NSS Exploring Economics 1 (3 Edition) : Answers To Exercises

NSS Exploring Economics 1 (3rd Edition) Answers to Exercises Chapter 1

Basic concepts in economics

Questions p.4 Test yourself 1.1 Explain whether the following statements are true or false. a. ‘Bill Gates, the founder of Microsoft, is a billionaire. He does not face the problem of scarcity.’ b. ‘Without scarcity, there is no need to make choices.’ c. ‘Economics is the study of how to eliminate the problem of scarcity.’ p.8 Test yourself 1.2 Refer to Table 1.1 again. 1st priority

Smartphone

2nd priority

Laptop

3 priority

Watch

rd

Table 1.1 (Reproduced) a. What is Leo’s cost of choosing a laptop? b. What is Leo’s cost of choosing a watch? Test yourself 1.3 Carrie is a senior accountant and Donald is a retired person. They love playing a mobile game. This game is free of charge. Some rare items from the game can be obtained by playing 10 hours or purchased for $200. a. ‘As the mobile game is free of charge, the cost of playing the game is zero.’ Do you agree? Explain your answer. b. Is it more likely that Carrie or Donald would purchase the rare items instead of playing 10 hours to obtain them? Explain your answer. p.9 Misconceptions 1.1 At a bus terminal, Jack and Sue are waiting for a bus. Jack is an old businessman who pays a concessionary fare of $2 per trip. Sue is a housewife who pays the full fare.

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Is Jack’s cost of taking a bus necessarily lower than that of Sue? p.15 Test yourself 1.4 Suppose Fiona has 10,000 supermarket points on her account. The following table shows her preferred priority for different items that can be redeemed in exchange. Each requires 10,000 points. Priority

Items

1

Mili stockpot

2nd

Bilisonic rice cooker

3

Apollo microwave oven

st

rd

For each case below, explain how Fiona’s cost of getting the Mili stockpot will change. a. Susan, Fiona’s best friend, tells Fiona that the quality of the Mili stockpot is not good. b. Solomon, Fiona’s son, complains that the rice is not fully cooked and asks her to buy a new cooker. c. The Apollo microwave oven provides a baking function which Fiona does not expect. d. The supermarket launches a new item, a ‘Butterfly dishwasher’, that can be exchanged for 10,000 points. Fiona wants the dishwasher more than the Bilisonic rice cooker. Test yourself 1.5 Refer to Joyce’s case in ‘Worked example 1.1’. a. Suppose Joyce’s mother is diagnosed with a serious illness and Joyce has to take care of her. Will her cost of switching to the international bank necessarily remain unchanged? b. Suppose the local bank where Joyce currently works offers her additional housing benefits. Will her cost of switching to the international bank necessarily increase? p.17 Test yourself 1.6 Peter has queued for an hour to book a one-week tour to Russia. After paying $9,000 for the tour, his friend offers him a one-week temporary job, with a salary of $10,000. The tour fee is non-refundable. Which of the following is included in Peter’s cost of continuing his trip to Russia? Put a  or  in the brackets. Included in the cost? ( ) ( ) ( )

a. One hour spent queuing to book the tour b. $9,000 tour fee c. $10,000 salary from the job

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d. Expenditure in Russia

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Test yourself 1.7 Carmen is deciding whether to buy a new electric vehicle. Explain whether the following are correct. a. ‘After the government waives the tax on electric vehicles, the price of electric vehicles decreases. Then, Carmen’s cost of using an electric vehicle will be lower.’ b. ‘When the electricity price increases, Carmen’s cost of buying an electric vehicle increases.’ c. ‘Because of technological advances, the charging time for electric vehicles has been reduced. This will encourage Carmen to buy an electric vehicle.’ p.18 Misconceptions 1.2 A famous British singer holds an outdoor concert in Hong Kong. Determine whether the following events would possibly increase his cost of holding the concert. a. The weather becomes very cold and rainy. The singer would very likely catch a cold. b. The singer’s favourite football team unexpectedly enters the final of the European Championship League. The singer wants to watch the match at the stadium but he is holding the concert in Hong Kong. c. The ticket revenue of the concert is lower than the singer originally expected. p.22 Test yourself 1.8 Determine whether each of the following goods is a free good. a. The free drink received after purchasing a regular cup of coffee b. A ketchup packet provided by a restaurant free of charge c. A mobile game which can be downloaded free of charge d. Leaves in the Shing Mun Reservoir e. Free TV programmes in Hong Kong

