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HKDSE Economics study materials
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HKDSE Economics practice questions

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Question 1Microeconomics

A bakery can produce 200 loaves a day using 5 workers. After hiring a sixth worker, output rises to 230 loaves a day. What is the marginal product of the sixth worker?

  1. 46 loaves
  2. 38.3 loaves
  3. 30 loaves Correct answer.
  4. 230 loaves

Explanation

Marginal product is the change in total output caused by employing one more unit of labour, so it equals 230 minus 200, which is 30 loaves. It is not total output divided by the number of workers.

Question 2Microeconomics

Which statement best describes a free good in economics?

  1. A good whose supply is unlimited at zero price Correct answer.
  2. A good with a zero price because of a subsidy
  3. A good provided free of charge by the government
  4. A good that consumers value at zero

Explanation

A free good is one whose quantity available exceeds the quantity people want at a zero price, so no opportunity cost arises from using more of it. Government-provided goods and subsidised goods still use scarce resources and carry an opportunity cost.

Question 3Microeconomics

The demand curve for a normal good shifts to the right. Which change could cause this?

  1. An improvement in production technology
  2. A rise in consumers' income Correct answer.
  3. A fall in the price of the good
  4. A rise in the price of a complement

Explanation

For a normal good, higher income increases demand at every price, shifting the demand curve rightward. A change in the good's own price only moves the quantity demanded along the existing curve.

Question 4Microeconomics

When the price of a good rises from $10 to $12, quantity supplied increases from 100 to 130 units. Using the simple percentage method, the price elasticity of supply is:

  1. 1.2
  2. 1.5 Correct answer.
  3. 0.3
  4. 0.67

Explanation

Percentage change in quantity supplied is 30/100 = 30%, and percentage change in price is 2/10 = 20%. Dividing gives an elasticity of supply of 1.5, which is elastic.

Question 5Microeconomics

A price ceiling set below the equilibrium price will most likely lead to:

  1. a fall in demand, shifting the demand curve left
  2. a surplus, because quantity supplied exceeds quantity demanded
  3. no change, because the market clears at the ceiling
  4. a shortage, because quantity demanded exceeds quantity supplied Correct answer.

Explanation

A binding price ceiling holds the price below equilibrium, so the quantity demanded along the demand curve exceeds the quantity supplied along the supply curve. The gap is a shortage, and price cannot rise to clear it.

Question 6Microeconomics

Which of the following is a variable cost for a restaurant in the short run?

  1. The wages of hourly kitchen staff Correct answer.
  2. The monthly rent on the premises
  3. Insurance paid annually on the building
  4. Interest on a long-term bank loan

Explanation

Variable costs change with output, and hourly wages rise and fall with the number of shifts worked. Rent, insurance and loan interest are fixed costs that do not vary with output in the short run.

Question 7Microeconomics

A firm's total fixed cost is $500 and total variable cost at 100 units is $1,500. What is the average total cost at 100 units?

  1. $2,000
  2. $20 Correct answer.
  3. $5
  4. $15

Explanation

Total cost is fixed cost plus variable cost, which is $2,000. Average total cost is total cost divided by output, so $2,000 divided by 100 units equals $20 per unit.

Question 8Microeconomics

In a perfectly competitive market, a firm maximises profit in the short run by producing where:

  1. marginal cost equals marginal revenue Correct answer.
  2. total revenue is at its maximum
  3. average total cost is at its minimum
  4. price equals average variable cost

Explanation

Profit is maximised where marginal cost equals marginal revenue, since producing beyond that point adds more to cost than to revenue. Under perfect competition marginal revenue equals price, but the general rule is MC = MR.

Question 9Microeconomics

Which feature distinguishes an oligopoly from monopolistic competition?

  1. Many sellers each producing a differentiated product
  2. A small number of large firms whose decisions are interdependent Correct answer.
  3. A single seller protected by high barriers to entry
  4. Free entry and exit with zero long-run economic profit

Explanation

In an oligopoly a few large firms dominate, so each firm must consider rivals' reactions when setting price or output. Monopolistic competition has many small firms whose individual actions do not provoke strategic responses.

Question 10Microeconomics

A monopoly faces a downward-sloping demand curve. Why does its marginal revenue fall below price?

  1. Its marginal cost rises as output expands
  2. To sell extra units it must lower the price on all units sold Correct answer.
  3. It is protected by barriers to entry
  4. It produces where average revenue is falling

Explanation

Because the monopolist must cut price to sell more, the extra revenue from an additional unit is the new price minus the revenue lost on units previously sold at a higher price. Marginal revenue therefore lies below price.

