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(ECON150)150s2006.final.pdf
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Department of Economics, HKUST


ECON 150
Big Problems in Economics: Issues, Ideas, and Principles


Semester: Spring 2006
Professor S. F. Leung







Final Examination
May 27, 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 next to the questions and 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 12 questions.





















1. (5)



The Census and Statistics Department conducts the Household Expenditure Survey (HES) every five years. According to the most recent HES (2004-2005), households spending on digital goods, beauty services, and education are up, while those for housing, durable goods, clothing and footwear, among others, are down.

Suppose the Hong Kong government follows the US methodology in defining the poverty line. How would the above HES finding affect the Hong Kong poverty line?




2. (10)



The government can use three different methods to control the extent of air pollution: fee, standard, and transferable emission permit. Compare these three methods and discuss which one (if any) is the best.




3. (5)



A cartel will be more effective the more heterogeneous is the product. Do you agree? Explain and use an example to support your argument.




4. (10)



According to a newspaper report in May 2006, Hong Kongs tourism industry has seen business drop by around a fifth during the Labor Day "golden week" (May 1 C 7), with high hotel prices turning mainland visitors away.

(a) (2) Why did hotels set high prices?



(b) (2.5) The number of tour groups had dropped by nearly 20 percent compared to last year. In addition to hotels, name five different businesses which suffered as a result of the drop in visitors.



(c) (5.5) Should the hotels action (setting high prices) be regarded as a negative externality to the businesses you mentioned in part (b)? Explain. How does this case compare to the one discussed in class: US drivers suffer from higher gasoline prices due to the increase in demand for petroleum in China, but the latter is not regarded as a negative externality to US drivers.



5. (10)



There are two main types of stores that sell drugs in Hong Kong: chain drug stores and retail drug stores. They may sell the same drugs, but the drugs sold by chain drug stores are usually much more expensive than those by retail drug stores. Explain this phenomenon by means of a supply and demand an