2025 HKDSE Economics Answers & Marking Scheme

A tariff raises the domestic price of imported laptops, which also allows domestic producers to sell at this higher price. (1) Since the domestic price increases, consumer surplus decreases. (2) Due to the law of supply, domestic producers will increase their quantity supplied (domestic production). (3) Total revenue of domestic producers is price multiplied by quantity; since both price and quantity increase, total revenue must increase. Therefore, all (1), (2), and (3) are correct.

Award 1 mark for the correct option D.

M1 = Legal tender held by the public + demand deposits with licensed banks. M2 = M1 + savings and time deposits with licensed banks + negotiable certificates of deposit (NCDs) issued by licensed banks held by the public. When $50,000 is withdrawn from a savings deposit (originally in M2 but not M1): (1) Cash held by the public increases by $20,000, so M1 increases by $20,000. (2) For M2, the savings deposit in the licensed bank decreases by $50,000, while cash held by public increases by $20,000. The $30,000 time deposit in the restricted licence bank is part of M3, not M2. Thus, M2 changes by +$20,000 - $50,000 = -$30,000 (decreases by $30,000).

Award 1 mark for the correct option A.

Price discrimination refers to charging different prices for the same product that are not associated with cost differences. Therefore, cost differences (the average cost of serving tourists being higher than that of serving local residents) are NOT a condition for price discrimination. Market power, market segmentation (distinguishing groups), and prevention of resale are the three necessary conditions.

Award 1 mark for the correct option D.

Calculate the Marginal Product (MP) for each unit of labor: MP(1) = 10, MP(2) = 14, MP(3) = 15, MP(4) = 13, MP(5) = 10, MP(6) = 8. Since MP peaks at 15 (3rd unit) and begins to fall at the 4th unit (13 < 15), the law of diminishing marginal returns sets in at the 4th unit of labor.

Award 1 mark for the correct option C.

Under a price ceiling below equilibrium: (1) Price falls, so quantity demanded increases while quantity supplied is unchanged. This creates a shortage. (2) Since supply is perfectly inelastic (vertical line), the quantity supplied remains at the equilibrium level, so the quantity transacted remains unchanged. (3) Producers sell the same quantity at a lower price, which reduces the producer surplus. Therefore, all (1), (2), and (3) are correct.

Award 1 mark for the correct option D.

When $100,000 cash is deposited, the cash held by the public (Cp) decreases by $100,000. Under a 20% reserve ratio, the maximum deposit creation (D) is $100,000 * (1 / 0.20) = $500,000. The change in the money supply is the change in cash held by public plus the change in deposits: \Delta M = \Delta Cp + \Delta D = -$100,000 + $500,000 = +$400,000.

Award 1 mark for the correct option B.

Opportunity cost of studying = Value of next best alternative (forgone salary) + explicit cost (net tuition payment). Original opportunity cost = $250,000 + $100,000 = $350,000. New opportunity cost = $300,000 + ($100,000 - $20,000) = $380,000. Change in opportunity cost = $380,000 - $350,000 = +$30,000 (increases by $30,000).

Award 1 mark for the correct option B.

GDP by expenditure approach = C + I + G + (X - M). Here, C = 800; Gross Investment (I) = Gross domestic fixed capital formation + Changes in inventories = 250 + (-30) = 220; G = 150; Net Exports (X - M) = 400 - 450 = -50. GDP = 800 + 220 + 150 + (-50) = 1,120 million.

Award 1 mark for the correct option A.

Opportunity cost of 1 unit of B in Country X is 2 units of A (20A / 10B). Opportunity cost of 1 unit of B in Country Y is 1 unit of A (15A / 15B). Since Country Y has a lower opportunity cost in producing Good B, Country Y will export B and Country X will import B. The mutually beneficial terms of trade for 1 unit of Good B must lie between 1 unit of Good A and 2 units of Good A (1A < 1B < 2A). Option C (1B = 1.5A) lies within this range.

Award 1 mark for the correct option C.

When MC is below AVC, it pulls the average down, so (1) AVC must be decreasing. Since Average Total Cost (ATC) = AVC + Average Fixed Cost (AFC), and both AVC and AFC are decreasing (AFC always decreases with output), (2) ATC must also be decreasing. However, (3) MC does not have to be decreasing; MC can be increasing while still being lower than AVC (e.g., after MC reaches its minimum but before it cuts AVC). Thus, only (1) and (2) are correct.

Award 1 mark for the correct option A.

A tariff raises the domestic price of the imported good. This encourages domestic producers to expand production along the domestic supply curve, so the domestically produced quantity definitely increases. Total expenditure on imports may rise or fall depending on elasticity. Consumer surplus and total social surplus of the importing country will decrease.

Award 1 mark for the correct answer A. No fractional marks are given.

Initial money supply \(M = C + D\). When \(\$50\) million of cash is deposited: cash in public hands decreases by \(\$50\) million, so \(\Delta C = -\$50\) million. Maximum deposit creation is \(\Delta D = \$50 \text{ million} \times (1 / 0.2) = \$250\) million. Therefore, the maximum change in money supply is \(\Delta M = \Delta C + \Delta D = -\$50 \text{ million} + \$250 \text{ million} = +\$200\) million.

Award 1 mark for the correct answer B. No fractional marks are given.

Statement (1) is a necessary condition because pricing differences to maximize profit are based on elasticity differences. Statement (2) is a necessary condition because preventing resale is essential to separate markets and practice price discrimination. Statement (3) is incorrect because price discrimination refers to charging different prices for reasons other than cost differences; if the price difference is purely due to cost differences, it is not price discrimination.

