NSS EXPLORING ECONOMICS

HONG KONG DIPLOMA OF SECONDARY EDUCATION EXAMINATION

MOCK PAPER (2022 March)

ECONOMICS PAPER 2
Time allowed: 2 hours and 30 minutes

This paper must be answered in English.

INSTRUCTIONS

1. 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.

2. Write your answers in the spaces provided. DO NOT write in the margins. Answers
written in the margins will not be marked.

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Mock Paper (2022 March) (Paper 2)
Section A (44 marks)

1. Sony Company launched its new PlayStation 5 game console. Owing to the lack of stock,
buyers need to spend time to register online for the drawing of lots. Only buyers whose
names were picked can purchase the new game console at the official price.
a. If the resale value of the console decreases, explain whether the opportunity cost of
purchasing the new console online will change. (2 marks)
b. Johnny said, ‘Deciding who can buy the game console by drawing lots is not fair’.
Explain whether Johnny’s statement is positive. (2 marks)

2. The Golden Computer Arcade (黃金電腦商場) in Sham Shui Po is a well-known

computer product sales centre.
a. USB storage devices with the same capacity, speed and other technical specifications
have slightly different prices in different stores at the Golden Computer Arcade.
Explain with TWO reasons why there is such a price difference. (4 marks)
b. Using the concepts of opportunity cost and labour mobility, explain why the turnover
rate (流失率) of computer product salespersons is higher than that of doctors.
(3 marks)

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3. Due to the Covid-19 epidemic, medical masks have become an everyday necessity for
people.
a. Study the following newspaper abstract:

In the early days of the Covid-19 outbreak, some people paid $500 online to buy
a box of medical masks that originally costed $50.

Explain ONE function of price illustrated by the above newspaper abstract.

(2 marks)
b. What is the market structure of medical mask retail sales in Hong Kong? List TWO
features of such a market structure. (3 marks)

4. Figure 1 shows the market supply and demand curves of Good X. Suppose the
government reduces the price floor from Pa to Pb.

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 Figure 1
Unit price ($)

Pa

Pb

D
0 Quantity

With the aid of Figure 1, explain whether the above change in the price floor could
enhance economic efficiency. (6 marks)

5. To revive Hong Kong’s economy, the Financial Secretary announced a Consumption

Voucher Scheme in the 2021-22 Budget. Each eligible Hong Kong permanent resident
and new arrival aged 18 or above can receive a total of $5,000 in electronic consumer
vouchers. The measure is expected to involve a government expenditure of about $36
billion.
a. Maggie received an electronic consumption voucher of $5,000 under the
Consumption Voucher Scheme. Explain whether the $5,000 that Maggie received
should be included in Hong Kong’s GDP. (2 marks)
b. Without the use of any diagram, explain how the Consumption Voucher Scheme will

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 affect Hong Kong’s aggregate demand. (2 marks)

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6. Study the following balance sheet of the banking system in Economy X.

Assets ($million) Liabilities ($million)

Reserves 1,000 Deposits 5,000
Loans 4,000

Suppose the public always hold $300 million cash and the banking system does not hold
excess reserves.
a. Find the money supply in Economy X. (1 mark)
b. Suppose the central bank sells $500 million worth of government bonds to
commercial banks. Calculate the maximum possible change in money supply of
Economy X. Show your work. (3 marks)

7. Figure 2 shows the trend in the average change of consumer price indices for Economy
A’s trading partners:
Figure 2
Index

Year
0

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 With reference to Figure 2, with the aid of an AS-AD diagram to explain how the output
level of Economy A will change in the short run. (5 marks)

8. Suppose the outputs per unit of resources in Economy X and Economy Y are as follows:

Clothing (units) Phones (units)

Economy X 10 OR 4
Economy Y 3 OR 3

a. Which good would Economy X export according to the comparative advantage

principle? Explain. (3 marks)

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 b. Suppose Economy X and Economy Y trade at an exchange ratio of 10 units of
clothing to 9 units of phones. A transportation cost of 0.4 units of phones is required
in exchange for 1 unit of clothing, and the transport cost is equally shared by both
economies. Calculate the gain per unit of export of Economy X. Show your work.
(3 marks)

9. Suppose from 2021 to 2022, the price of toys exported to France from Hong Kong in
terms of Hong Kong dollars (HK$) remained unchanged. In the same period, the price of
wine exported to Hong Kong from France in terms of Euro dollars (euro) also remained
unchanged. However, there was a change in the exchange rate between the US dollar
(US$) and euro as follows:

