FREE HKDSE PRACTICE PAPER
HKDSE Economics Paper 2 Mock Paper (2027)
This practice paper follows the HKEAA 2027 Paper 2 question-answer book: Section A (44 marks) has 8 short questions with parts of 1 to 5 marks, Section B (60 marks) has 4 structured questions ending in a source-based question with an essay part, and Section C (16 marks) has one question on each elective part, of which candidates attempt ONE. Allow 2 hours 30 minutes. Model answers give the marking points, including the effective communication marks for the essay.
14 questions120 marks2 hr 30 min
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Paper structure
- Section A8 questions · 44 marks
- Section B4 questions · 60 marks
- Section C2 questions · 16 marks
Topics in this sample
- Basic economic concepts
- Firms and production
- Market and price
- Efficiency, equity and the role of government
- Macroeconomic problems and policies
- Money and banking
- International trade and finance
- National income determination and price level
- Elective 1: Monopoly pricing, anti-competitive behaviours and competition policy
- Elective 2: Extension of trade theory, economic growth and development
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Model answers
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Question 15 marks
1(a): Opportunity cost is the highest-valued option forgone (1). It is the $600 from private tuition, not $600 + $400, because Mr Lee can only take one of the alternatives (1).
1(b): A free good is a good with zero opportunity cost to society, i.e. the quantity available is more than enough to satisfy all wants at zero price (1). Producing the lunch boxes uses scarce resources such as food ingredients and labour, which have alternative uses (1). The lunch boxes are therefore economic goods, even though they are given at zero price; a zero price does not make a good a free good (1).
Question 24 marks
2(a): Statement A is a positive statement (1). It describes what will happen and can be refuted by facts, e.g. by comparing cigarette consumption before and after the duty rise (1).
2(b): Statement B is not a positive statement; it is a normative statement (1). It contains a value judgement ('should') about what ought to be done and cannot be refuted by facts (1).
Question 34 marks
3(a): Marginal product of the 4th worker = 150 − 120 = 30 loaves (1).
3(b): The marginal products of the 1st to 5th workers are 30, 40, 50, 30 and 15 loaves (1). The number of ovens is fixed while labour is a variable factor; holding technology constant, the marginal product of labour rises at first but diminishes from the 4th worker onwards (1). Hence the law of diminishing marginal returns is illustrated: when more units of a variable factor are added successively to a given quantity of fixed factors, the marginal product of the variable factor will eventually diminish (1).
Question 46 marks
4(a): Diagram: demand and supply curves of subdivided units with equilibrium rent P₀ and quantity Q₀; a maximum rent Pc drawn below P₀ (1); quantity supplied Qs and quantity demanded Qd at Pc correctly indicated (1). At the lower rent, landlords are willing to let out fewer units, so the quantity supplied falls from Q₀ to Qs (1). Since the quantity transacted is the smaller of the quantity demanded and quantity supplied, the quantity of units rented falls from Q₀ to Qs and there is a shortage of Qd − Qs (1).
4(b): Any TWO, 1 mark each: queuing or long searching time for units; side payments such as key money (black market); deterioration in the quality or maintenance of units; landlords choosing tenants by non-price criteria (e.g. discrimination).
Question 56 marks
5(a): Expected real interest rate = 3% − 1% = 2% (1).
5(b): Actual real interest rate = 3% − 4% = −1% (1).
5(c): The actual real interest rate (−1%) is lower than the expected real interest rate (2%) (1). The bank, as the borrower, gained, while Ms Wong, the lender, lost purchasing power (1).
5(d): From MV = PY, the inflation rate equals the growth rate of money supply when the velocity of circulation of money (V) is constant (1) and real output (Y) is constant (1).
Question 65 marks
6(a): Required reserves = 20% × 100 million; excess reserves = 100 million = $50 million (1).
6(b): Banking multiplier = 1 / 20% = 5 (1). Maximum possible change in deposits = $50 million × 5 = $250 million (1).
6(c): Any ONE explained, 2 marks: the public may hold part of the loans as cash (cash leakage), so less is redeposited and the deposit creation process is smaller; banks may keep excess reserves for safety; there may be insufficient demand for loans from creditworthy borrowers.
Question 76 marks
7(a): With the same amount of resources, Country A can produce more wheat than Country B (600 units > 400 units) (1). Country A has an absolute advantage in producing wheat (1).
7(b): Opportunity cost of 1 unit of cloth: Country A = 600/300 = 2 units of wheat; Country B = 400/100 = 4 units of wheat (1). Country A has the lower opportunity cost and hence a comparative advantage in producing cloth (1).