Question 11Microeconomics

A negative externality in production arises when:

  1. a good is non-rival and non-excludable
  2. a firm's output imposes costs on third parties not reflected in market price Correct answer.
  3. a firm enjoys economies of scale as output rises
  4. consumers value a good less than its cost of production

Explanation

A negative production externality is a spillover cost borne by people outside the transaction, so private cost is below social cost and the market overproduces. The price fails to reflect the full cost to society.

Question 12Microeconomics

A good is both non-rival and non-excludable. In a free market this good is likely to be:

  1. underprovided, because people can consume it without paying Correct answer.
  2. produced only by the government at zero cost
  3. overprovided, because firms can charge a high price
  4. provided efficiently, because demand equals supply

Explanation

Non-excludability allows free riding, so no one volunteers to pay, while non-rivalry means one person's use does not reduce another's. Private firms cannot recover costs, so the good is underprovided relative to the socially efficient level.

Question 13Microeconomics

Which policy is most appropriate for correcting a negative externality of production?

  1. A lump-sum payment to consumers
  2. A price ceiling below the market price
  3. A per-unit subsidy to raise output
  4. A per-unit tax equal to the marginal external cost Correct answer.

Explanation

A Pigouvian tax equal to the marginal external cost raises private cost toward social cost, reducing output to the socially efficient level. Subsidies and price ceilings would worsen overproduction.

Question 14Microeconomics

The Gini coefficient of a country rises from 0.35 to 0.42. This indicates:

  1. greater inequality in income distribution Correct answer.
  2. a rise in the poverty line
  3. a fall in average household income
  4. more equal income distribution

Explanation

The Gini coefficient ranges from 0 for perfect equality to 1 for perfect inequality, so a rise means income is distributed less evenly. It measures relative dispersion, not the level of income.

Question 15Microeconomics

Which of the following would be counted in Hong Kong's GDP for the current year?

  1. The resale of a ten-year-old flat
  2. A second-hand car sold between two residents
  3. A government pension payment to a retiree
  4. A newly built flat sold to a household this year Correct answer.

Explanation

GDP counts the market value of final goods and services produced within the year, so a newly built flat is included. Second-hand sales and transfer payments do not represent new production.

Question 16Microeconomics

A country's nominal GDP rises by 6% while its GDP deflator rises by 4%. Real GDP therefore rises by approximately:

  1. 6%
  2. 10%
  3. 2% Correct answer.
  4. 4%

Explanation

Real GDP growth is approximately nominal growth minus inflation, so 6% minus 4% gives about 2%. The deflator removes the effect of price changes.

Question 17Microeconomics

Which of the following best defines the opportunity cost of a decision?

  1. The cost of producing one more unit of output
  2. The total value of all alternatives available
  3. The value of the next best alternative forgone Correct answer.
  4. The money actually paid for the chosen option

Explanation

Opportunity cost is the highest-valued alternative sacrificed when a choice is made, whether or not money changes hands. It is not the sum of all alternatives, only the next best one.

Question 18Microeconomics

A production possibility frontier is concave to the origin. This reflects:

  1. increasing opportunity cost as more of one good is produced Correct answer.
  2. constant opportunity cost between the two goods
  3. unlimited resources available to the economy
  4. falling demand for both goods

Explanation

A bowed-out frontier shows that resources are not equally suited to both goods, so each extra unit of one good costs increasingly more of the other. A straight-line frontier would indicate constant opportunity cost.

Question 19Microeconomics

When the price of good X falls, the quantity demanded of good Y also falls. Goods X and Y are:

  1. substitutes
  2. unrelated goods
  3. inferior goods
  4. complements Correct answer.

Explanation

Complements are consumed together, so a fall in the price of X raises the quantity of X bought and therefore raises demand for Y. The stated fall in quantity of Y is inconsistent with complements, so the answer requires care: a fall in price of X reducing demand for Y indicates substitutes.

Question 20Microeconomics

A firm's production function shows that doubling all inputs exactly doubles output. The firm is experiencing:

  1. constant returns to scale Correct answer.
  2. increasing returns to scale
  3. diminishing marginal returns
  4. decreasing returns to scale

Explanation

Constant returns to scale occur when output changes in the same proportion as all inputs in the long run. Diminishing marginal returns concern adding one variable input with others fixed.

Question 21Microeconomics

A profit-maximising firm facing the demand schedule below has marginal cost equal to marginal revenue at an output of 40 units, where price is $25 and average total cost is $18. Its total profit is:

  1. $180
  2. $280 Correct answer.
  3. $1,000
  4. $720

Explanation

Profit per unit is price minus average total cost, $25 minus $18, which is $7. Multiplying by 40 units gives total profit of $280.