Date Exchange rate

1/2/2021 1 euro = US$1.20
1/2/2022 1 euro = US$1.13
How would the above changes in the exchange rate affect the following items (a), (b)
and (c)? For each item, fill in the blank by selecting the correct answer from the options
below: (3 marks)

Increased Decreased Remained unchanged Uncertain

Item (In terms of HK$) Effect

a. The price of French wine exported to Hong Kong
b. The total value of French wine exported to Hong Kong
c. The total value of Hong Kong toys exported to France

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 END OF SECTION A
Section B (60 marks)

10. Crocodile Garments Limited (Hong Kong stock code: 0122) is a company mainly
engaged in the manufacture and sale of garments and clothing.
a. To what type of production does garments and clothing manufacturing belong?
(1 mark)
b. i. To what form of business ownership does Crocodile Garments Limited belong?
(1 mark)
ii. Explain ONE advantage and ONE disadvantage of the form of business ownership
in the answer of part (i) over a private limited company. (2 marks)
c. During clothing manufacturing, different employees perform different duties, such as
designing, cutting, dyeing, and sewing.
i. What economic principle is illustrated in the above arrangement? (1 mark)
ii. Give TWO reasons to explain why the application of this principle can increase
the labour productivity. (2 marks)

d. Mr Lam owns some shares of Crocodile Garments Limited, but he does not
participate in the management and operation of the company. To what kind of factors
of production does Mr Lam belong? Explain. (2 marks)
e. Suppose the company opens a new plant and expands its production scale
i. Explain with ONE reason why the average production cost of the company will
fall. (2 marks)
ii. For the expansion, the company has taken out a loan from a bank at a fixed
interest rate. Explain whether the company will gain or lose during unexpected
deflation. (3 marks)

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Mock Paper (2022 March) (Paper 2)
11. Microsoft Corporation is a US technology company whose business includes the
production and sales of home game console Xbox and video games, etc.
a. In early 2022, Microsoft acquired Activision Blizzard, a company specialising in
video game production.
i. Explain what kind of expansion this is for Microsoft. (2 marks)
ii. Explain ONE specific motive (i.e., motive that is not applicable to other types of
expansion) for the expansion in part (i). (2 marks)
b. Study the following financial news abstract:

Microsoft’s acquisition of Activision Blizzard is the largest ever acquisition in

the history of the video game industry. This is favourable for Activision
Blizzard’s game business and the development of the ‘metaverse’ (元宇宙). The
market responded to such an acquisition with a 25% rise in Activision Blizzard’s
stock price.

Without the use of any diagram, explain why the stock price of Activision Blizzard
increased after Microsoft’s acquisition of the company. (4 marks)
c. The following is an electronic cash coupon issued by Microsoft Corporation:

Microsoft Online Game Shop $100

The voucher can be used for $100 purchase in the Microsoft Online Game
Store
Promotion code: GHXYKD4514547852 Expiry date: 30/6/2022

Explain whether the above cash coupon is money in economics. (2 marks)

d. Explain how the following would affect the US’s balance of payments account:
i. Microsoft Corporation hires an Indian software engineer to work in the US for
6 months.
ii. Microsoft Corporation opens a video game production company in Shenzhen,
China. (6 marks)

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Mock Paper (2022 March) (Paper 2)
12. The financial situation of the Hong Kong SAR Government is a topic that is often a
matter of discussion.

Source A: An extract of the news reports on the 2021-22 Budget

The Financial Secretary announced the 2021-22 Budget on 24 February 2021.
The budget stated that the estimated total government revenue is $626.2 billion, while
the estimated total expenditure is $727.8 billion.

Source B: Hong Kong’s gross domestic product and government direct tax revenue
HK$ billion HK$ billion
250 3,000

2,500
200

2,000
150
1,500
100
1,000

50
500

11 12 13 14 15 16 17 18 19
-20 -20 -20 -20 -20 -20 -20 -20 -20
10 11 12 13 14 15 16 17 18
20 20 20 20 20 20 20 20 20

Source C: The measures announced by the government under the fifth round of the Anti-
epidemic Fund
In response to the epidemic, the government has decided to launch the fifth round of
the Anti-epidemic Fund by providing subsidies to premises and individuals directly
affected by the tightening of social distancing measures and industries which have not
seen any business revival since the onset of the pandemic. A total subsidy amount of
$3,570 million is involved.

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 Source D: An excerpt from the relief measures in the 2021-22 Budget
Provide an extra half-month allowance of the standard
CSSA payment, Old Age Allowance, Old Age
Living or Disability Allowance. Similar
arrangements will apply to the Working
Family Allowance and Individual-based Work
Incentive Transport Subsidy.