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p.23 Misconceptions 1.3 Determine whether the following statements are correct. a. The market price of an economic good must be positive. b. People only need a small amount of a free good. c. The available quantity of an economic good must be small. d. The provision of free goods involves zero costs. e. When a good can satisfy one’s wants, it must be an economic good. f. People prefer an economic good to a free good. g. In economics, free goods are more important than economic goods. h. The use of free goods involves zero costs. p.24 Test yourself 1.9 Determine whether the following actions are production or consumption. Put a  in the correct box. Production

Consumption

a. A student helps erase the blackboard. b. Mary reads a magazine for leisure. c. John surfs the internet to complete his research report. d. A father repairs a TV set at home. p.26 Test yourself 1.10 ‘In an economy, a person can be a consumer as well as a producer.’ Do you agree? Explain. p.30 Test yourself 1.11 Some shops that sell electrical appliances allow customers to buy their products with interestfree instalment loans. What is the effect of this scheme on the consumption behaviour of customers? Discuss. Misconceptions 1.4 Determine whether the following statements are correct: a. ‘When money does not exist, interest does not exist either.’ b. ‘When scarcity does not exist, interest does not exist either.’

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Exercises pp.32-35 Multiple Choice Questions Choose the best answer. 1. Scarcity _____. A. does not exist in the real world because free goods exist B. may exist even if the quantity available of a good is plentiful C. always exists as resources are limited D. will not exist when wants are limited 2. Which of the following statements about scarcity is true? A. As a country develops, the problem of scarcity will gradually disappear. B. The problem of scarcity exists because we have to make choices. C. Rich people do not have to face the problem of scarcity. D. Neither developed nor developing countries can avoid the problem of scarcity. 3. Which of the following can explain the relationship between scarcity and choice? A. Even if there is no scarcity, we still need to make choices. B. If there is no choice, there is no scarcity. C. If there is no scarcity, we do not need to make choices. D. All of the above 4. All of the following cases incur an opportunity cost EXCEPT A. a person who gives up leisure time to study. B. a tourist who goes to Ocean Park instead of Disneyland. C. a person who cannot get back the tuition he paid after he withdrew from a university. D. a piece of land is developed into a commercial complex rather than a housing estate.

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5. Opportunity cost is measured by A. the highest-valued alternative forgone. B. the price we pay for a good. C. the total expenditure on a good. D. all alternatives forgone in making a choice. 6. David won $0.3 million in a lucky draw. The following show how he prefers to spend the money: 1st preference: Make a down payment on a new flat 2nd preference: Buy a sports car 3rd preference: Buy a diamond watch The opportunity cost of making a down payment on a new flat is A. B. C. D.

a sports car. a diamond watch. a sports car and a diamond watch. zero, because the money was won in a lucky draw.

7. Peter has a coupon that he can exchange for one of the following items: Items

Value to Peter

Bubble Trap (a computer game)

$100

King of Knights (a video game)

$80

A set of rare items from the Cat Empire (a mobile game)

$60

Which of the following independent events will lower his cost of choosing the computer game? A. Peter has found that the rare items from the Cat Empire are more useful than he expected. B. Peter has purchased a new smartphone on which he can play the Cat Empire. C. Peter has found that his computer does not meet the minimum requirements for playing Bubble Trap. D. Peter has found that his video game console is out of order.