Award 1 mark for the correct answer A. No fractional marks are given.

Calculate the marginal product (MP) of each labor unit: 1st unit MP = 10; 2nd unit MP = 15; 3rd unit MP = 17 (peak); 4th unit MP = 14; 5th unit MP = 9. Since MP begins to decline with the addition of the 4th unit of labor (from 17 to 14), the law of diminishing marginal returns begins to set in when the 4th unit of labor is employed.

Award 1 mark for the correct answer C. No fractional marks are given.

Opportunity cost of producing 1Y in Country A is 2X, and in Country B is 4X. Thus, Country A has a comparative advantage in Good Y and will export Good Y. Country B has a comparative advantage in Good X and will export Good X (A and B are incorrect). Since Country A's domestic opportunity cost of 1Y is 2X, and the terms of trade is 1Y = 3X, Country A will gain 3X - 2X = 1X for every unit of Y exported (C is correct). Country B's domestic cost of 1Y is 4X, and it imports 1Y by paying 3X, so it gains 4X - 3X = 1X for every unit of Y imported (D is incorrect).

Award 1 mark for the correct answer C. No fractional marks are given.

The price tag of $8,000 states the value of the laptop, demonstrating the unit of account function (2). The agreement to make the payment next month creates a credit obligation in money terms, demonstrating the standard of deferred payment function (3). Since no cash or transaction deposit is transferred instantly to settle the transaction (credit card is not money but a method of deferred payment), money is not acting as a medium of exchange (1) at the moment of the transaction.

Award 1 mark for the correct answer C. No fractional marks are given.

Under perfect price discrimination, the monopolist charges each consumer their maximum willingness to pay, completely extracting consumer surplus (so consumer surplus decreases to zero, making A incorrect). The output level increases to the point where Price equals Marginal Cost (allocative efficiency), meaning the deadweight loss is eliminated (C is correct, B is incorrect). In this case, the marginal revenue curve coincides with the demand curve, so MR = P for each unit sold (D is incorrect).

Award 1 mark for the correct answer C. No fractional marks are given.

Since all inputs are increased in the same proportion (100%), and output increases by a smaller proportion (80%), it shows decreasing returns to scale. The law of diminishing marginal returns is a short-run concept with at least one fixed factor. Economies of scale refers to falling long-run average cost, which is a cost concept rather than a physical input-output relationship.

Award 1 mark for the correct answer B. No fractional marks are given.

An import quota restricts import supply, pushing up the domestic price of the good. (1) As price rises, domestic quantity demanded (consumption) decreases along the demand curve. (2) As price rises, domestic firms increase their quantity supplied (production) along the domestic supply curve. (3) Since both domestic price (P) and domestic production quantity (Q) increase, the total revenue of domestic producers (P x Q) must increase.

Award 1 mark for the correct answer D. No fractional marks are given.

Widespread adoption of mobile payments reduces the need for the public to hold cash or liquid demand deposits for daily transactions, resulting in a decrease in the transaction demand for money. The money demand curve shifts to the left. With a constant money supply, this leftward shift in money demand leads to a decrease in the equilibrium nominal interest rate.

Award 1 mark for the correct answer D. No fractional marks are given.

Country A has a lower opportunity cost of producing Clothing (\(2\text{ Food} < 4\text{ Food}\)), so it has a comparative advantage in and will export Clothing. For each unit of Clothing exported, Country A receives 3 units of Food, but must pay 0.5 units of Food for transport, yielding a net receipt of \(3 - 0.5 = 2.5\) units of Food. Since the opportunity cost of producing 1 unit of Clothing is 2 units of Food, the net gain to Country A is \(2.5 - 2 = 0.5\) units of Food per unit of Clothing.

Award 1 mark for the correct option A. No marks for incorrect options.

Since the quota restricts imports to the same level as under the tariff, the domestic price, domestic quantity supplied, and domestic quantity demanded remain unchanged. Thus, consumer surplus and domestic producer surplus remain unchanged. However, the tariff revenue previously collected by the domestic government is now captured by foreign exporters as quota rent. Therefore, the domestic country's social surplus decreases.

Award 1 mark for the correct option C. No marks for incorrect options.

1. For exports: Depreciation lowers the price of exports in foreign currency. Since foreign demand is price elastic, the percentage increase in quantity demanded is greater than the percentage decrease in foreign-currency price, leading to an increase in export volume. Since the export price in domestic currency remains unchanged, the total value of exports in domestic currency increases.
2. For imports: Depreciation increases the price of imports in domestic currency. Since domestic demand for imports is unit elastic, the percentage decrease in quantity demanded equals the percentage increase in domestic-currency price. Thus, the total expenditure on imports (import value in domestic currency) remains unchanged.

Award 1 mark for the correct option A. No marks for incorrect options.

Initially, Reserves = $500, Deposits = $2000, and Cash in hand = \(C\). Money Supply (\(M\)) = \(C + 2000\).
After the changes:
1. Public deposits $100 cash into the bank, so Cash in hand becomes \(C - 100\) and Reserves increase to \(500 + 100 = 600\).
2. With the new required reserve ratio of 25%, the maximum deposits that can be supported by $600 of reserves is \(600 / 0.25 = 2400\).
3. The new Money Supply is \((C - 100) + 2400 = C + 2300\).
4. The maximum change in the money supply is \((C + 2300) - (C + 2000) = +300\) (an increase of $300).

Award 1 mark for the correct option B. No marks for incorrect options.

