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(ECON150)150s2006.final.key.pdf
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Department of Economics, HKUST
ECON 150
Big Problems in Economics: Issues, Ideas, and Principles

Semester: Spring 2005/06
Tutor: Peter K. Tsui Office number: Room 2393 (ext.7597) Email: [email protected] Office hours: Wed 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.
Uncertain. It depends on whether households spending on food has risen or not.

2.
If we knew the costs and benefits of abatement and if all firms costs were identical, we could apply a standard. Alternatively, if the costs of abatement varied among firms, an emissions fee would work. However, when firms costs vary and we do not know the costs and benefits, neither a standard nor a fee will generate an efficient outcome. In this case, we can reach the goal of reducing emissions efficiently by using transferable emissions permits.

None of these three methods is the best universally.

3.
No. A cartel will be less effective the more heterogeneous is the product because each firm has incentive to cheat by arguing that the difference in prices is due to the heterogeneity of products.

Example: Oil markets

4.
(a) The hotels had high expectations on the number of visitors to Hong Kong.

(b)
Restaurants, Retail, Transportation, Theme Parks, Tour Guiding.

(c)
Yes, the hotels action (setting high prices) should be regarded as a negative externality to the businesses mentioned in part (b) because its effect is not taken into account by normal market behavior.



5.
The demand for the drugs sold by chain drug stores is higher because of the convenience and reliability they offer. On the other hand, since the chain drug stores are usually set up at busy locations, their rental costs are usually higher than those of the retail drug stores.

6.
Arguments for:

.
Nurses do not have enough knowledge about drugs dispensing

.
Doctors charge high prices when the two types of services are offered together

.
Patients cannot buy prescription drugs in pharmacies without prescription from doctors




Arguments against:
.
Time cost to patients

.
High cost of operation of pharmacies

.
Doctors earn less after separation


Gainers: Pharmacists, Patients
Losers: Doctors, Patients

7.
According to Professor Sung of the Chinese University of Hong Kong, the South Korean government should be responsible for the Korean farmers hardship. In South Korea, the production of rice has no comparative advantage. Although the government can temporarily maintain the rice farmers livelihood by subsidizing them, the structural change of the agricultural industry is hampered. As a result of this policy, the price of rice in South Korea is currently five times as high as the world price, whi