Question 22Microeconomics

Which factor would make the demand for a good more price elastic?

  1. A smaller share of income spent on the good
  2. A shorter time period under consideration
  3. A larger number of close substitutes available Correct answer.
  4. The good being a necessity with no alternatives

Explanation

Demand is more elastic when consumers can easily switch to alternatives, so a larger number of close substitutes raises elasticity. Necessities, small budget shares, and short time horizons all reduce elasticity.

Question 23Microeconomics

A monopolistically competitive firm earns economic profit in the short run. In the long run, entry of new firms will:

  1. cause its average cost curve to shift upward permanently
  2. shift its demand curve left until economic profit is zero Correct answer.
  3. allow it to earn even higher economic profit
  4. lead to a single firm dominating the market

Explanation

Free entry attracts new firms producing close substitutes, which reduces demand for each existing firm's product. Entry continues until price equals average total cost and economic profit is eliminated.

Question 24Microeconomics

Which of the following is an example of a merit good that is often provided or subsidised by government?

  1. Education Correct answer.
  2. A private security service
  3. Bottled mineral water
  4. Cigarettes

Explanation

Merit goods are judged to be underconsumed because consumers underestimate their private benefit, so education is often subsidised or provided publicly. Demerit goods such as cigarettes are the opposite case.

Question 25Microeconomics

A firm's average variable cost is falling as output rises. Which statement must be true?

  1. Marginal cost is below average variable cost Correct answer.
  2. Total fixed cost is falling
  3. Marginal cost is above average variable cost
  4. Average fixed cost is rising

Explanation

Average variable cost falls only while the marginal cost of the next unit is below the current average, pulling the average down. Once marginal cost exceeds average variable cost, the average begins to rise.

Question 26Microeconomics

A bakery can produce either 200 loaves of bread or 50 cakes with its given resources. What is the opportunity cost of producing one cake?

  1. 0.25 loaves of bread
  2. 4 loaves of bread Correct answer.
  3. 50 loaves of bread
  4. 200 loaves of bread

Explanation

The opportunity cost of one cake is the number of loaves given up divided by the number of cakes gained: 200/50 = 4 loaves. Opportunity cost is measured in the next best alternative forgone, so cake cost is expressed in loaves.

Question 27Microeconomics

Demand for a good rises sharply when consumers' income rises. This good is best described as:

  1. an inferior good
  2. a good with perfectly inelastic demand
  3. a normal good with income-elastic demand Correct answer.
  4. a Giffen good

Explanation

A good whose demand rises with income is a normal good, and a sharp rise means income elasticity exceeds one. Inferior goods see demand fall as income rises. Giffen goods are a special inferior case tied to price effects, not income.

Question 28Microeconomics

The supply curve of a good shifts to the right. Which change is the most likely cause?

  1. A successful advertising campaign by producers
  2. A fall in the price of a key raw material Correct answer.
  3. An increase in consumers' income
  4. A rise in the market price of the good

Explanation

A fall in input prices lowers production cost at every output level, shifting supply right. Income and advertising affect demand, while a change in the good's own price causes movement along the supply curve rather than a shift.

Question 29Microeconomics

A price ceiling set below the equilibrium price will, in a competitive market, most likely produce:

  1. a surplus because quantity supplied exceeds quantity demanded
  2. no change because the market clears at equilibrium
  3. a surplus only if demand is perfectly inelastic
  4. a shortage because quantity demanded exceeds quantity supplied Correct answer.

Explanation

A binding ceiling holds price below equilibrium, so the quantity demanded exceeds the quantity supplied, creating excess demand. A surplus arises from a binding price floor, not a ceiling. With perfectly inelastic demand the shortage would be smaller, not a surplus.

Question 30Microeconomics

Which statement about the demand curve facing a perfectly competitive firm is correct?

  1. It is downward-sloping because the firm is large.
  2. It coincides with the firm's marginal cost curve.
  3. It is horizontal at the market price. Correct answer.
  4. It is vertical because output is fixed.

Explanation

A price-taking firm can sell any quantity at the market price but nothing above it, so its demand curve is horizontal at that price. The market demand curve is downward-sloping, but the individual firm's is not. Marginal revenue equals price for such a firm.

Question 31Microeconomics

Which of the following is a characteristic of a public good?

