HKDSE Economics Paper 2 Practice Paper | 4 questions, 100 marks, 2 hours 15 minutes

2026-10-31

HKDSE Economics Paper 2

HKDSE Economics Paper 2 practice paper: 4 questions, 100 marks, 2 hours 15 minutes, covering demand, supply and elasticity, costs and profit maximisation, GDP, unemployment and inflation, fiscal policy and deposit creation. Full worked answers and mark schemes are included for S4 to S6 revision.

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Paper details　Level: HKDSE | Subject: Economics | Time: 2 hours 15 minutes | Marks: 100 | Questions: 4

Section A: Microeconomics (50 marks)

Answer ALL four questions. Total: 100 marks; time allowed: 2 hours 15 minutes. Show the formula and full working for calculations and give correct units; an answer without working scores at most half.

#	Question	Answer and marking notes
1	Daily demand and supply in a market are given (quantity in units, price in dollars): Qd = 1,200 − 40P Qs = 200 + 40P (a) Calculate the equilibrium price and quantity, showing your steps. (4 marks) (b) The government sets a price ceiling of $10. Calculate the quantity demanded, quantity supplied and the shortage, and name one group that gains. (4 marks) (c) The ceiling is replaced by a price floor of $15. Calculate the surplus and state one social cost it creates. (3 marks) (d) When price falls from $12.5 to $11, calculate the price elasticity of demand using the arc formula (4 decimal places) and say whether demand is elastic or inelastic. (6 marks) (e) Compute total revenue at the two prices in (d) and use elasticity to explain the direction of the change. (4 marks) (f) Suppose income rises and the good is a normal good. Explain what happens to the equilibrium price and quantity, and state which way the demand curve shifts. (4 marks)	(a) At equilibrium Qd = Qs: 1,200 − 40P = 200 + 40P → 1,000 = 80P → P = $12.5; Qd = 1,200 − 500 = 700 and Qs = 200 + 500 = 700, so Q = 700 units. (4: equation, P, Q, units) (b) A ceiling of $10 is binding. Qd = 800, Qs = 600, shortage = 200 units. Consumers who can buy at $10 gain; queues or rationing appear. (4: Qd, Qs, shortage, gainers) (c) A floor of $15 gives Qs = 800 and Qd = 600, so a surplus of 200 units. Cost: the price signal fails, resources are misallocated and producers may have to destroy stock or the government buy it up. (3: Qs/Qd, surplus, cost) (d) %ΔQ = (760 − 700) ÷ 730 = 8.2192%; %ΔP = (11 − 12.5) ÷ 11.75 = -12.766%; Ed = 8.2192 ÷ 12.766 = 0.6438; demand is inelastic because Ed < 1. (6: mid-point denominators, %ΔQ, %ΔP, formula, value, conclusion) (e) TR = 12.5 × 700 = $8,750; then 11 × 760 = $8,360, a fall of $390 (-4.46%). With inelastic demand the percentage rise in quantity is smaller than the percentage fall in price, so revenue falls. (4: two TR values, difference, elasticity explanation) (f) Demand for a normal good rises with income: the demand curve shifts right, so equilibrium price and quantity both rise. (4: shift, price, quantity, normal good)
2	A firm has total cost TC = 2Q² + 40Q + 8,000 (dollars), with fixed cost of $8,000. (a) Write down the marginal cost (MC) function and explain why MC excludes fixed cost. (3 marks) (b) If the market price is $400, find the profit-maximising output, total revenue, total cost and profit. (6 marks) (c) If price falls to $260, find the profit-maximising output and decide, with numbers, whether the firm should keep producing or shut down in the short run. (6 marks) (d) Find the long-run shut-down price (minimum average total cost) and explain its economic meaning. (6 marks) (e) Annual revenue is $165,000 and explicit costs are $120,000; the owner gives up $30,000 of salary and $10,000 of interest on own funds. Compute accounting profit and economic profit, and explain the difference. (4 marks)	(a) MC = dTC/dQ = 4Q + 40. Fixed cost of $8,000 does not vary with output, so its derivative is zero and it does not affect the cost of one more unit. (3: MC function, explanation) (b) Set P = MC: 400 = 4Q + 40 → Q = 90; TR = 36,000; TC = 2(90²) + 40(90) + 8,000 = 27,800; profit = 8,200. (6: condition, Q, TR, TC, profit) (c) 260 = 4Q + 40 → Q = 55; TR = 14,300, TC = 16,250, loss = 1,950. AVC = (16,250 − 8,000) ÷ 55 = 150, below price; shutting down loses the whole $8,000 fixed cost, which is worse, so produce on. (6: Q, loss, AVC comparison) (d) ATC = 2Q + 40 + 8,000/Q; dATC/dQ = 2 − 8,000/Q² = 0 gives Q = 63.25 and minimum ATC = $292.98. Below this price firms cannot earn normal profit and exit, so it is the long-run shut-down price. (6: ATC expression, minimisation, Q, price, meaning) (e) Accounting profit = 165,000 − 120,000 = 45,000; economic cost = 120,000 + 40,000 = 160,000; economic profit = 5,000. The $40,000 of implicit cost (salary and interest forgone) explains the gap. (4: accounting profit, economic cost, economic profit, explanation)

