S5 Economics Practice Paper: Price Elasticity, Consumer Surplus And Market Intervention (12 Questions, 100 Marks, 75 Minutes)

S5 Economics Practice Paper: Price Elasticity, Consumer Surplus and Market Intervention (12 Questions, 100 Marks, 75 Minutes)

2026-11-10

S5 Economics: Elasticity, Consumer Surplus and Market Intervention

S5 Economics paper: 12 questions, 100 marks, 75 minutes, on elasticity, consumer surplus, price ceilings, quotas, taxes, subsidies and monopoly pricing, with full answers and marking points.

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

Instructions: This paper has three sections, A, B and C. Answer all questions. Total marks: 100. Time allowed: 75 minutes.

Show the formula and the values substituted. Give money answers to two decimal places with units.

For percentage changes always use the original value as the denominator, and compare the absolute value with 1 when classifying elasticity.

Spend about 20 minutes on Section A, 30 minutes on Section B and the last 25 minutes on Section C.

Section A Price, Income and Cross Elasticity (4 questions, 28 marks)

Answer all questions and show the formula, the substitution and the units.

#	Question	Answer and marking notes
1	A cha chaan teng cuts the price of iced milk tea from 20 dollars to 18 dollars a cup, and daily sales rise from 50 to 65 cups. (a) Find the percentage changes in price and in quantity demanded. (b) Calculate the price elasticity of demand and classify it. (c) What happens to the shop daily total revenue?	Answer: (a) Price change = (18 – 20) / 20 x 100% = -10.0%; quantity change = (65 – 50) / 50 x 100% = +30.0%. (b) PED = 30.0% / (-10.0%) = -3.0; the absolute value 3.0 is above 1, so demand is elastic. (c) Old revenue = 20 x 50 = 1000 dollars; new revenue = 18 x 65 = 1170 dollars, a rise of 170 dollars or 17.0%, which is consistent with elastic demand.
2	The price of an electronic part rises from 40 dollars to 44 dollars, and a factory monthly supply rises from 200 to 224 units. (a) Find the percentage changes in price and in quantity supplied. (b) Calculate the price elasticity of supply and classify it. (c) Explain why short-run supply is usually less elastic than long-run supply.	Answer: (a) Price change = +10.0%; quantity supplied change = +12.0%. (b) PES = 12.0% / 10.0% = 1.2, above 1, so supply is elastic. (c) In the short run plant and machinery are fixed, output can rise only by extra shifts and marginal cost climbs quickly, so supply cannot expand much; in the long run the firm can build capacity, so supply is more elastic. The figures here describe the long run.
3	A household monthly income rises from 20,000 dollars to 22,000 dollars, and its purchases of a brand of instant noodles fall from 300 to 285 packets a month. (a) Find the percentage changes in income and in quantity demanded. (b) Calculate the income elasticity and classify the good. (c) Explain what this implies for the producer pricing strategy.	Answer: (a) Income change = +10.0%; quantity change = -5.0%. (b) YED = (-5.0%) / 10.0% = -0.5, below zero, so the good is inferior. (c) Demand falls as income rises, so sales shrink in richer districts; the producer should target price-sensitive buyers or add a higher grade product line.
4	The price of good Y rises from 50 dollars to 55 dollars, and the quantity demanded of good X rises from 400 to 440 units. (a) Find the two percentage changes. (b) Calculate the cross price elasticity. (c) State the link between X and Y and give one Hong Kong example.	Answer: (a) Price of Y change = +10.0%; quantity of X change = +10.0%. (b) XED = 10.0% / 10.0% = +1.0. (c) A positive value means X and Y are substitutes; for example two brands of instant noodles, where a price rise for one raises sales of the other.

Section B Consumer Surplus, Price Ceilings, Taxes and Subsidies (4 questions, 32 marks)

For elasticity questions, show the percentage changes and state the elasticity class.