Using US dollars to quote prices indicates that the local currency is losing its function as a unit of account. Converting cash savings into gold indicates that the local currency is losing/has lost its function as a store of value. Since it is still used for daily transactions, it still functions as a medium of exchange.

Award 1 mark for the correct option B. No marks for incorrect options.

1. Open market purchases by the central bank increase the money supply, shifting the money supply curve to the right.
2. An increase in expected inflation reduces the demand for holding money (as people shift to physical assets), shifting the money demand curve to the left.
3. Both a rightward shift in money supply and a leftward shift in money demand will cause the nominal interest rate to fall.
4. Since the money supply curve shifts to the right, the new equilibrium quantity of money (which equals the money supply) must increase.

Award 1 mark for the correct option A. No marks for incorrect options.

For price discrimination to be viable and profitable, the seller must have market power, segment markets with different demand elasticities (charging a lower price to the group with higher elasticity), and prevent resale (arbitrage). Statement A represents different elasticities, and Statement B represents prevention of resale. If marginal costs differed (as in C), the price difference might simply reflect cost differences rather than price discrimination.

Award 1 mark for the correct option D. No marks for incorrect options.

A perfect price-discriminating monopoly charges each consumer their maximum willingness to pay, producing up to the point where marginal benefit (price) equals marginal cost. This results in the allocatively efficient output level (larger than that of a single-price monopoly) and eliminates deadweight loss completely (reducing it to zero).

Award 1 mark for the correct option B. No marks for incorrect options.

Let's calculate the marginal product (MP) of each worker:
- 1st worker: \(15 - 0 = 15\) units
- 2nd worker: \(32 - 15 = 17\) units
- 3rd worker: \(45 - 32 = 13\) units
- 4th worker: \(55 - 45 = 10\) units
- 5th worker: \(60 - 55 = 5\) units
The marginal product increases from 15 to 17, and then decreases to 13 when the 3rd worker is employed. Thus, diminishing marginal returns set in with the 3rd worker.

Award 1 mark for the correct option B. No marks for incorrect options.

1. By definition, if the marginal cost is greater than the average variable cost (\(MC > AVC\)), it pulls the average variable cost up, so AVC must be rising. Thus, option A is correct.
2. When ATC is falling, MC can be falling or rising, as long as MC is below ATC. Thus, B is incorrect.
3. The vertical distance between ATC and AVC is Average Fixed Cost (AFC). Since \(AFC = TFC / Q\) and TFC is constant, AFC decreases as output increases. Thus, the distance narrows, making C incorrect.
4. MC reaches its minimum before ATC reaches its minimum, making D incorrect.

Award 1 mark for the correct option A. No marks for incorrect options.

Opportunity cost of 1 unit of X in Country A = \( 2/6 = 0.33 \) units of Y. Opportunity cost of 1 unit of X in Country B = \( 4/8 = 0.50 \) units of Y. Since Country A has a lower opportunity cost in producing Good X, it exports Good X. For Country A to benefit, the net price received after paying transportation cost must be at least its opportunity cost: \( T - 0.1 \ge 0.33 \Rightarrow T \ge 0.43 \) units of Y. For Country B to benefit, the price paid must not exceed its own opportunity cost: \( T \le 0.50 \) units of Y. Thus, the mutually beneficial range is between 0.43 units of Y and 0.50 units of Y.

Award 1 mark for the correct option B. No partial marks.

Initial money supply \( M_0 = C_0 + 1000 \). The public withdraws $50M cash, keeps $25M as cash holdings, and deposits $25M back. Net cash withdrawn from the banking system is \( $50M - $25M = $25M \). New Reserves = \( 200 - 25 = 175 \) million. Maximum Deposits possible = \( \text{Reserves} / 0.20 = 175 / 0.20 = 875 \) million. New cash holdings of public = \( C_0 + 25 \) million. New money supply \( M_1 = (C_0 + 25) + 875 = C_0 + 900 \) million. Change in money supply = \( (C_0 + 900) - (C_0 + 1000) = -$100 \) million.

Award 1 mark for the correct option B. No partial marks.

Price discrimination occurs when different prices are charged for the same product for reasons not associated with differences in cost. Therefore, the marginal cost of serving different groups does not need to be different. The necessary conditions are: the firm must possess market power (Option D), must be able to segment the market and prevent resale (Option A), and the two groups must have different price elasticities of demand (Option B).

Award 1 mark for the correct option C. No partial marks.

Average Variable Cost \( AVC = TVC / TP = (W \times L) / TP = W / AP_L \), where \( AP_L \) is the average product of labor. To minimize AVC, the firm must maximize \( AP_L \). Let's calculate the average product for each labor level: L=1: AP=15; L=2: AP=16; L=3: AP=17; L=4: AP=16.25; L=5: AP=15. Since average product of labor is maximized at the 3rd worker (17 units), the average variable cost is minimized at the 3rd worker.

Award 1 mark for the correct option B. No partial marks.

If the tariff and the quota lead to the same quantity of imports, the domestic price, domestic quantity supplied, and domestic quantity demanded will remain unchanged. Therefore, consumer surplus, producer surplus, and the deadweight loss of society will also remain unchanged. However, under the tariff, the government collects tariff revenue, whereas under a quota (assuming licenses are distributed for free), the quota rent goes to quota holders. Thus, replacing the quota with a tariff will increase government revenue.

Award 1 mark for the correct option B. No partial marks.

- 'bought a flat ... paid a down payment' illustrates money serving as a medium of exchange (1).
- 'for $6 million' and 'remaining $4 million' illustrate money as a unit of account (2) since values are measured in monetary terms.
- 'pay over 20 years in monthly installments' illustrates money as a standard of deferred payment (4) because future debt is specified and settled in money.
- Money serving as a store of value is not explicitly featured in this transaction.