7(c): 1 unit of cloth exchanges for more than 2 units of wheat (1) and less than 4 units of wheat (1).
Question 88 marks
8(a): Consumption expenditure (1).
8(b): Lower household wealth reduces consumption expenditure (1), so the AD curve shifts to the left from AD₀ to AD₁ (1). At the original price level there is excess supply of aggregate output, so the general price level falls from P₀ to P₁ (1) and real output falls from Y₀ to Y₁ along SRAS (1). Correct diagram with AD₁, P₁ and Y₁ labelled (1).
8(c): The deflationary (output) gap is the distance between the full-employment output Yf (at LRAS) and Y₁ (1). Any ONE measure: increase government expenditure, or cut taxes, to raise aggregate demand (1).
Question 913 marks
9(a): Any TWO, 1 mark each: shareholders of a private limited company have limited liability while partners (except limited partners) have unlimited liability; a limited company is a separate legal entity with continuity, while a partnership may be dissolved when a partner dies or leaves; a private limited company can raise capital from up to 50 shareholders, while a partnership is usually limited to 20 partners; shares of a private limited company may be transferred with the consent of other shareholders, while a partner's ownership cannot be transferred freely.
9(b): Vertical expansion (backward) (1). Any TWO reasons, 1 mark each: to secure a stable supply of tea leaves; to control the quality of inputs; to reduce transaction costs such as searching for and negotiating with suppliers; to capture the profit of the supplier.
9(c): The output of a rider (number of orders delivered) is easy to measure (1); piece rate links pay to output, giving riders an incentive to work harder and reducing the cost of monitoring them (1).
9(d): The output of a shop assistant is difficult to measure, since serving customers and preparing drinks are done jointly with other staff (1); paying by piece rate may cause assistants to sacrifice quality or neglect tasks that are not counted (1).
9(e): Any TWO reasons, 2 marks each: the drinks are differentiated (brand, taste, quality, hygiene), so customers are willing to pay more for Bubbly's products; the full cost (monetary cost + time cost) of buying from Bubbly may be lower because its shops are more conveniently located or serve faster; buying from a known brand lowers the information cost of checking quality.
Question 1014 marks
10(a): Tax = 20 000 + 20% × 6 000 (1). Average tax rate = 50 000 = 12% (1).
10(b): Progressive (1). The average tax rate rises as income rises, e.g. a worker earning 1 000, an average tax rate of 5%, which is lower than 12% (1).
10(c): The tax cut raises households' disposable income, so consumption expenditure increases (1). The AD curve shifts to the right (1). At the original price level there is excess demand for aggregate output, so the general price level rises (1) and real output rises towards the full-employment output (1); the deflationary (output) gap narrows (1). Diagram with LRAS, SRAS, AD₀ shifting to AD₁, and the original and new gaps indicated (1).
10(d): Lower tax rates reduce the revenue from each dollar of income (1), but the rise in aggregate output and income enlarges the tax base and may encourage people to work more, so total tax revenue may not fall (1).
10(e): Tobacco duty (or duty on alcohol/hydrocarbon oil, or a per-unit tax) (1). It is a fixed amount per unit, so the tax paid forms a larger proportion of the income of a low-income consumer than of a high-income consumer who buys the same quantity (1).
Question 1114 marks
11(a): The per-unit tax raises the cost of selling each unit, so the supply curve shifts upward by the amount of the tax from S₀ to S₁ (1). The price paid by consumers rises from P₀ to P₁ (1) and the quantity transacted falls from Q₀ to Q₁ (1). The price received by sellers falls to P₁ − t (1). The tax burden of consumers is the area (P₁ − P₀) × Q₁ correctly shaded (1).
11(b): The use and disposal of plastic cutlery causes pollution and uses landfill space, an external cost borne by third parties (1). Marginal social cost is higher than marginal private cost, so at the market output marginal social benefit is less than marginal social cost (1); too much is produced and there is a deadweight loss (1). The tax raises the private cost of using plastic cutlery, reducing the quantity towards the efficient level where MSB = MSC, so the deadweight loss is reduced (1).
11(c): The demand for plastic cutlery is price-inelastic (1), because customers regard it as necessary, it has few convenient substitutes and it forms a small proportion of expenditure (1). The percentage fall in quantity demanded is smaller than the percentage rise in price, so the quantity used would fall only slightly (1).
11(d): Advantage (1): the reduction in use is more certain and immediate. Disadvantage (1): it may overshoot the efficient quantity, removing uses whose benefit exceeds their social cost, or raise enforcement costs; the government also forgoes tax revenue.
