HKDSE Economics Practice Paper: Market Structure, Competition And Monopoly

HKDSE Economics Practice Paper: Market Structure, Competition and Monopoly

2026-11-03

HKDSE Economics: Market Structure

HKDSE Economics paper on market structure: 12 questions, 100 marks, 75 minutes, covering competition, monopoly, oligopoly, concentration, deadweight loss and price discrimination.

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Paper details　Level: S6 | Subject: Economics | Time: 75 minutes | Marks: 100 | Questions: 12

Section A (Questions 1 to 4, 30 marks)

Read each question and write the correct answer with an explanation.

#	Question	Answer and marking notes
1	State the differences between perfect competition and monopolistic competition in terms of product differentiation and the number of firms.	Product differentiation: under perfect competition the product is homogeneous and consumers treat the output of every firm as a perfect substitute, whereas under monopolistic competition products differ in substance or in consumers perception, through branding, packaging, location and after-sales service. Number of firms: perfect competition has very many firms, each with a negligible share, while monopolistic competition has many firms but fewer than perfect competition, and each has slight pricing power because of differentiation. Marking points: 3 marks for each comparison. Common weakness: saying only that products differ without explaining homogeneity and differentiation.
2	Explain why firms in an oligopoly often avoid direct price competition, and state the effect of this behaviour on consumers.	Reasons: an oligopoly has few firms that are mutually interdependent, so a price cut by one invites retaliation, a price war follows and the profits of all fall; firms therefore prefer non-price competition such as advertising, branding and service; with a kinked demand curve, rivals follow a price cut but not a price rise, so prices are sticky. Effect on consumers: prices may be more stable in the short run, but non-price competition raises costs and may push prices up in the long run, and advertising may confuse choice. Marking points: interdependence, retaliation and price war, non-price competition, and the effect on consumers. Common weakness: saying only that firms do not want to cut prices without explaining interdependence.
3	The market shares of five firms are 40 per cent, 25 per cent, 15 per cent, 10 per cent and 10 per cent. (a) Find the four-firm concentration ratio. (b) Find the Herfindahl index. (c) Identify the market structure from the index.	(a) 40 plus 25 plus 15 plus 10 equals 90 per cent. (b) 40 squared plus 25 squared plus 15 squared plus 10 squared plus 10 squared equals 1,600 plus 625 plus 225 plus 100 plus 100, which is 2,650. (c) A four-firm ratio of 90 per cent and an index of 2,650 indicate a highly concentrated oligopoly, close to a tight oligopoly. Marking points: the equation, the sum of squares and the identification. Common weakness: adding shares without squaring them.
4	A monopolist faces a price of 120 dollars, has a marginal cost of 40 dollars, produces 1,000 units and has an average total cost of 70 dollars. (a) Find total revenue. (b) Find total cost. (c) Find profit. (d) Find the mark-up of price over marginal cost as a percentage, to one decimal place.	(a) 120 multiplied by 1,000 equals 120,000 dollars. (b) 70 multiplied by 1,000 equals 70,000 dollars. (c) 120,000 minus 70,000 equals 50,000 dollars. (d) (120 minus 40) divided by 120 multiplied by 100 equals 66.7 per cent. Marking points: working and units for each part. Common weakness: using marginal cost as the denominator, or giving the absolute mark-up of 80 dollars without a percentage.

Section B (Questions 5 to 8, 32 marks)

Read each question and write the correct answer with an explanation.