Award 1 mark for the correct option D. No partial marks.

This pricing strategy is known as a two-part tariff, which consists of a lump-sum entry fee and a per-unit usage fee. The primary economic objective of a two-part tariff is to extract consumer surplus from consumers and convert it into the firm's profit.

Award 1 mark for the correct option B. No partial marks.

An increase in the price of raw materials (input prices) increases production costs at every scale of output, which shifts the entire LRAC curve upward. On the other hand, expanding the scale of production and encountering inefficiencies (Option B) is a movement along the LRAC curve (diseconomies of scale), not a shift. A volume discount (Option C) or technological progress (Option D) would shift the LRAC curve downward.

Award 1 mark for the correct option A. No partial marks.

Under the tariff, the domestic price rises by $2. The reduction in consumer surplus is represented by the area of a trapezoid: \( \Delta CS = \frac{C_0 + C_1}{2} \times \Delta P = (C_0 + C_1) \), where \( C_0 \) and \( C_1 \) are the initial and new levels of domestic consumption. Since initial imports were 100 and fell to 60, we know \( C_0 = S_0 + 100 \ge 100 \) and \( C_1 = S_1 + 60 \ge 60 \). Thus, \( C_0 + C_1 \ge 160 \). The decrease in consumer surplus is equal to \( C_0 + C_1 \ge $160 \), which is definitely greater than $120.
- Option A is incorrect because tariff revenue is \( 60 \times $2 = $120 \).
- Option B is incorrect because deadweight loss is \( 0.5 \times (100-60) \times 2 = $40 \).
- Option C is incorrect because the 40-unit drop in imports is shared between a decrease in domestic consumption and an increase in domestic production, so consumption decreases by less than 40.

Award 1 mark for the correct option D. No partial marks.

- (1) decreases the transaction demand for holding money, shifting money demand leftward and lowering interest rates.
- (2) increases the monetary base and money supply, shifting money supply rightward and lowering interest rates.
- (3) increases the transaction demand for money, shifting money demand rightward and raising interest rates.
- (4) reduces the money multiplier, which decreases the money supply, shifting money supply leftward and raising interest rates.
Thus, (3) and (4) only will raise the interest rate.

Award 1 mark for the correct option D. No partial marks.

To find the opportunity cost of producing 1 unit of Clothing:
- For Country X: \(8 / 4 = 2\) units of Toys.
- For Country Y: \(18 / 6 = 3\) units of Toys.

Since Country X has a lower opportunity cost of producing Clothing (\(2\text{ T} < 3\text{ T}\)), it has a comparative advantage in Clothing. Since the terms of trade (1 Clothing = 2.5 Toys) lies between the opportunity costs of the two countries (\(2\text{ T} < 2.5\text{ T} < 3\text{ T}\)), both countries will gain from trade. Therefore, Country X has a comparative advantage in Clothing and will gain from trade.

Award 1 mark for the correct answer A. Reject other options.

Initially, \(M1 = \text{Currency held by public} + \text{Deposits} = \$500 \text{ million} + \$2000 \text{ million} = \$2500 \text{ million}\).

When the public deposits \$100 million into banks, cash held by public decreases by \$100 million, so \(C_{\text{new}} = \$400 \text{ million}\).
The total reserves of the banking system increase from \$400 million to \$500 million.

With a minimum reserve ratio of 20%, the maximum total deposits the banking system can support is:
\(D_{\text{max}} = \text{Reserves} / 0.20 = \$500 \text{ million} / 0.20 = \$2500 \text{ million}\).

Therefore, the new maximum money supply is:
\(M_{\text{new}} = C_{\text{new}} + D_{\text{max}} = \$400 \text{ million} + \$2500 \text{ million} = \$2900 \text{ million}\).

Change in money supply = \$2900 million - \$2500 million = +\$400 million.

Award 1 mark for the correct answer B. Reject other options.

Price discrimination is defined as charging different prices for the same good not because of differences in production costs. Thus, different marginal costs for different segments is not a necessary condition. In fact, if the differences in prices were purely due to cost differences, it would not be classified as price discrimination. Options A, B, and C are all necessary conditions for a firm to practice effective price discrimination.

Award 1 mark for the correct answer D. Reject other options.

Let's analyze the options:
- Option A is incorrect. When output is 0, Total Cost = \$100, which represents the Fixed Cost (FC). So FC = \$100.
- Option B is correct. When producing 25 units (with 2 workers), Total Cost = \$240. Since FC = \$100, Variable Cost (VC) = \$240 - \$100 = \$140. Average Variable Cost (AVC) = VC / TP = \$140 / 25 = \$5.6.
- Option C is incorrect. The marginal product of the 3rd worker is \(35 - 25 = 10\) units.
- Option D is incorrect. The marginal product of the 1st worker is 10; the 2nd is 15; the 3rd is 10. The marginal product starts to decrease when the 3rd worker is employed, so the law of diminishing marginal returns starts to set in when the 3rd worker is employed.

Award 1 mark for the correct answer B. Reject other options.

Under the Linked Exchange Rate System, the HKD is pegged to the USD. When the JPY depreciates against the USD, the JPY also depreciates against the HKD (or the HKD appreciates against the JPY).
- Option A is incorrect because imports from Japan will become cheaper in HKD terms.
- Option B is incorrect because HKD appreciates, making traveling to HK more expensive for Japanese tourists, so their number will decrease.
- Option C is correct because the appreciation of the HKD makes Hong Kong's exports more expensive in JPY terms, reducing their competitiveness and subjecting them to greater competition from Japan's domestic goods.
- Option D is incorrect because the HKD appreciates against the JPY.