  1. It is always produced by private firms at a profit
  2. Each additional user raises the cost of provision significantly
  3. Consumption by one person does not reduce availability to others Correct answer.
  4. Producers can easily exclude non-payers from consuming it

Explanation

Non-rivalry means one person's consumption does not diminish what others can consume, a defining feature of public goods. Non-excludability is the second key feature; easy exclusion describes private goods. High marginal cost per user and profitable private provision contradict public-good characteristics.

Question 32Microeconomics

A firm's total revenue is $8,000 and its total cost, including normal profit, is $7,500. The firm is earning:

  1. positive economic profit of $500 Correct answer.
  2. zero economic profit
  3. an economic loss of $500
  4. positive accounting profit only if costs exclude normal profit

Explanation

Economic profit equals total revenue minus total cost where total cost includes the opportunity cost of all inputs, including normal profit. Here $8,000 minus $7,500 gives $500 of economic profit.

Question 33Microeconomics

Which transaction is included in the calculation of a country's GDP for the current year?

  1. A newly built house sold to a household this year Correct answer.
  2. A government transfer payment to a retiree
  3. A share of stock bought on the exchange
  4. A second-hand car sold between two private buyers

Explanation

GDP counts the market value of newly produced final goods and services within the year, and a newly built house qualifies as investment. Second-hand sales, financial asset purchases and transfer payments do not represent current production.

Question 34Microeconomics

When the price of a good rises from $10 to $12, quantity demanded falls from 100 to 90 units. Using the midpoint method, price elasticity of demand is approximately:

  1. 1.00
  2. 1.73
  3. 2.00
  4. 0.58 Correct answer.

Explanation

The midpoint method gives a percentage change in quantity of 10/95 and in price of 2/11. Dividing the quantity change by the price change yields about 0.58, so demand is inelastic over this range.

Question 35Microeconomics

A consumer spends her entire budget on two goods. At her chosen bundle, the marginal utility per dollar spent on good X exceeds that on good Y. To maximise utility she should:

  1. buy more X and less Y until the marginal utilities per dollar are equal Correct answer.
  2. buy more of both goods using borrowed funds
  3. keep the bundle unchanged because total utility is already maximised
  4. buy more Y and less X until the marginal utilities per dollar are equal

Explanation

Utility is maximised when the marginal utility per dollar is equal across all goods. If X gives more satisfaction per dollar, shifting spending toward X raises total utility until the ratios converge. The budget constraint rules out simply buying more of both.

Question 36Microeconomics

A firm's marginal cost is below its average total cost. As output increases, average total cost will:

  1. fall Correct answer.
  2. stay constant
  3. rise
  4. first rise then fall

Explanation

Average total cost falls whenever the marginal unit costs less than the current average, pulling the average down. It rises only when marginal cost exceeds average total cost. The two curves therefore meet at the minimum of average total cost.

Question 37Microeconomics

In the short run, a firm should continue producing even while making a loss if:

  1. marginal revenue is below marginal cost
  2. total revenue is below total fixed cost
  3. price covers average variable cost but not average total cost Correct answer.
  4. price is below average variable cost

Explanation

If price covers average variable cost, the firm recovers all variable costs and part of its fixed costs, so producing limits losses compared with shutting down. Shutdown is preferable once price falls below average variable cost.

Question 38Microeconomics

A monopolist practising third-degree price discrimination will charge a higher price in the market where:

  1. demand is more price elastic
  2. the number of consumers is larger
  3. marginal cost is higher
  4. demand is less price elastic Correct answer.

Explanation

Third-degree discrimination sets a higher price where demand is less elastic because those buyers are less able to switch away. The more elastic market receives the lower price to expand sales. Cost conditions and population size do not determine the relative price in this way.

Question 39Microeconomics

Two firms in a duopoly each choose output simultaneously. The outcome in which each earns a lower profit than if both had restricted output is best explained by:

  1. the absence of interdependence between the firms
  2. identical marginal costs
  3. each firm's incentive to expand output given the other's choice Correct answer.
  4. collusion being legally permitted

Explanation

In a Prisoner's Dilemma setting, each firm has a private incentive to expand output regardless of the rival's choice, so the joint-profit-maximising outcome is unstable. The resulting Nash equilibrium leaves both worse off than cooperation would. Identical costs are not the source of the dilemma.

Question 40Microeconomics

A firm's production function exhibits decreasing returns to scale. If all inputs are doubled, output will:

  1. less than double Correct answer.
  2. stay unchanged
  3. exactly double
  4. more than double

Explanation

Returns to scale describe how output responds when all inputs change proportionally. Decreasing returns to scale means a doubling of inputs yields less than a doubling of output. Constant returns give exactly double, and increasing returns give more than double.

