)

Q94
* Ming said, ‘Even though a government official claims that the government has already provided a
production subsidy to a service provider, the quantity supplied of the service has not increased and the price
of the service has not decreased.’ Explain the above phenomenon with the aid of a diagram. (6 marks)

Q95
There are three cross-harbour tunnels in Hong Kong. They are the Cross-Harbour Tunnel, the Western
Harbour Crossing and the Eastern Harbour Crossing. Suppose the government plans to construct a fourth
cross-harbour tunnel.
(a) The Cross-Harbour Tunnel is always very congested. Explain why traffic congestion would increase
the cost of using the Cross-Harbour Tunnel. (4 marks)
(b) Draw a diagram to explain why the utilisation rate of the Western Harbour Crossing is far below its
maximum capacity. (4 marks)
(c) Suppose the utilisation rate of the Eastern Harbour Crossing is at equilibrium. Draw a diagram to
explain how the reduction in the toll for the Eastern Harbour Crossing will affect its total revenue. (6
marks)

Q96
* In Country A, before the opening of ABC Park, there was only one amusement park. The maximum
number of people the amusement park can serve is 100,000 people per day.
(a) Explain with the aid of a diagram why queues are usually found outside the amusement park. (6 marks)
(b) Explain why the opening of ABC Park can help improve the situation mentioned in (a). (3 marks)
(c) Explain why an extension of the amusement park can help improve the situation mentioned in (a). (6
marks)

Q97
The 2004 Olympic Games were held in Athens.
(a) Because of the Olympic Games, many visitors went to the city and found that the rental rate of hotel
accommodation had increased significantly. How does this affect the quantity transacted and total
rental income from hotel accommodation in Athens? (4 marks)
(b) However, it was reported that there were still some unsold tickets for the closing ceremony two weeks
before the ceremony.
(i) Explain the phenomenon with the aid of a diagram. (4 marks)
(ii) An official of the Olympic Games said, ‘We could have increased our total income from the sale
of the tickets if the price had been lowered to a level where all tickets were sold.’
Is he correct? Explain. (5 marks)

Q98
Hong Kong is going to host the 6th Ministerial Conference of the World Trade Organization in 2005. A lot
of people are expected to visit Hong Kong during that period. This will lead to a drastic increase in the
demand for hotel accommodation in Hong Kong.
(a) Suppose the market for hotel accommodation in Hong Kong is originally in equilibrium and the rental
rate of hotel accommodation is fixed. Explain with the aid of a diagram how the holding of the
conference will affect the total revenue of hotels in Hong Kong. (8 marks)
* (b) Suppose it has been reported that terrorists are planning to launch attacks in Hong Kong during the
conference.
(i) Explain with the aid of a diagram why this will cause room vacancies. (7 marks)
(ii) Ming said, ‘There will not be any vacant rooms if the rental rate is determined by market demand
and supply.’ Do you agree with him? Explain. (6 marks)

Q99
Suppose in view of an economic downturn, the government announced the suspension of the sale of flats
under the Home Ownership Scheme (HOS) for one year. Private property developers said that the
suspension of the sale would help stabilise property prices in Hong Kong.
(a) Explain with the aid of a diagram why there were a lot of unsold flats built by private housing
developers at prices set by them. (3 marks)
(b) A business analyst said, ‘Private property developers can increase their sales revenue by lowering the
prices of their flats.’
 Do you agree with him? Explain. (5 marks)
* (c) However, it turns out that property prices in Hong Kong continued to decrease after the
announcement. Explain why the above policy failed to stabilise property prices. (6 marks)

Q100
Suppose in view of an economic downturn, the government announced the suspension of the sale of flats
under the Home Ownership Scheme (HOS) for one year. Private property developers said that the
suspension of the sale would help stabilise property prices in Hong Kong.
(a) Explain with the aid of a diagram why there were a lot of unsold flats built by private housing
developers at prices set by them. (3 marks)
(b) A business analyst said, ‘Private property developers can increase their sales revenue by lowering the
prices of their flats.’
Do you agree with him? Explain. (5 marks)
(c) Suppose people expect the supply of housing units to increase in the near future. What will the effect
of this expectation be on the price of property now? (5 marks)

Q101
* Suppose the government announces that it will set the rental rate of public rental housing units according
to market demand and supply.
(a) Explain with the aid of a diagram why the government’s rental income will increase. (6 marks)
(b) Explain with the aid of a diagram why the private developers’ rental income will also increase. (8
marks)

Q102
Suppose the public’s income has been falling in recent years. Many people believe that there are more than
enough taxis on the road to satisfy the demand for taxi services. Evidence often cited is the phenomenon
that there are many taxi drivers waiting for passengers all over Hong Kong.
(a) Explain with the aid of a diagram why there are many taxi drivers waiting for passengers. (6 marks)
(b) Some taxi drivers want to lower their fares to increase their sales revenue. Explain with a diagram
under what conditions their revenue will increase. (5 marks)
(c) Suppose the taxi fare remains unchanged and the government reduces the per-unit gasoline tax to ease
the financial burden on taxi drivers. Explain what will happen to the quantity transacted and the total
income of taxi drivers. (5 marks)