Award 1 mark for the correct answer C. Reject other options.

(a) Under free trade, the domestic price is equal to the world price \(P_w = \$100\). Consumer surplus is the area below the demand curve and above \$100. After the tariff of \$20 is imposed, the domestic price rises to \(P_t = \$120\). Consumers now buy fewer smartwatches and pay a higher price. Consumer surplus decreases by the area \(P_w P_t A B\) (the trapezoid area between the two prices under the demand curve).\n(b) One disadvantage is the creation of deadweight loss (efficiency loss). The tariff causes overproduction by less efficient domestic producers (production distortion) and underconsumption by domestic consumers (consumption distortion), leading to a loss in net social surplus.

(a) Diagram (2 marks):\n- Correct labels of axes (Price \(P\), Quantity \(Q\)), domestic supply \(S_d\), domestic demand \(D_d\), world price \(P_w\) and tariff price \(P_t\). (1 mark)\n- Correctly shaded or indicated area showing the decrease in consumer surplus. (1 mark)\nExplanation (1.5 marks):\n- Due to the tariff, the domestic price increases from \$100 to \$120. (0.5 mark)\n- Quantity demanded decreases. (0.5 mark)\n- Consumer surplus decreases. (0.5 mark)\n(b) One disadvantage (2 marks):\n- Pointing out deadweight loss / efficiency loss. (1 mark)\n- Explaining that domestic resources are misallocated because higher-cost domestic production replaces lower-cost imports, or consumers' marginal benefit exceeds marginal cost. (1 mark)

(a) For Country X, the opportunity cost of producing 20 units of Clothing is 40 units of Food. Therefore, the opportunity cost of producing 1 unit of Clothing is \(40 / 20 = 2\) units of Food. For Country Y, the opportunity cost of producing 30 units of Clothing is 90 units of Food. Therefore, the opportunity cost of producing 1 unit of Clothing is \(90 / 30 = 3\) units of Food.\n(b) Country X has a lower opportunity cost of producing Clothing (2 units of Food) than Country Y (3 units of Food). Therefore, Country X has a comparative advantage in producing Clothing.\n(c) The terms of trade are 1 unit of Clothing = 2.4 units of Food. For Country X (the exporter of Clothing), it gains because it receives 2.4 units of Food for 1 unit of Clothing, which is more than its domestic opportunity cost of 2 units of Food. For Country Y (the importer of Clothing), it gains because it pays 2.4 units of Food for 1 unit of Clothing, which is less than its domestic cost of producing 1 unit of Clothing (3 units of Food). Hence, both countries gain from trade.

(a) Opportunity cost calculation (2 marks):\n- Correct opportunity cost of 1 unit of Clothing for Country X: 2 units of Food (1 mark)\n- Correct opportunity cost of 1 unit of Clothing for Country Y: 3 units of Food (1 mark)\n(b) Comparative advantage (1.5 marks):\n- Identifying Country X has comparative advantage in Clothing. (0.5 mark)\n- Explanation: Country X's opportunity cost of producing Clothing is lower than Country Y's. (1 mark)\n(c) Gains from trade (2 marks):\n- Explaining Country X gains because 2.4 units of Food > 2 units of Food (its cost). (1 mark)\n- Explaining Country Y gains because 2.4 units of Food < 3 units of Food (its cost). (1 mark)

(a) The required reserve ratio (rr) = \(Reserves / Deposits = 300 / 1500 = 20\%\) (or 0.2).\n(b) When \$50 million cash is withdrawn and held by the public: The banking system's reserves decrease by \$50 million (\(\Delta R = -\$50\) million). The maximum change in deposits (\(\Delta D\)) is: \(\Delta D = \Delta R \times (1 / rr) = -\$50\text{ million} \times (1 / 0.2) = -\$250\) million. The change in cash held by the public (\(\Delta Cp\)) is \(+\$50\) million. The change in money supply (\(\Delta MS\)) is: \(\Delta MS = \Delta Cp + \Delta D = +\$50\text{ million} + (-\$250\text{ million}) = -\$200\) million. Thus, the money supply decreases by \$200 million.

(a) Required reserve ratio = \(300 / 1500 = 20\%\) (or 0.2) (1 mark)\n(b) Workings (4.5 marks):\n- State that change in reserves (\(\Delta R\)) is \(-\$50\) million. (1 mark)\n- Calculate maximum change in deposits: \(\Delta D = -\$50\text{ million} \times (1 / 0.2) = -\$250\) million. (1.5 marks)\n- Correct formula or concept of money supply change: \(\Delta MS = \Delta Cp + \Delta D\). (1 mark)\n- Calculate maximum change in money supply: \(+\$50\text{ million} + (-\$250\text{ million}) = -\$200\) million. (1 mark)

(a) Mobile payment systems improve transaction efficiency, meaning people need to hold less liquid money (cash and demand deposits) to facilitate daily transactions. Thus, the transaction demand for money decreases. Since transaction demand is a major component of money demand, the total money demand decreases (shifts to the left).\n(b) In the money market diagram, the money supply curve (\(M_s\)) is vertical, and the money demand curve (\(M_d\)) is downward-sloping. The decrease in total money demand shifts the money demand curve to the left from \(M_{d1}\) to \(M_{d2}\). At the original interest rate, there is an excess supply of money. The equilibrium interest rate decreases from \(r_1\) to \(r_2\).