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8. Mr Lee, a Hong Kong resident, has a flat in Shenzhen. Which of the following will raise his cost of living in the flat? A. The rental rate of flats in Shenzhen increases. B. The selling price of his flat increases rapidly. C. The Shenzhen government has introduced a new policy to restrict the transfer of flats. D. None of the above 9. Paul is a university student. He can either spend his summer holiday taking two more subjects at the university or visiting Beijing on a self-financed exchange programme. Which of the following will raise his cost of taking two more subjects at the university? A. The fee for the exchange programme suddenly increases. B. The two subjects at the university are very boring. C. The air ticket price between Hong Kong and Beijing suddenly increases. D. A company suddenly offers him a summer job which has a higher value than the exchange programme. 10. Mr Chan has already paid $5,000 to buy a mobile phone. In which of the following situations will the cost of keeping his mobile phone increase? A. The retail price of a new mobile phone (same as Mr Chan’s model) increases to $6,000. B. The resale price of Mr Chan’s mobile phone increases in the second-hand market. C. Telecommunications companies suddenly increase their service fees. D. None of the above 11. Mr Zhao plans to travel to Kazakhstan for leisure. He can go to Kazakhstan by plane or highspeed train. He has purchased an air ticket to Kazakhstan. Which of the following will raise his cost of going to Kazakhstan? A. The air ticket price to Kazakhstan increases. B. The people of Kazakhstan are nicer than he expected. C. The price of high-speed trains to Kazakhstan increases. D. The time Mr Zhao spends waiting for the flight increases because of flight delays.

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12. A show organiser invited a famous mainland music group to stage a show in Hong Kong. After the group arrives in Hong Kong, the group’s manager finds that they had neglected to apply for work permits. It would be illegal for the group to perform in Hong Kong. The opportunity cost for the group to go ahead with the show would A. decrease because the group could refuse to stage the show. B. remain unchanged because the cost of breaking the law would be the same as the compensation they pay to the organiser for not staging the show. C. remain unchanged as the transportation expenses had already been paid. D. increase as the group may have to bear the legal costs of performing illegally. 13. An economic good MUST be a good A. whose quantity available is insufficient to satisfy all people’s wants. B. produced with a cost. C. sold at a positive price. D. sold in the market. 14. Which of the following are examples of an economic good? (1) The right to live in a house free of charge (2) The right to consume a product in advance (3) The right to get a room with a better view when checking into a hotel A. (1) and (2) only B. (1) and (3) only C. (2) and (3) only D. (1), (2) and (3) 15. If a good is described as a ‘free good’ in economics, we would expect that A. there must be an unlimited supply of the good in the market. B. nobody wants the good. C. the government distributes the good to people free of charge. D. the quantity available of the good is greater than the amount people want to obtain at zero price.

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16. A free good must be free-of-charge A. because it is a gift of nature. B. because all human wants for it have been satisfied. C. because it involves no production. D. None of the above 17. Which of the following statements is correct? A. Production is an activity through which goods and services are transformed into money. B. Consumption is an activity through which resources are allocated. C. Mary draws a picture to relieve stress. This action is production. D. Peter cooks for his customers. This action is production. 18. Which of the following statements about the circular flows of economic activities are correct? (1) Firms are production units. (2) Households provide factor services in the factor market. (3) All people can be producers and consumers. A. (1) and (2) only B. (1) and (3) only C. (2) and (3) only D. (1), (2) and (3)

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19. Refer to the following circular flows of an economy.

X, Y and Z can be _____, respectively. A. households, firms and income B. firms, households, and goods and services C. households, firms, and goods and services D. firms, households and production cost 20. Which of the following statements about interest are correct? (1) Interest is a premium paid for earlier consumption of goods. (2) Interest is the price of money. (3) Interest exists even without money. A. (1) and (2) only B. (1) and (3) only C. (2) and (3) only D. (1), (2) and (3)

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pp.35-37 Short Questions 1. The basic concept of economics is scarcity. Does this mean that economics is useless in rich countries like the United States? Explain. (4 marks) 2. The table below shows the values of different uses of a piece of land. Value ($ million)

Option Building a swimming pool

100

Building a commercial complex

90

Building a residential estate

70

a. What is the opportunity cost of using the land to build a commercial complex? Explain. (2 marks) b. What is the opportunity cost of using the land to build a swimming pool? Explain. (2 marks) c. Suppose that oil is suddenly discovered under the land. Explain how the discovery of oil will affect the opportunity cost of using the land to build a swimming pool. (2 marks) 3. Johnson has asked Judy to choose one of the following items as her birthday gift. The table below shows Judy’s preferences. Priority

Items

1

st

A luxury watch

2nd

A diamond ring

3rd

A car

Explain how the following separate events affects Judy’s cost of choosing the luxury watch. a. Judy has found that the safety rating of the car is very low. (3 marks) b. The diamond ring that Judy wants is out of stock. (4 marks) c. The market value of the luxury watch increases rapidly. (3 marks)