#	Question	Answer and marking notes
5	The demand curve for a good is P = 100 – 2Q and the market price is 40 dollars. (a) Find the quantity traded. (b) Calculate the consumer surplus. (c) Explain what consumer surplus means.	Answer: (a) 40 = 100 – 2Q, so Q = 30 units. (b) Consumer surplus = 0.5 x 30 x (100 – 40) = 900 dollars. (c) Consumer surplus is the gap between what buyers are willing to pay and what they actually pay; here the first unit is worth 100 dollars to buyers but costs only 40 dollars.
6	Continuing from the previous question, the government sets a price ceiling of 30 dollars and the supply curve is P = 10 + 2Q. (a) Find quantity demanded and quantity supplied under the ceiling. (b) Find the shortage and the free market equilibrium price and quantity. (c) Calculate the deadweight loss.	Answer: (a) Quantity demanded = (100 – 30) / 2 = 35 units; quantity supplied = (30 – 10) / 2 = 10 units. (b) Shortage = 35 – 10 = 25 units; free market equilibrium: 100 – 2Q = 10 + 2Q gives Q = 22.5 units and P = 55 dollars. (c) Deadweight loss = area between the demand and supply curves from Q = 10 to Q = 22.5 = 90 x 12.5 – 2 x (22.5 squared – 10 squared) = 312.5 dollars.
7	Continuing, the government instead imposes a per-unit tax of 20 dollars on producers. (a) Find the new equilibrium quantity and the price paid by buyers. (b) Find the price received by producers. (c) Find the share of the tax borne by consumers and the tax revenue.	Answer: (a) Supply becomes P = 30 + 2Q, so 100 – 2Q = 30 + 2Q gives Q = 17.5 units and buyers pay 65 dollars. (b) Producers receive 65 – 20 = 45 dollars. (c) Consumers bear (65 – 55) / 20 = 50.0% of the tax; tax revenue = 20 x 17.5 = 350 dollars.
8	In the same market the government instead gives producers a per-unit subsidy of 10 dollars. (a) Find the new equilibrium quantity and the price paid by buyers. (b) Find the price received by producers. (c) Find the total cost of the subsidy.	Answer: (a) With the subsidy the supply condition is P = 2Q, so 100 – 2Q = 2Q gives Q = 25 units and buyers pay 50 dollars. (b) Producers receive 50 + 10 = 60 dollars. (c) Subsidy cost = 10 x 25 = 250 dollars.

Section C Monopoly Pricing, Quotas and Tax Incidence (4 questions, 40 marks)

For intervention questions use figures or a diagram to explain equilibrium, shortage, surplus and deadweight loss.

#	Question	Answer and marking notes
9	A monopoly faces demand P = 120 – 2Q and total cost TC = 20Q + 100. (a) Find the marginal revenue function. (b) Find the profit-maximising output and price. (c) Find the profit and the consumer surplus.	Answer: (a) TR = 120Q – 2Q squared, so MR = 120 – 4Q. (b) MR = MC: 120 – 4Q = 20 gives Q = 25 units and P = 70 dollars. (c) Profit = 70 x 25 – (20 x 25 + 100) = 1150 dollars; consumer surplus = 0.5 x 25 x (120 – 70) = 625 dollars.
10	The demand for a good is P = 60 – 0.5Q and the current price is 40 dollars. (a) Find the current sales and total revenue. (b) Find the price elasticity of demand at that point. (c) If the producer cuts the price to 36 dollars, find the new total revenue and its percentage change, and explain.	Answer: (a) 40 = 60 – 0.5Q gives Q = 40 units and revenue = 40 x 40 = 1600 dollars. (b) dQ/dP = -2, so elasticity = -2 x (40 / 40) = -2.0, which is elastic. (c) New quantity = (60 – 36) / 0.5 = 48 units and revenue = 36 x 48 = 1728 dollars, a rise of 8.0%, because the volume gain outweighs the price cut when demand is elastic.
11	Using the demand P = 100 – 2Q and supply P = 10 + 2Q from question 6, the government limits total supply to 15 units by a quota. (a) Find the price paid by buyers. (b) Find the price received by suppliers. (c) Find the quota rent and explain who gains.	Answer: (a) Buyers pay P = 100 – 2 x 15 = 70 dollars. (b) Suppliers receive P = 10 + 2 x 15 = 40 dollars. (c) Quota rent = (70 – 40) x 15 = 450 dollars; the holders of the quota gain while consumer surplus falls because the price rises.
12	The absolute value of price elasticity of demand for a good is 0.4 and the price elasticity of supply is 2.0. The government imposes a per-unit tax of 10 dollars. (a) Find the tax borne by consumers and by producers. (b) Explain why one side bears most of the tax.	Answer: (a) Consumers bear 10 x 2.0 / (2.0 + 0.4) = 8.33 dollars; producers bear 10 – 8.33 = 1.67 dollars. (b) Demand is inelastic and supply is elastic, so buyers cannot easily cut purchases and have weaker bargaining power, hence most of the tax is passed to them.

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