(a) Transaction and total demand (2 marks):\n- Pointing out transaction demand for money decreases due to higher efficiency / convenience of mobile payment. (1 mark)\n- Pointing out total money demand decreases. (1 mark)\n(b) Diagram and explanation (3.5 marks):\n- Diagram showing: Vertical \(M_s\) curve, downward-sloping \(M_d\) curve, axes correctly labeled (Interest rate \(r\), Quantity of Money \(M\)). (1 mark)\n- Leftward shift of the \(M_d\) curve. (1 mark)\n- Correct indication of decrease in equilibrium interest rate. (0.5 mark)\n- Explanation: Since money demand decreases, at the original interest rate, there is excess supply of money, driving down the interest rate until a new equilibrium is reached. (1 mark)

(a) The theme park can practice price discrimination because: 1. It has market power (is a price searcher). 2. It can segment the market (by checking identity cards/passports) and effectively prevent resale (arbitrage) since tickets are non-transferable once verified.\n(b) Under price discrimination, a firm charges a higher price to the customer group with lower price elasticity of demand, and a lower price to the group with higher price elasticity of demand. Tourists have a lower price elasticity of demand for the theme park because they have fewer local alternatives/substitutes and are on vacation (less price-sensitive). Local residents have a higher price elasticity of demand because they can easily access other domestic entertainment options. Therefore, tourists are charged a higher price.

(a) Necessary conditions (2.5 marks):\n- State that the firm must have market power. (1 mark)\n- State that the firm must be able to prevent resale / arbitrage, and identify different customer segments. (1.5 marks)\n(b) Group charged higher price (3 marks):\n- Explain the relationship between price elasticity of demand and price under price discrimination (higher price for lower elasticity, lower price for higher elasticity). (1 mark)\n- State that tourists have a lower price elasticity of demand (or residents have higher elasticity) with economic reasoning (e.g., availability of substitutes). (1 mark)\n- Conclude that tourists will be charged a higher price. (1 mark)

(a) The output level under perfect price discrimination is higher than that under single pricing. The firm will increase production until the price of the last unit equals marginal cost.\n(b) (i) Consumer surplus will decrease to zero. Because the monopolist charges each consumer their maximum willingness to pay, all potential consumer surplus is captured by the producer and turned into producer surplus.\n(ii) Allocative efficiency will increase (be fully achieved). Under perfect price discrimination, the price (marginal benefit) of the last unit sold equals the marginal cost of production (\(P = MC\)), meaning there is no underproduction and the deadweight loss is eliminated.

(a) Output level (1.5 marks):\n- State that output level is higher under perfect price discrimination. (1 mark)\n- Explain that production expands to where price equals marginal cost. (0.5 mark)\n(b) Effects (4 marks):\n(i) Consumer surplus (2 marks):\n- Decreases to zero / vanishes. (1 mark)\n- Because the price charged for each unit is exactly equal to the buyer's maximum willingness to pay. (1 mark)\n(ii) Allocative efficiency (2 marks):\n- Efficiency is achieved / deadweight loss is eliminated. (1 mark)\n- Because the marginal benefit (price) of the last unit equals marginal cost (\(P = MC\)), maximizing total social surplus. (1 mark)

(a) Marginal Product (MP) of each worker is calculated as the change in total product divided by the change in labor:\n- 1st worker: 50 units\n- 2nd worker: \(110 - 50 = 60\) units\n- 3rd worker: \(180 - 110 = 70\) units\n- 4th worker: \(230 - 180 = 50\) units\n- 5th worker: \(270 - 230 = 40\) units\n- 6th worker: \(300 - 270 = 30\) units\n\n(b) The Law of Diminishing Marginal Returns states that in the short run, when successive units of a variable factor (e.g., labor) are added to a fixed factor (e.g., capital), the marginal product of the variable factor will eventually decrease, ceteris paribus.\n\n(c) Yes, the data illustrates the Law of Diminishing Marginal Returns. The marginal product increases from the 1st worker (50) to the 3rd worker (70), but starts to decrease when the 4th worker is employed (falling from 70 to 50). Therefore, diminishing marginal returns set in at the 4th worker.

(a) Marginal product calculation (1.5 marks):\n- Award 1.5 marks if all calculations are correct. Deduct 0.5 mark for each error, minimum 0 marks.\n(b) Law of Diminishing Marginal Returns (1.5 marks):\n- Mentions 'short run' / 'fixed factor'. (0.5 mark)\n- Mentions adding 'successive units of a variable factor'. (0.5 mark)\n- Mentions 'marginal product eventually decreases', ceteris paribus. (0.5 mark)\n(c) Application (2.5 marks):\n- Correctly answers 'Yes'. (0.5 mark)\n- Explains that MP increases up to the 3rd worker (70) and starts to fall from the 4th worker (50). (1 mark)\n- Identifies that it sets in at the 4th worker. (1 mark)

(a) The firm experiences economies of scale if the percentage increase in output is greater than the percentage increase in all inputs (i.e., output increases by more than 100% when inputs are doubled). As a result, the long-run average cost of production decreases.\n(b) Two possible sources of economies of scale: 1. Technical economies (e.g., use of large-scale, specialized machinery that is highly efficient). 2. Financial economies (e.g., larger firms can secure loans at lower interest rates due to lower perceived risk).\n(c) If the firm continues to expand indefinitely, it will eventually face 'diseconomies of scale'. This is usually due to managerial/coordination problems (such as communication breakdown, excessive bureaucracy, and reduced control), which cause the long-run average cost to rise.