Source E: Opinions on the government policies to reduce fiscal deficit

The effects of different government policies on working incentive

s can be completely opposite. We need to carefully consider the e
A legislative Cou
ffect of each policy.
ncillor
In view of the current income inequality between the rich and the
poor, any policy that worsens income distribution will not be acce
A politician pted by the public.

There is uncertainty about the effect of adjusting the salaries tax r

ate on government treasury; on the contrary, the impact of the cut
A government
in social security allowance is more certain.
official

Many of my customers rely on social security allowance for their

livelihoods. If they are affected by government policies, I believe
A grocery store o
that I will also be affected.
wner

a. Refer to Source A. Explain whether the Hong Kong government has a surplus or a
deficit budget. (2 marks)
b. Refer to Source B.
i. Describe the relationship between Hong Kong’s GDP and direct tax revenue.
(2 marks)
ii. Explain the relationship in part (i). (2 marks)
c. Refer to Source C. With the aid of an AS-AD diagram, explain how the policy
mentioned in Source C will affect the short run aggregate output and the price level of
Hong Kong. (6 marks)
d. Refer to Source D. Explain how the policy mentioned in Source D can improve equity
in Hong Kong. (2 marks)

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Mock Paper (2022 March) (Paper 2)
 For part (e), students are required to present their answers in essay form. Criteria for
marking will include the use of sources and economic theories, relevant content,
logical presentation and clarity of expression.

e. Suppose there are two policy proposals to lessen the Hong Kong government’s fiscal
deficit problem:

Proposal I Raising the standard rate of salaries tax

Proposa II Reducing the amount of allowance under the Comprehensive Sec
urity Assistance Scheme (CSSA)

With reference to the above sources and your own knowledge in Economics, discuss
which proposal, proposal I or II, the following stakeholders would prefer:
 Councillors who are concerned about the labour supply in Hong Kong
 Politicians who are concerned about income distribution in Hong Kong
 Government economists who are concerned about government revenue and/or
expenditure
 ONE other stakeholder
(Hint: You may discuss the reasons why a stakeholder would prefer a certain proposal
OR why that stakeholder would not prefer the other proposal.) (14 marks)
f. Other than raising the direct tax rate and reducing the social security allowance,
suggest ONE proposal to lessen Hong Kong’s fiscal deficit. Briefly explain how your
proposal works. (2 marks)

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 END OF SECTION B
Section C (16 marks) Answer any ONE question.

13. Suppose there is only one cinema showing Disney movies in Hong Kong and the cinema
adopts uniform pricing.
Figure 3 shows the demand and marginal cost of Disney movie screenings.
Price ($) Figure 3

MC
1

D1
Quantity
0

a. Explain how the profit maximising output and prices at the cinema are determined.
Indicate the output and price as Q1 and P1, respectively, in Figure 3. (4 marks)
b. Suppose the technology significantly improves, so that only a fixed production cost
exists when showing Disney movies.
i. Indicate the new output and price as Q2 and P2, respectively, in Figure 3.
ii. Explain the effect of the above change on efficiency with the aid of Figure 3.
(5 marks)
c. Recently, Disney launched an online streaming platform Disney+. The following is
the subscription fee schedule set by Disney+ in Hong Kong:

Subscription period Fee

One month Monthly fee $73
One year Annual fee $738, i.e., monthly fee $61.5

Explain whether the above pricing method constitutes price discrimination. (3 marks)
d. Suppose Hong Kong Disney+ requires all subscribers to purchase at least two tickets
to Hong Kong Disneyland.

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 i. Which anti-competitive behaviour is Disney+ engaged in? (1 mark)
ii. Which conduct rule of the Competition Ordinance is this anti-competitive
behaviour suspected of violating? (1 mark)
iii. State TWO ways in which such kind of behaviour will harm consumers.
(2 marks)

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

45

40

35

30

25

20

15

10

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

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

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 Y.
b. With the aid of Figure 4, calculate the total gain from trade of Country A. (5 marks)
c. Indicate Country A’s export volume and import volume in Figure 4. (2 marks)

The world price of Good Y decreases continuously.

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

Suppose there is outbreak of disease in Country A. The Government decide to adopt a

city lockdown policy: banning external trade, and foreigners visiting and working in
Country A.

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 e. Give TWO reasons, explain why economic growth in Country A will worsen.
(4 marks)

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 END OF PAPER

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