HKDSE Economics Paper 2 Short Questions Mock Paper (8 questions, 100 marks)

2026-10-31

HKDSE Economics Paper 2

HKDSE Economics Paper 2 short-question mock paper: 8 questions, 100 marks, 2 hours, with micro and macro sections, full answers and marking notes for exam practice.

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Paper details　Level: HKDSE | Subject: Economics | Time: 2 hours | Marks: 100 | Questions: 8

Section A: microeconomics (50 marks)

Short questions: answer in full sentences. For calculations, show the formula and working, give units and state your conclusion. Eight questions, 100 marks in total.

#	Question	Answer and marking notes
1	A bookstore chain cuts the price of a reference book from $20 to $16 per copy, and monthly sales rise from 500 to 650 copies. (a) Using the original quantity as the base, calculate the price elasticity of demand and state which type of elasticity it is. (4 marks) (b) Calculate total revenue before and after the price cut and explain why it changes in this way. (5 marks) (c) Should the shop raise or cut the price to increase total revenue? Explain. (3 marks)	Answer: (a) Percentage change in quantity = (650 – 500) / 500 x 100% = 30%; percentage change in price = (16 – 20) / 20 x 100% = -20%; elasticity = 30% / 20% = 1.5. As it exceeds 1, demand is elastic. (b) Revenue before = 20 x 500 = $10,000; after = 16 x 650 = $10,400, a rise of $400. With elastic demand the percentage rise in quantity is larger than the percentage fall in price, so total revenue rises. (c) Cut the price: price and total revenue move in opposite directions, so a price cut raises revenue while a price rise would lower it.
2	The government imposes a specific tax of $6 per bottle on a bottled drink. Before the tax the price is $30 and monthly sales are 500 bottles; after the tax the price rises to $34 and sales fall to 400 bottles. (a) How much tax per bottle is borne by consumers and by producers, and what percentage of the tax does each bear? (5 marks) (b) Calculate the government tax revenue per month. (3 marks) (c) If demand for the drink were perfectly inelastic, what share of the tax would consumers bear? Explain. (5 marks)	Answer: (a) Consumers bear 34 – 30 = $4, which is 4 / 6 x 100% = 66.7%; producers bear 6 – 4 = $2 (the price received falls from $30 to $26), i.e. 33.3%. Demand is relatively less elastic, so consumers bear the larger share. (b) Revenue = 6 x 400 = $2,400. (c) 100%. With perfectly inelastic demand the quantity does not fall when the price rises, so the whole $6 tax is shifted forward: the price rises from $30 to $36 and sales stay at 500 bottles.
3	A firm has the short-run total cost function TC = 5,000 + 20Q, where TC is in dollars and Q is monthly output. (a) Calculate average cost at Q = 300 and Q = 500, and say whether economies of scale exist; explain. (5 marks) (b) Find marginal cost and explain why it is constant. (4 marks) (c) If the market price is $28, should the firm keep producing at Q = 500? Show your calculation and explain. (3 marks)	Answer: (a) At Q = 300: TC = 5,000 + 20 x 300 = $11,000, so AC = $36.67. At Q = 500: TC = $15,000, so AC = $30.00. Average cost falls as output rises, so economies of scale exist (here because the fixed cost is spread over more units). (b) MC = $20. Only the fixed cost of $5,000 does not vary with output, and variable cost is a constant $20 per unit, so MC is constant. (c) Keep producing. Price $28 exceeds average variable cost $20, so each unit contributes $8 towards fixed cost; shutting down would lose the whole $5,000, whereas producing loses only $1,000.
4	A monopolist faces the demand curve P = 100 – 4Q, has a constant marginal cost of $20 and fixed costs of $200. (a) Find the profit-maximising output and price. (5 marks) (b) Calculate the profit at that output. (4 marks) (c) If the government requires marginal cost pricing, what happens to price and output, and to consumer surplus and total surplus? (4 marks)	Answer: (a) TR = 100Q – 4Q^2, so MR = 100 – 8Q. Setting MR = MC: 100 – 8Q = 20, giving Q = 10 and P = 100 – 4 x 10 = $60. (b) Profit = (60 – 20) x 10 – 200 = $200. (c) With marginal cost pricing: 100 – 4Q = 20, so Q = 20 and P = $20. Output rises and price falls, so consumer surplus rises; output is closer to the efficient level, so total surplus rises (the firm moves from a profit of $200 to a loss of $200).