(a) Economies of scale condition (2.5 marks):\n- Mentioning output increases by a larger percentage than inputs. (1.5 marks)\n- Mentioning average cost of production decreases. (1 mark)\n(b) Sources (2 marks):\n- State any two valid sources (e.g., Technical, Financial, Marketing, Managerial economies). (1 mark for each source, max 2 marks)\n(c) Indefinite expansion (1 mark):\n- Mentioning diseconomies of scale / managerial or coordination difficulties. (1 mark)

Part a: (i) In Country A, opportunity cost of 1 unit of Microchips = 10/20 = 0.5 units of Rice. In Country B, opportunity cost of 1 unit of Microchips = 15/10 = 1.5 units of Rice. (ii) Country A has a lower opportunity cost in producing Microchips (0.5 units of Rice < 1.5 units of Rice) than Country B. Therefore, Country A has a comparative advantage in producing Microchips. (iii) The mutually beneficial terms of trade for 1 unit of Microchips lies between the opportunity costs of the two countries: 0.5 units of Rice < 1 unit of Microchips < 1.5 units of Rice. Part b: When a tariff is imposed on imported Rice, the domestic price of Rice in Country A increases. Import volume decreases. Consumer surplus decreases. Deadweight loss is created because of overproduction by less efficient domestic producers and underconsumption by domestic consumers. Part c: In the short run, contracts are pre-determined, and export/import quantities cannot adjust immediately. The total value of imports increases in terms of domestic currency while export revenue remains largely unchanged, leading to a worsening of the trade balance (the J-curve effect). In the long run, as price elasticities of demand for exports and imports increase and satisfy the Marshall-Lerner condition, export volume increases and import volume decreases significantly, improving the trade balance.

Part a: (i) Correct opportunity cost for Country A [1 mark] and Country B [1 mark]. (ii) Identify Country A [1 mark]. Explain using opportunity cost comparison [2 marks]. (iii) Correct range of terms of trade [3 marks]. Part b: Correctly labelled diagram showing tariff shifting import supply upwards, domestic price rising, and imports shrinking [2 marks]. Explain decline in consumer surplus [2 marks]. Explain deadweight loss [2 marks]. Part c: Explain short-run effect with J-curve/contract rigidities [3 marks]. Explain long-run effect with elasticities/Marshall-Lerner condition [3 marks].

Part a: (i) Required reserve ratio = Reserves / Deposits = 300 / 1200 = 25%. (ii) Initial money supply = Cash held by public + Deposits = 100 + 1200 = \$1300 million. (iii) When public deposits \$50 million cash, cash held by public decreases by \$50 million, and bank reserves increase by \$50 million. Maximum deposit creation = \$50 million * (1 / 0.25) = \$200 million. Maximum change in money supply = Change in cash + Change in deposits = -\$50 million + \$200 million = +\$150 million. Part b: (i) An increase in the required reserve ratio reduces the banking multiplier (1/RRR), meaning banks must hold more reserves for each dollar of deposit and can lend out less. Thus, the money creation capability of the banking system decreases. (ii) In the money market, the money supply curve shifts to the left. At the original interest rate, there is an excess demand for money, causing the equilibrium interest rate to rise. As interest rates rise, the cost of borrowing increases, leading to a decrease in investment expenditure. Part c: The store of value function is most affected. During hyperinflation, the purchasing power of money falls rapidly. Holding money leads to a huge loss in real value, so people will refuse to hold wealth in the form of money.

Part a: (i) 25% [2 marks]. (ii) \$1300 million [2 marks]. (iii) Calculate change in cash (-\$50 million) [1 mark], calculate change in deposits (+\$200 million) [2 marks], find final net change in money supply (+\$150 million) [1 mark]. Part b: (i) Explain RRR increase reducing multiplier and bank lending capacity [3 marks]. (ii) Draw correct money market diagram showing MS shifting left and interest rate rising [2 marks]; explain interest rate increase [2 marks]; explain decrease in investment expenditure [2 marks]. Part c: Identify store of value [1 mark]; explain relationship with rapid loss of purchasing power [2 marks].

Part a: (i) The law of diminishing marginal returns states that as more units of a variable factor are added to a given quantity of fixed factors, the marginal product of the variable factor will eventually decrease. Marginal products: 1st worker = 5; 2nd worker = 7; 3rd worker = 6; 4th worker = 4; 5th worker = 3. Diminishing marginal returns begin at the 3rd worker because marginal product starts to decrease (from 7 to 6). (ii) In the short run, at least one factor of production is fixed. In the long run, all factors of production are variable. In the short run, a firm cannot change its fixed assets because by definition, fixed assets are fixed factors that require time to adjust. Part b: (i) This pricing practice is price discrimination (specifically, third-degree price discrimination). Three conditions: The firm must possess monopoly power; The firm must be able to segment the market into different groups with different price elasticities of demand; The firm must be able to prevent resale of the good/service. (ii) Tourists have a lower price elasticity of demand for tickets because they have fewer substitutes (e.g., they travel specifically for recreation) and higher search costs. Local residents have more substitutes and higher price elasticity of demand. According to price discrimination theory, the firm charges a higher price to the group with lower price elasticity of demand (tourists, \$300) and a lower price to the group with higher price elasticity of demand (local residents, \$180) to maximize profits. (iii) Compared to a single-price monopoly, if price discrimination allows the monopoly to expand total output and sell to consumers who otherwise would not buy under a single price, total social surplus increases, thereby improving allocative efficiency. However, if total output remains the same or decreases, or if price discrimination is purely distributive without output expansion, allocative efficiency might not increase, and deadweight loss may remain or increase depending on the exact redistribution of output.