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4. Study the following information. Nam Sang Wai is a wetland area to the north of Yuen Long. Its scenery attracts birdwatchers, cyclists, photographers and even filmmakers. Developers have planned to develop residential property in Nam Sang Wai, but their plan was rejected by the government due to the negative impact on the wetland ecosystem. Suppose the developer was allowed to develop residential property in Nam Sang Wai. Explain whether the cost of developing residential property in Nam Sang Wai will necessarily remain unchanged if a. property prices fall significantly; (3 marks) b. a fire occurs in Nam Sang Wai and destroys the wetland ecosystem. (3 marks) 5. Doctor Chan says, ‘I need to spend one hour getting my hair cut. The cost of my haircut is more than yours!’ Taxi driver Lam replies, ‘You’re wrong! We go to the same salon and spend the same amount of time and money.’ From the viewpoint of economics, who is right? Explain your answer. (5 marks) 6. ‘There is no such thing as a free lunch.’ Do you agree with this statement? Explain your answer. (3 marks) 7. John downloads an infringed electronic book free of charge. Jane pays $5 to download the same electronic book at an online bookstore. Suppose the infringed book downloaded by John has the same quality as the book downloaded by Jane. a. ‘The infringed book downloaded by John is a free good.’ Do you agree? Explain. (3 marks) b. ‘John’s cost of obtaining the electronic book must be lower than Jane.’ Do you agree? Explain. (3 marks)

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8. Ocean Park gives 10,000 free tickets to primary and secondary students. Are the free tickets a free good? Explain your answer. (3 marks) 9. What is the meaning of interest for borrowers and lenders, respectively? Explain.

(4 marks)

10. ‘Interest does not exist when there is no money.’ Do you agree? Explain your answer. (3 marks)

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Answers p.4 Test yourself 1.1 a. False. Bill Gates still faces the problem of scarcity as his resources (e.g., wealth and time) are limited and some of his wants have not been satisfied. Even though the billionaire may have enough money to buy all the goods and services he wants, there are still other non-material or psychological wants (e.g., love, status, prestige, etc.) that he wants to be satisfied. Both rich and poor people face the problem of scarcity. b. True. If there is no scarcity, then we can have all the things we want. There is no need to make choices to decide what wants to satisfy and what wants to give up. c. False. Since our resources are always insufficient to satisfy all our wants, the problem of scarcity can never be eliminated. Economics cannot teach us how to eliminate scarcity. Instead, it studies the human behavior of using scarce resources to satisfy the unlimited wants. p.8 Test yourself 1.2 a. The cost is the value of a smartphone because a smartphone is the best alternative option forgone. b. The cost is the value of a smartphone because a smartphone is the best alternative option forgone. Test yourself 1.3 a. Disagree. Although the money cost of playing the game is zero, there are alternative uses of the time spent on the game. b. Carrie would most likely purchase the rare items as she has a higher time cost (i.e., more income has to be forgone). p.9 Misconceptions 1.1 No, because Jack’s time cost may be higher than Sue’s.

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p.15 Test yourself 1.4 a. No change. This will only lower the value of getting a Mili stockpot. b. Increase. As the Bilisonic rice cooker becomes more needed, the value of the Bilisonic rice cooker increases. The cost of getting a Mili stockpot increases. c. Uncertain. This will raise the value of the Apollo microwave oven. If the oven becomes the first or second priority, the cost of getting the stockpot increases. However, if the oven remains the third priority, the cost of getting the stockpot will remain unchanged. d. Increase. As the dishwasher becomes the second priority and has a higher value than the rice cooker, the cost of getting the stockpot will increase. Test yourself 1.5 a. No. The value of staying at her current bank will increase. If the option ‘To stay at her current bank’ becomes her first or second option, the cost of switching to the international bank will increase. b. No. If the option ‘To stay at her current bank’ remains as the third priority, the cost of switching to the international bank will remain unchanged. p.17 Test yourself 1.6 a.  b.  c.  d.  Test yourself 1.7 a. Incorrect. This will only lower the cost of buying an electric vehicle. b. Incorrect. This will only raise the cost of using an electric vehicle. c. Correct. As the time cost of using an electric vehicle decreases, Carmen will be more willing to use an electric vehicle. This encourages her to buy (or rent) an electric vehicle.

