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(ECON150)150f2006.final.key.pdf
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Department of Economics, HKUST
ECON 150
Big Problem in Economics: Issues, Ideas, and Principles

Semester: Fall 2006/07
Tutor: Peter K. Tsui Office number: Room 2393 (ext.7597) Email: [email protected] Office hours: Thu 2:30p.m. C 5:00p.m.
Note: This set of solutions serves only as guidelines for grading. Giving the same answers as suggested below is no guarantee of full credits. Detailed explanation is required.

Final Examination
(Solutions prepared by Peter Tsui)

1. (a) Assume that we knew the cost of a minimally adequate diet. 1
The figure was then multiplied by 3.89 ( = ) to get the poverty line.
25.7%
1.1%
(b) The figure was multiplied by 3.85 ( = ) instead to get the poverty
25.7%
line.

2.
Yes. Free trade encourages competition. Competition makes gender discrimination costly.

3.
(a) Rent seeking Less incentive to innovate Deadweight loss due to underproduction

(b) Natural monopoly
Protection of intellectual property right
Existence of negative externality


4.
Individual firms in the cartel will have incentive to cheat by lowering their selling price because there is not enough demand for their products. The stability of the cartel is therefore negatively affected.


5. (a) Tariff C a tax levied when a good is imported. Import Quota C limitations on the quantity of imports. Nontariff barriers C barriers to trade resulting from regulatory actions.
(b) Protection of local industries Retaliation Environmental objections Immoral labor practices National security National identity
6. (a) Unanticipated
Price LRAS

P0
AD

AD

Real output
Output will deviate from full employment capacity when unexpectedly strong demand pushes prices in the good and services market up more than was expected. For a time, many wage rates, interest payments, rents, and other resource prices will continue to reflect the initial price level (P0) and the previously weaker demand. Because markets do not adjust instantaneously, these resource prices, and therefore costs, will lag behind prices in the goods and services market. Thus, the higher price level will temporarily improve profit margins, which, in turn, will provide the incentive for business firms to expand both output and employment in the short run.

P1

Anticipated Price LRAS Real output

YF
Output will not deviate from full employment capacity when the increase in aggregate demand was expected. As the contracts of many wage rates, interest payments, rents, and other resource prices have already taken into account the stronger demand in the near future, markets will adjust instantaneously once this stronger demand is realized. New resource prices, and therefore costs, will then take effect and the SRAS will shift upward, reflecting the higher prices in the output market.
(b) (i) Price
LRAS
SRAS
P0

P1

AD
AD


Real output
Y1
YF
The stock market crash reduces the