#	Question	Answer and marking notes
5	The demand curve shows that quantity demanded is zero at a price of 120 dollars and 500 units at a price of 80 dollars. Assuming perfect competition, (a) find the consumer surplus, and (b) explain the link between consumer surplus and price elasticity of demand.	(a) 0.5 multiplied by (120 minus 80) multiplied by 500 equals 10,000 dollars. (b) The more elastic the demand, the more strongly consumers respond to price, so the gap between willingness to pay and the price actually paid is larger and consumer surplus is greater; if demand were perfectly inelastic, consumer surplus could absorb most of the value. Marking points: the triangle formula and the elasticity link. Common weakness: omitting the factor of 0.5 and treating the area as a rectangle.
6	A monopolist sets output at 600 units and a price of 120 dollars with a marginal cost of 40 dollars; under perfect competition output would be 1,000 units. (a) Find the deadweight loss. (b) Explain its source.	(a) 0.5 multiplied by (120 minus 40) multiplied by (1,000 minus 600) equals 0.5 multiplied by 80 multiplied by 400, which is 16,000 dollars. (b) Monopoly output is below the socially optimal level: for units 600 to 1,000 the price consumers are willing to pay exceeds marginal cost, so those trades would have raised total surplus but do not take place, and the loss is the triangle. Marking points: the formula and the explanation of restricted output. Common weakness: using total cost instead of marginal cost, or confusing deadweight loss with monopoly profit.
7	The price of a product rises from 100 dollars to 110 dollars and quantity demanded falls from 500 to 450 units. (a) Find the price elasticity of demand to two decimal places. (b) Find the change in total revenue. (c) State whether demand is elastic, unit elastic or inelastic.	(a) Percentage change in quantity is (450 minus 500) divided by 500, which is minus 10 per cent; percentage change in price is (110 minus 100) divided by 100, which is plus 10 per cent; elasticity is minus 10 divided by 10, or minus 1.00, with an absolute value of 1.00. (b) Initial revenue is 100 multiplied by 500, or 50,000 dollars; new revenue is 110 multiplied by 450, or 49,500 dollars, a fall of 500 dollars. (c) An elasticity of one means unit elastic demand, which is consistent with the fall in total revenue. Marking points: both percentages, the elasticity value and the revenue comparison. Common weakness: dividing a change in quantity by a change in price, or missing the link between unit elasticity and falling revenue.
8	When output rises from 1,000 to 2,000 units, long-run average cost falls from 75 dollars to 60 dollars. (a) Find the percentage fall in cost. (b) Explain how economies of scale create a natural monopoly.	(a) (75 minus 60) divided by 75 multiplied by 100 equals 20.0 per cent. (b) Economies of scale mean long-run average cost falls as output rises, through indivisibilities, specialisation, bulk buying and cheaper finance. Where market demand supports only one large firm, the incumbent can use low costs to drive out rivals, so a natural monopoly arises and supply by a single firm is actually the cheapest arrangement. Marking points: the percentage, the sources of economies of scale and the natural monopoly reasoning. Common weakness: confusing economies of scale with fixed costs without explaining falling average cost.

Section C (Questions 9 to 12, 38 marks)

Write fuller answers and support them with specific examples and data.

#	Question	Answer and marking notes
9	Explain the conditions for third-degree price discrimination and analyse its effects on consumer surplus and market efficiency.	Conditions: the firm must have pricing power; it must be able to separate consumers into groups by elasticity, and resale between groups must be impossible; elasticities must differ, so the inelastic group pays more. Effects: the firm converts part of consumer surplus into profit and consumer surplus falls; if the extra output brings quantity close to the competitive level, total surplus may rise and efficiency may improve, although distribution becomes more unequal. Marking points: three conditions, the transfer of surplus and the efficiency and equity judgement. Common weakness: describing different prices for different people without mentioning the ban on resale.
10	Discuss the statement: A monopoly always harms social welfare.	For and against: a monopoly restricts output and raises price, creating deadweight loss, and may become productively inefficient and less innovative without competitive pressure, so it harms welfare. Yet a monopoly may bring economies of scale and lower average cost and avoid duplicating networks such as rail or grid infrastructure; monopoly profit can fund research, and patents deliberately trade short-run monopoly for long-run innovation; where the market is contestable, potential entrants already discipline conduct. Conclusion: the statement is too absolute and depends on contestability, the strength of economies of scale and the effectiveness of regulation. Marking points: two points on each side, examples and a clear conclusion. Common weakness: listing drawbacks without weighing efficiency and innovation.
11	Compare perfect competition and monopoly in terms of price, output and efficiency, using the data in questions 4 and 6 to support your answer.	Price: the monopoly price of 120 dollars exceeds marginal cost of 40 dollars, whereas the competitive price would equal marginal cost. Output: monopoly output of 600 units is below the competitive 1,000 units. Efficiency: perfect competition achieves allocative efficiency where price equals marginal cost and total surplus is maximised; the monopoly restricts output and creates a deadweight loss of 16,000 dollars, so allocative efficiency is lower, although the monopoly may enjoy better productive efficiency through economies of scale, so the overall comparison depends on whether those savings offset the deadweight loss. Marking points: three comparisons, use of the data and an efficiency judgement. Common weakness: comparing prices only without using marginal cost and output to explain efficiency.
12	Explain the concept of a contestable market and how a government can promote competition by reducing sunk costs.	Concept: a contestable market is one where, even with few or only one firm, entry and exit are free and there are no sunk costs, so the threat of potential entrants forces incumbents to price close to marginal cost and behave much like perfect competitors. Policy: a government can lower licensing and land barriers, allow shared infrastructure, require short contracts and easy switching, and avoid demanding irreversible specialised assets, all of which reduce sunk costs, while keeping information open and enforcing competition law so that entrants can join at any time. Marking points: definition, sunk costs and two policies. Common weakness: treating a contestable market as identical to perfect competition and ignoring potential rather than existing rivals.

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