Section B: Macroeconomics (50 marks)

#	Question	Answer and marking notes
3	An economy reports (in $100 million): private consumption 1,200, gross domestic fixed capital formation 420, government consumption 380, exports of goods and services 900, imports of goods and services 980, net factor income from abroad −60, population 7.5 million. The price index (base year = 100) is 105 and real GDP last year was 1,760. (a) Compute GDP by the expenditure approach. (5 marks) (b) Compute GNP and explain how it differs from GDP. (3 marks) (c) Compute GDP per capita in dollars. (4 marks) (d) Compute real GDP and the real growth rate (2 decimal places). (5 marks) (e) The labour force is 3.9 million and employment is 3.75 million. Compute the unemployment rate and give one reason it may understate unemployment. (5 marks) (f) The CPI rises from 108.4 to 112.7. Compute the inflation rate (2 decimal places) and state the effect of inflation on people with fixed incomes. (3 marks)	(a) GDP = C + I + G + X − M = 1,200 + 420 + 380 + 900 − 980 = 1,920 ($100 m). (5: formula, components, answer with unit) (b) GNP = GDP + net factor income from abroad = 1,920 − 60 = 1,860. GDP is territory-based while GNP is resident-based; the difference is net factor income. (3: value, concepts, difference) (c) GDP per capita = 1,920 × 10⁸ ÷ 7.5 × 10⁶ = 25,600. (4: formula, unit conversion, answer) (d) Real GDP = 1,920 ÷ 1.05 = 1,828.6; real growth = (1,828.6 − 1,760) ÷ 1,760 × 100% = 3.9%. (5: deflating, real GDP, growth formula, answer) (e) Unemployed = 3.9 m − 3.75 m = 150,000; unemployment rate = 150,000 ÷ 3,900,000 = 3.85%. It may understate because discouraged workers leave the labour force and are not counted, and some work only part-time. (5: unemployed, formula, value, reason) (f) Inflation = (112.7 − 108.4) ÷ 108.4 × 100% = 3.97%. People on fixed money incomes lose purchasing power and their real living standard and savings fall. (3: formula, value, effect)
4	(a) The marginal propensity to consume is 0.8. Compute the expenditure multiplier and the change in equilibrium output if government spending falls by $4,000 million. (4 marks) (b) Government revenue is $710,000 million and spending $640,000 million. Compute the budget balance and state whether it is a surplus or a deficit. (4 marks) (c) Using (a) and (b), decide whether fiscal policy is expansionary or contractionary and give two channels through which it affects aggregate demand. (4 marks) (d) Banks hold initial deposits of $500,000 million with a 20% required reserve ratio, no excess reserves and no cash drain. Compute the deposit multiplier, the maximum final deposits and the newly created deposits. (6 marks) (e) The public holds $80,000 million of cash and $240,000 million of demand deposits. Compute M1. (3 marks) (f) Taxable income is $480,000. The first four $50,000 bands are taxed at 2%, 6%, 10% and 14%, and the remainder at 17%. Compute the tax payable and the effective tax rate (2 decimal places). (4 marks)	(a) Multiplier k = 1 ÷ (1 − 0.8) = 5.0; ΔY = 5.0 × (−40) = -200, so output falls by $200,000 million. (4: multiplier, change, direction) (b) Balance = 7,100 − 6,400 = 700 ($100 m), a surplus because revenue exceeds spending. (4: formula, value, conclusion) (c) Cutting spending while running a surplus is contractionary. Channels: lower government consumption and investment reduce the G component of aggregate demand directly, and the multiplier effect further reduces output and employment. (4: conclusion, two channels) (d) Multiplier = 1 ÷ 0.20 = 5.0; maximum deposits = 5,000 × 5.0 = 25,000; newly created = 20,000 ($100 m). (6: multiplier, total, new deposits, units) (e) M1 = cash + demand deposits = 800 + 2,400 = 3,200 ($100 m). (3: definition, working, answer) (f) Tax = 1,000 + 3,000 + 5,000 + 7,000 + 280,000 × 17% = 63,600; effective rate = 63,600 ÷ 480,000 × 100% = 13.25%. (4: bands, remainder, effective rate)

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