Part a: (i) State the law correctly [2 marks]. Calculate marginal products and identify 3rd worker [2 marks]. (ii) State distinction between short run and long run [2 marks]. Explain that fixed assets cannot be changed in short run [2 marks]. Part b: (i) Identify price discrimination [1 mark]. State three conditions (monopoly power, market segmentation, no resale) [3 marks]. (ii) Contrast the price elasticity of demand of tourists (inelastic) and locals (elastic) with reasons [2 marks]. Link low elasticity to high price and high elasticity to low price [2 marks]. (iii) Explain how output change determines allocative efficiency (increase if total output increases; decrease/unchanged if not) [4 marks].

(a) 1. Monopoly power: The firm must be a price-searcher so that it has the power to set different prices. 2. Market segmentation: The firm must be able to segment the market into separate sub-markets and prevent resale (arbitrage) from the lower-priced market to the higher-priced market. 3. Differences in price elasticity of demand: The price elasticity of demand of the sub-markets must be different at any given price. (b)(i) For profit maximization under third-degree price discrimination, the firm equates the marginal revenue of each market to its marginal cost, i.e., \(MR_p = MC\) and \(MR_s = MC\). The diagram consists of two panels. Panel 1 (Professionals): Shows a relatively steep demand curve \(D_p\), the corresponding marginal revenue curve \(MR_p\), and a horizontal marginal cost curve \(MC\). The profit-maximizing quantity \(Q_p\) is determined where \(MR_p = MC\), and the price \(P_p\) is determined along the demand curve \(D_p\). Panel 2 (Students): Shows a relatively flat demand curve \(D_s\), the corresponding marginal revenue curve \(MR_s\), and the same horizontal marginal cost curve \(MC\). The profit-maximizing quantity \(Q_s\) is determined where \(MR_s = MC\), and the price \(P_s\) is determined along the demand curve \(D_s\). Because the demand of professionals is less elastic, the diagram shows that \(P_p\) is higher than \(P_s\). (b)(ii) The relationship between \(MR\), \(P\), and \(E_d\) is given by \(MR = P \times (1 - 1/E_d)\), where \(E_d\) is the absolute value of the price elasticity of demand (assuming \(E_d > 1\)). Since the profit-maximizing condition requires \(MR_p = MR_s = MC\), we have \(P_p \times (1 - 1/E_{dp}) = P_s \times (1 - 1/E_{ds})\). Since the demand of professionals is less elastic than that of students (\(E_{dp} < E_{ds}\)), the term \((1 - 1/E_{dp})\) is smaller than \((1 - 1/E_{ds})\). For the equality of marginal revenues to hold, the price charged to professionals must be higher than that charged to students (\(P_p > P_s\)). (c) No, allocative efficiency does not necessarily decrease. First, both before and after price discrimination, price remains higher than marginal cost, so some allocative inefficiency (deadweight loss) persists. Second, if the total output increases under price discrimination compared to the uniform pricing scenario (for example, if students who could not afford the uniform price can now purchase the service), the total deadweight loss may decrease. In such a case, allocative efficiency would increase. If total output remains unchanged or decreases, allocative efficiency would decrease. Thus, the effect on allocative efficiency is ambiguous and does not necessarily decrease.

(a) Award 1 mark for identifying each condition and 1 mark for explanation. Condition 1: Monopoly power / price-setting ability. (1 mark) Condition 2: Ability to segment markets and prevent resale (arbitrage). (2 marks) Condition 3: Different price elasticities of demand in the sub-markets. (1 mark) (b)(i) Diagram (3 marks): Award 1 mark for showing a horizontal MC line at the same level for both markets. Award 1 mark for the professional market: relatively steep demand curve \(D_p\) and marginal revenue curve \(MR_p\), with correct profit-maximizing output \(Q_p\) where \(MR_p = MC\) and price \(P_p\) indicated on the vertical axis. Award 1 mark for the student market: relatively flat demand curve \(D_s\) and marginal revenue curve \(MR_s\), with correct profit-maximizing output \(Q_s\) where \(MR_s = MC\) and price \(P_s\) indicated on the vertical axis. (Note: The diagram must clearly show \(P_p > P_s\)). Explanation (3 marks): To maximize profit, the monopolist equates the marginal revenue in each market to its marginal cost, i.e., \(MR_p = MC = MR_s\). (1 mark) If \(MR > MC\), the firm can increase profit by selling more; if \(MR < MC\), it should sell less. Thus, output is optimized when \(MR = MC\) in both markets. (1 mark) The prices \(P_p\) and \(P_s\) are determined along their respective demand curves. Since professionals have a less elastic demand, they are charged a higher price. (1 mark) (b)(ii) State the relation: \(MR = P \times (1 - 1/E_d)\), where \(E_d\) is the absolute value of price elasticity of demand. (1 mark) Equate MRs: Since profit maximization requires \(MR_p = MR_s\), we have \(P_p \times (1 - 1/E_{dp}) = P_s \times (1 - 1/E_{ds})\). (1 mark) Conclusion: Since \(E_{dp} < E_{ds}\), we have \((1 - 1/E_{dp}) < (1 - 1/E_{ds})\). Therefore, \(P_p\) must be greater than \(P_s\) to maintain equality. (1 mark) (c) State that it is not necessarily the case. (1 mark) Explain that allocative efficiency depends on the change in total output: if total output increases (e.g., due to serving a new group of customers), deadweight loss decreases and allocative efficiency improves. (1 mark) Explain that if total output remains unchanged or decreases, deadweight loss increases and allocative efficiency worsens. (1 mark)

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