Section B: macroeconomics (50 marks)

Short questions: answer in full sentences. For calculations, show the formula and working, give units and state your conclusion. Eight questions, 100 marks in total.

#	Question	Answer and marking notes
5	The figures for an economy in a year are (in millions of dollars): private consumption 1,200; gross domestic fixed capital formation 400; government consumption expenditure 350; exports of goods and services 900; imports of goods and services 750; depreciation 120. (a) Calculate GDP at market prices by the expenditure approach. (5 marks) (b) Calculate net exports and state whether their contribution to GDP is positive or negative. (3 marks) (c) Calculate net domestic product (NDP). (4 marks)	Answer: (a) GDP = C + I + G + X – M = 1,200 + 400 + 350 + 900 – 750 = 2,100 million dollars. (b) Net exports = 900 – 750 = 150 million dollars; being positive, exports exceed imports and the contribution to GDP is +150 million. (c) NDP = GDP – depreciation = 2,100 – 120 = 1,980 million dollars.
6	In a closed economy the marginal propensity to consume (MPC) is 0.8 and current output is 200 million dollars below potential output. (a) Calculate the expenditure multiplier. (4 marks) (b) If the government raises autonomous spending by 40 million dollars, how much does equilibrium output rise, and does it fully close the output gap? (5 marks) (c) If MPC rises to 0.9, how much would the same 40 million dollar increase raise output? Explain the difference. (4 marks)	Answer: (a) Multiplier = 1 / (1 – MPC) = 1 / (1 – 0.8) = 5. (b) Output rises by 40 x 5 = 200 million dollars, exactly equal to the 200 million gap, so the gap is fully closed. (c) With MPC = 0.9 the multiplier is 1 / (1 – 0.9) = 10, so output rises by 40 x 10 = 400 million dollars. A higher MPC means a larger fraction of each round of new income is spent locally, so the multiplier effect is stronger.
7	A banking system has a required reserve ratio of 20%. The public holds no cash and banks hold no excess reserves. (a) Calculate the deposit multiplier. (3 marks) (b) If the reserves of the banking system rise by 50 million dollars, what is the maximum creation of deposits? (4 marks) (c) If banks actually hold 5% excess reserves, how do the actual reserve ratio, the multiplier and the maximum deposit creation change? (5 marks)	Answer: (a) Deposit multiplier = 1 / required reserve ratio = 1 / 0.20 = 5. (b) Maximum deposit creation = 50 x 5 = 250 million dollars. (c) Actual reserve ratio = 20% + 5% = 25%; multiplier = 1 / 0.25 = 4; maximum deposit creation = 50 x 4 = 200 million dollars, i.e. 50 million less. Excess reserves keep a larger share of new deposits inside the banks instead of being lent out, weakening the multiplier effect.
8	The consumer price index (CPI) of an economy rises from 110 to 115.5, while the nominal interest rate is 7%. The exchange rate of the Hong Kong dollar changes from 7.80 to 7.75 per US dollar. (a) Calculate the inflation rate for the period. (3 marks) (b) Calculate the real interest rate using both the approximation method and the exact Fisher equation. (5 marks) (c) Has the Hong Kong dollar appreciated or depreciated against the US dollar? Calculate the change, taking the US dollar as the base. (5 marks)	Answer: (a) Inflation = (115.5 – 110) / 110 x 100% = 5.0%. (b) Approximation: real rate is about 7% – 5% = 2%. Exact (Fisher): (1 + 0.07) / (1 + 0.05) – 1 = 0.0190, i.e. about 1.90%. (c) The Hong Kong dollar has appreciated: one US dollar now costs 7.75 instead of 7.80 Hong Kong dollars, so fewer dollars are needed to buy a US dollar. The appreciation is (7.80 – 7.75) / 7.75 x 100% = 0.645%.

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