Q103
In recent years, people’s income has been increasing. Queues are found outside boutiques selling
international fashion brands.
Suppose the price is fixed. Explain the relationship between the increase in income and the queues with the
aid of a diagram. (10 marks)

Q104
Suppose the public’s income has been falling in recent years and some people have urged the government
to lower the effective minimum wage rate of foreign domestic helpers.
(a) Explain the effect of the proposed reduction of the minimum wage rate on the total income of foreign
domestic helpers as a whole. (5 marks)
(b) What are the combined effects of the decline in the public’s income and the fall in the minimum wage
rate on the employment and the total income of foreign domestic helpers? (7 marks)
(c) Suppose the government rejects the proposal to lower the minimum wage rate of foreign domestic
helpers. On the other hand, local domestic helpers have agreed to a lower wage rate for their services.
(i) In what kind of demand are foreign domestic helpers and local domestic helpers? (2 marks)
(ii) What are the effects of the fall in the wage rate of local domestic helpers on the employment and
the total income of foreign domestic helpers? (5 marks)
(d) To solve the problem of the high unemployment rate among unskilled workers, a government official
suggests retraining unskilled female workers to become local domestic helpers. What is the effect of
the retraining programme on the wage rate, employment and the total income of local domestic
 helpers? Explain.
(5 marks)

Q105
The following table shows the market demand and supply schedules for imported Japanese televisions.
Unit price ($) Quantity demanded (units) Quantity supplied (units)
5,000 700 100
6,000 600 200
7,000 500 300
8,000 400 400
9,000 300 500
10,000 200 600
(a) Find the equilibrium price and the quantity transacted. (2 marks)
(b) Suppose the government imposes a per-unit sales tax of $2,000 on imported Japanese televisions.
(i) Find the new equilibrium price and the quantity transacted. (2 marks)
(ii) Show with the aid of a well-labelled diagram how the tax burden is distributed between consumers
and sellers. (4 marks)
(iii) Calculate the tax burdens on consumers and sellers. Is the price elasticity of demand larger than or
smaller than the price elasticity of supply? Explain. (6 marks)
(iv) Calculate the change in the total revenue (sales tax included) after the imposition of the sales tax.
(2 marks)
(v) Calculate the arc elasticity of demand between the initial equilibrium price and the new
equilibrium price. Suggest one reason that accounts for the price elasticity of demand between the
initial and new prices. (4 marks)
*(vi) Based on your answers in (b)(iv) and (v), explain with the aid of a diagram the relationship
between the change in total revenue (sales tax included) and the price elasticity of demand. (5
marks)

Q106
Country A has imposed a $10 per-unit tariff on goods imported from Country B. However, the volume of
imports did not fall.
(a) Explain the above phenomenon with the aid of a diagram. (8 marks)
(b) An economics teacher said, ‘Under the situation mentioned in (a), the government can increase its tax
revenue by increasing the tariff rate.’
Do you agree? Explain. (3 marks)
* (c) What other measures can the government use to restrict imports more effectively? State and explain
one of them. (6 marks)
Q107
An economist says, ‘If the government removes the subsidies for education, the total education expenditure
of parents on their children will increase.’
(a) Based on this, draw a diagram to explain the price elasticity of demand for children’s education. (6
marks)
(b) Draw another diagram to explain how the removal of the education subsidy will affect the price of
school books. (6 marks)

Q108
* A Chinese fruit grower says, ‘The removal of tariffs imposed by the Chinese government on fruit
imported from Taiwan will cause the total revenue of fruit growers in China to fall.’
Explain the statement made by the fruit grower with the aid of a diagram. How can the Chinese government
compensate the fruit growers for the loss in revenue by providing a per-unit subsidy? (15 marks)

Q109
* The following table shows the market demand and supply schedules for Ganoderma Spore (靈芝孢子).
Unit price ($) Quantity demanded (units) Quantity supplied (units)
10,000 100,000 60,000
 20,000 90,000 70,000
30,000 80,000 80,000
40,000 70,000 90,000
50,000 60,000 100,000
(a) Find the market clearing price and quantity transacted. (2 marks)
(b) Suppose the government provides a $20,000 per-unit subsidy to producers of Ganoderma Spore.
(i) Find the new market clearing price and quantity transacted. (2 marks)
(ii) Explain with the aid of a diagram how the subsidy is shared between consumers and producers. (6
marks)
(iii) Based on the shares of the subsidy calculated above, can we know whether the price elasticity of
demand or the price elasticity of supply is higher? (5 marks)
(iv) Calculate the total revenue of producers (including the subsidy) after the provision of the subsidy.
(3 marks)