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(ECON150)150f2006.final.pdf
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Department of Economics, HKUST
ECON 150

Big Problems in Economics: Issues, Ideas, and Principles
Semester: Fall 2006 Professor S. F. Leung
Final Examination December 18, 2006 12:30 pm C 3:30 pm
This is a closed book examination. You have 180 minutes to complete the exam. Write coherently, lucidly, and legibly. Explain your answers wherever necessary. The maximum score for this exam is 180 points. Points are marked in parentheses next to the question numbers. The numbers in square brackets refer to the points for each part of the questions. The points may be served as a rough guide to how much time you should allocate on each question. Points will be deducted for irrelevant materials. Use mathematics and/or diagrams wherever appropriate to support your answer.
This examination contains altogether 11 questions.
1. (10) [5,5]
(a)
Suppose the Hong Kong government considers following the US methodology in defining the poverty line. According to the 1999/2000 Household Expenditure Survey, Hong Kong people spent 25.7% of their income on food. Using this information and making appropriate assumptions, determine the poverty line. Clearly show your steps.

(b)
According to the 1999/2000 Household Expenditure Survey, Hong Kong people spent 1% of their income on alcoholic drinks and tobacco (namely, Chinese wines, foreign-style wines, beer, and cigarettes). If the government declares that these sinful goods are inappropriate for the poor, how should the poverty line in (a) be modified? Explain.


2.
(5)

For low income countries where women are discriminated in the job market, free trade will improve the welfare of women. Do you agree? Explain.

3.
(10) [5,5]


(a)
Give three reasons for why monopoly is undesirable.

(b)
If monopoly is undesirable, then why does the government continue to grant monopoly rights to companies and individuals?


4.
(5)

Suppose that the demand for a cartels product is falling. What will be the effects, if any, of falling demand on the stability (effectiveness) of the cartel? Explain.

5.
(10) [4,6]


(a)
There are many types of trade restrictions. Give three different types and explain how they work.

(b)
If free trade between two countries is mutually beneficial, then why are there so many trade restrictions in the real world? Give six reasons for trade restrictions.


6. (20) [8,4,5,3]
(a)
Using the Classical AD/AS model, indicate the difference between an anticipated and an unanticipated increase in aggregate demand. Which is more likely to result in a temporary surge of real output?

(b)
Suppose that there is a sudden stock market crash and the economy was initially operating at its full-employment output level. Analyze the following situations within the framework of the Classical model.

(i)
What are the short run effects on output, unemployment rate, and domestic prices? Show the effects in the AD/AS diagram.

(ii)