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p.18 Misconceptions 1.2 a. Yes. As this increases the possibility of catching a cold, the singer may need to pay medical costs. In addition, if the singer caught a cold, he may need to take sick leave and give up some income. He could avoid the medical expense and the sick leave if he chooses not to hold the concert. b. Yes. This will increase the value of watching the match. If watching the match is his highest-valued option forgone, then the cost of holding the concert will increase. c. No. This will only lower the value of holding the concert. p.22 Test yourself 1.8 a. Not a free good. b. Not a free good. c. Not a free good. d. Free goods. We prefer to have some of but not more of leaves. e. Not a free good. p.23 Misconceptions 1.3 a. No. Sometimes the government and some producers provide economic goods to consumers at a zero price. b. No. As long as the available quantity of a good is SUFFICIENT to satisfy all human wants for it, the good is a free good, whether the amount people need of it is small or not. c. No. As long as the available quantity of a good is INSUFFICIENT to satisfy all human wants for it, the good is an economic good, whether its available quantity is small or not. d. Yes. We do not need to allocate scarce resources to produce free goods. e. No. Both economic goods and free goods can satisfy one’s wants. The difference between the two types of goods is based on whether they are scarce or not. f. No. People may not prefer an economic good to a free good. Some free goods like air and sunlight are essential to our lives and we must have a certain amount of them. g. No. Economics is the study of scarcity. It is more important for us to study how to allocate limited resources to provide economic goods.

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h. Yes. Since a free good is a good whose quantity available is sufficient to satisfy all human wants for it, no alternative use is forgone and no cost is involved in using it. (Note that free goods can be transformed into economic goods in some cases. For example, seawater in the ocean is a free good. But once the seawater has been delivered to a seafood restaurant, it is transformed into an economic good as labour is involved.) p.24 Test yourself 1.9 Production 

a. A student helps erase the blackboard.

Consumption

b. Mary reads a magazine for leisure.



c. John surfs the internet to complete his research report.

 

d. A father repairs a TV set at home.

p.26 Test yourself 1.10 Yes. Members of households consume goods and services. To support their consumption, they supply factor services to firms in order to earn income. p.30 Test yourself 1.11 People prefer to consume goods earlier. If customers do not need to pay interest for earlier availability, their cost of present consumption decreases. As a result, more customers will choose to buy electrical appliances with interest-free instalment loans now. Misconceptions 1.4 a. Incorrect. Even if money does not exist, interest still exists. Interest can be expressed as the extra amount of goods paid to compensate the lender for deferring his consumption of the goods. b. Correct. When there is no scarcity, people do not need to make choices between present and future consumption of economic goods. Thus, interest does not exist.

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Exercises pp.32-35 Multiple Choice Questions 1. B Both Options C and D are incorrect. Scarcity is a relative concept. Provided that we do not have enough resources to satisfy all wants, there is scarcity. 2. D Option B is not correct. Scarcity causes us to make choices. Both Options A and C are incorrect. Even if a country (a person) is very rich, it (he) will still face the problem of scarcity, provided that the resources available cannot satisfy all wants. 3. C 4. C Option C is the answer. As the tuition is not refundable, it is the money paid in the past 5.

6.

7.

8.

9.

and should not be counted as part of the cost of withdrawing from the university. A Option B is not correct. The opportunity cost includes both the money cost and nonmoney cost. The price we pay for a good is the money cost. A The highest-valued option forgone is the choice of buying a sports car. Even if the money is won in a lucky draw, there is still an opportunity cost of using it as long as there are choices about its uses. D Neither Option A nor B is the answer. They will raise the value of the Cat Empire. If the Cat Empire becomes the second priority, the cost of choosing the computer game will increase. Option C is not correct. This will only lower the value of the computer game. A Option B raises the cost of owning the flat. Even if Mr Lee sells his flat, he may continue to live in the flat by renting it. Option C lowers the cost of owning the flat. D Option B will lower the value of taking the two subjects. Both Options A and C will raise the money cost of taking the exchange programme. In other words, the value of the exchange programme decreases and so does the cost of taking the two subjects.