Question 1219 marks
12(a): Unemployed workers may not have the skills required by, or may not live near, the vacant posts (mismatch / structural unemployment) (1); it takes time for job-seekers and employers to obtain information and match with each other (frictional unemployment), so vacancies and unemployment coexist (1).
12(b): Ageing and emigration reduce the number of people willing to work as restaurant workers, so the supply of labour decreases (1); the recovery of tourism and dining out increases the demand for restaurant workers (derived demand) (1). The equilibrium wage rate rises from W₀ to W₁ (1). Correct diagram with labelled shifts and wage rates (1).
12(c): Effective communication (EC, max. 2): 2 = arguments supported by the sources and appropriate economic theories, relevant material, well-organised without repetition, clear and fluent language; 1 = some support from the sources/theories, some irrelevant material or repetition; 0 = no support from the sources or theories, material unrelated to the question.
Content (max. 11). Answers may include:
Strategy 1, wage rates (max. 3): the supply of labour in the shortage sectors increases, lowering the wage rate (or slowing its rise) of local workers who are close substitutes for imported workers (Source B); workers in complementary jobs (e.g. supervisors) may gain as demand for them rises.
Strategy 1, productivity (max. 2): more workers with the same capital means each worker has less capital to work with, so average labour productivity may fall by the law of diminishing returns; imported workers with relevant skills may raise productivity where vacancies are filled.
Strategy 1, equity (max. 2): lower wages of low-skilled local workers may widen income inequality; firms' owners gain from lower costs.
Strategy 2, wage rates (max. 2): machines substitute for low-skilled labour, reducing the demand for them and their wage rates; demand for technicians and skilled workers who operate machines rises, raising their wages.
Strategy 2, productivity (max. 2): more and better capital per worker raises average labour productivity and potential output (Source D).
Strategy 2, equity (max. 2): wage gaps between skilled and unskilled workers widen and capital owners gain, so inequality may worsen; the subsidy is financed by taxpayers. Credit a reasoned overall comparison drawing on Source C (ageing makes the shortage long-lasting).
Question 1316 marks
13(a): The company produces the output at which MR = MC, i.e. Qm (1), because producing an extra unit adds to profit as long as MR > MC (1). The price is read off the demand curve at Qm, i.e. Pm (1). Qm and Pm correctly indicated (1).
13(b): Deadweight loss is the triangle between the demand curve and MC from Qm to the output where D = MC (1). At Qm the price, which measures marginal benefit, is higher than marginal cost (1), so units whose marginal benefit exceeds marginal cost are not produced (1).
13(c): Yes (1). Price discrimination is charging different prices for the same good where the price differences are not due to differences in cost (1). The different units of gas cost the same to supply but are sold at different prices according to the quantity consumed (multi-part / block pricing) (1).
13(d): Any ONE behaviour (1): predatory pricing, tying/bundling, exclusive dealing, refusal to deal, or margin squeeze. Explanation (2): e.g. predatory pricing drives rivals out by pricing below cost, after which the firm raises prices, so consumers face higher prices and less choice in the long run.
13(e): Piped gas has a high fixed cost of laying pipes (1). The average cost falls over a large range of output because of economies of scale (natural monopoly) (1). Several suppliers duplicating the network would each have a higher average cost, which may lead to higher prices (1).
Question 1416 marks
14(a): The opportunity cost of 1 unit of Good X in Country A is 60/30 = 2 units of Good Y, higher than the world price of 1 unit of Good Y (1). Equivalently, Country A produces Good Y at a lower opportunity cost (0.5 units of X) than the world price, so it will export Good Y (1).
14(b): P at (0, 60) on the Good Y axis (1); CPFA as a straight line from (0, 60) to (60, 0) with slope equal to the world price (1); C at (20, 40) (1).
14(c): Without trade, consuming 20 units of X leaves 60 − 2 × 20 = 20 units of Y (1). With trade it consumes 40 units of Y, so the gain from trade is 20 units of Good Y (1).
14(d): A long and healthy life (life expectancy at birth) (1); knowledge (education, e.g. mean and expected years of schooling) (1); a decent standard of living (GNI per capita in PPP terms) (1).
14(e): Any ONE reason explained (3): the gains from growth may be unevenly distributed, so most people do not enjoy better health or education; growth may come with pollution that harms health; output may be devoted to investment, exports or military use rather than education and health care.
14(f): Foreign firms bring in capital, increasing the capital stock (1), and transfer technology and management know-how (1). Both raise labour productivity and the productive capacity of the economy, so real output grows (1).