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10. B Mr Chan’s cost of keeping the mobile phone is the value of reselling it in the second-hand market. If the price or the value of the mobile phone in the second-hand market increases, his cost of keeping it increases. Option A affects the cost of buying a new mobile phone while Option C affects the cost of using (instead of keeping) the mobile phone. 11. D Option A is not correct. As Mr Zhao has purchased the air ticket and the air ticket cannot be resold, the change in the air ticket price will not affect the cost of going to Kazakhstan. Option B will only increase the value of going to Kazakhstan. Option C will lower the value of taking high-speed trains to Kazakhstan. 12. D The cost for the group to go ahead with the show would increase. If the group chose not to go ahead, it could avoid the possibility of being caught and punished. 13. A Option B is not correct. An economic good may not involve production. Some natural resources are natural gifts which involve no production costs. 14. D 15. D Option B is not correct. People prefer to have some free goods. 16. B 17. D 18. D 19. C 20. B pp.35-37 Short Questions 1. No. (1 mark) Even in rich countries like the United States, people have to face the problem of scarcity (1 mark) because people’s wants are unlimited and resources are limited. (1 mark) They have to make choices about the use of scarce resources and opportunity costs are involved in making choices. (1 mark)

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2. a. Building a swimming pool (1 mark) because it is the highest-valued option forgone. (1 mark) b. Building a commercial complex (1 mark) because it is the highest-valued option forgone. (1 mark) c. If the value of the oil is higher than the value of using the land to build a commercial complex, then the opportunity cost of building a swimming pool will increase. (2 marks) 3. a. Remains unchanged. (1 mark) The low safety rating will only lower the value of the car which is not the best alternative forgone. (2 marks) b. Decreases. (1 mark) The original cost of choosing the luxury watch is the (value of the) diamond ring. After the event, the option of the diamond ring is no longer available. Thus, the new cost of choosing the luxury watch is the (value of the) car, which has a lower priority than the diamond ring. (3 marks) c. Remains unchanged. (1 mark) The event will only raise the value of the luxury watch, but have no effect on the value of the highest-valued option forgone. (2 marks) 4. a. Yes, (1 mark) because this will only affect the value of developing residential property in Nam Sang Wai. (2 marks) b. No. (1 mark) If preserving Nam Sang Wai is the highest-valued option forgone and the value of preserving it decreases, the opportunity cost of developing residential property in Nam Sang Wai will decrease. (2 marks)

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5. Doctor Chan is right. (1 mark) When a person spends an hour getting a haircut, he has to give up the opportunity to do other things during that period, thus the best alternative use of the time spent is his time cost. Since Doctor Chan’s hourly income is higher than that of taxi driver Lam, Doctor Chan’s time cost of getting a haircut is higher. (3 marks) Therefore, even when the money cost of a haircut is the same for both of them, Doctor Chan’s full cost of having a haircut is higher. (1 mark) 6. Yes. (1 mark) A free-of-charge lunch involves cost. When more resources are used to produce the lunch, fewer resources will be available for producing other lunches. (2 marks) 7. a. No. (1 mark) John needs to pay a cost (e.g., time cost) to obtain the electronic book. / Its production involves a cost. (2 marks) (Any other reasonable explanation) b. No. (1 mark) Although John pays a zero money price, his non-money cost may be higher or he may have other non-money costs. For example, ● John may spend more time searching for the book. ● John may forgo more income searching for the book. ● John may need to spend more money on his internet connection. (Any ONE of the above or other reasonable answers. 2 marks) OR Yes. (1 mark) If John is rational, when his non-money cost is high enough, he will choose to pay the price to buy the book instead. His choice of downloading the infringed electronic book implies that the value of his non-money cost is smaller than $5. (2 marks)

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8. No, the tickets are an economic good. (1 mark) When Ocean Park provides services for the students, fewer resources will be available to provide other services. Therefore, costs are incurred. (2 marks) OR More of these free tickets are preferred to less of them. (2 marks) 9. For borrowers, interest is the cost of the earlier availability of goods or resources. (2 marks) For lenders, interest is the compensation for deferring consumption of goods or the use of resources. (2 marks) 10. Disagree.

(1 mark)

Interest can be in terms of money or non-money things. Interest exists even if there is no money. (1 mark) In an economy that does not use money, borrowers may pay the interest charge with an extra amount of goods in addition to the borrowed amount. (1 mark)

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