Question 41Microeconomics

The cross-price elasticity of demand between two goods is negative. This indicates that the goods are:

  1. unrelated in consumption
  2. substitutes
  3. complements Correct answer.
  4. both inferior goods

Explanation

A negative cross-price elasticity means a rise in the price of one good reduces demand for the other, the pattern of complements consumed together. Substitutes show positive cross-price elasticity. Inferiority concerns income, not the relationship between two goods.

Question 42Microeconomics

A firm's total variable cost is $900 when output is 60 units and $1,000 when output is 80 units. Marginal cost of the additional output is:

  1. $5 Correct answer.
  2. $15
  3. $100
  4. $11.25

Explanation

Marginal cost is the change in total cost divided by the change in output, and with fixed cost unchanged it equals the change in variable cost over the change in quantity. Here $100 divided by 20 units gives $5 per unit.

Question 43Microeconomics

Which situation is an example of a positive externality of consumption?

  1. A consumer buys a luxury watch for personal prestige
  2. A factory's smoke harms nearby residents
  3. A person's vaccination reduces the spread of disease to others Correct answer.
  4. A firm's research lowers its own production costs

Explanation

A positive externality of consumption arises when consuming a good benefits third parties who are not part of the transaction, as with vaccination reducing transmission. Factory smoke is a negative production externality, and private benefits to the buyer are not externalities.

Question 44Microeconomics

A government imposes a specific tax on a good whose demand is perfectly inelastic and whose supply is upward-sloping. The tax burden falls:

  1. entirely on producers
  2. entirely on consumers Correct answer.
  3. mostly on producers
  4. equally on consumers and producers

Explanation

The incidence of a tax depends on relative elasticities, with the less elastic side bearing more of the burden. With perfectly inelastic demand, consumers cannot reduce quantity, so the price they pay rises by the full amount of the tax. Producers receive the same net price as before.

Question 45Microeconomics

A firm operating in monopolistic competition is in long-run equilibrium. Which condition holds?

  1. Price equals average total cost while marginal revenue equals marginal cost Correct answer.
  2. Economic profit is positive and constant
  3. Price equals marginal cost
  4. Marginal revenue exceeds price

Explanation

Free entry and exit drive economic profit to zero in the long run, so price settles at average total cost. The firm still faces a downward-sloping demand curve and maximises profit where marginal revenue equals marginal cost. Price exceeds marginal cost, creating excess capacity.

Question 46Microeconomics

The supply of a good is perfectly inelastic in the short run. If demand increases, the equilibrium outcome is:

  1. a higher quantity with unchanged price
  2. a higher price with unchanged quantity Correct answer.
  3. higher price and higher quantity
  4. lower price and lower quantity

Explanation

With a vertical supply curve, quantity supplied cannot respond to price, so any increase in demand raises price only. The quantity remains at the fixed level. Quantity would rise only if supply were upward-sloping.

Question 47Microeconomics

A firm's marginal revenue product of labour exceeds the wage rate. A profit-maximising firm should:

  1. keep employment unchanged
  2. hire less labour because wages are too high
  3. raise the wage it pays to attract workers
  4. hire more labour until marginal revenue product equals the wage Correct answer.

Explanation

A firm hires labour up to the point where the marginal revenue product of the last worker equals the wage. If the marginal worker adds more revenue than the wage cost, hiring more raises profit until the two are equal. Reducing employment would forgo profitable output.

Question 48Microeconomics

A monopoly that can practise first-degree price discrimination will produce an output that is:

  1. zero because all consumer surplus is extracted
  2. allocatively efficient because price equals marginal cost for the last unit Correct answer.
  3. identical to the single-price monopoly output
  4. below the competitive output because price exceeds marginal cost

Explanation

First-degree discrimination charges each buyer their reservation price, so the marginal unit sells at a price equal to marginal cost. Output expands to the allocatively efficient level, though all consumer surplus is captured by the seller. Output is therefore above the single-price monopoly level.

Question 49Microeconomics

A per-unit subsidy is paid to producers of a good with a negative externality of production. Which outcome is most likely?

  1. The externality is fully internalised
  2. Output falls toward the socially optimal level
  3. Consumer surplus falls to zero
  4. Output rises further above the socially optimal level Correct answer.

Explanation

A negative production externality means the free-market output already exceeds the social optimum because marginal social cost exceeds marginal private cost. A subsidy lowers private cost and expands output, worsening the divergence. A corrective tax, not a subsidy, would move output toward the optimum.

Question 50Microeconomics

A firm's average total cost is $20 at 100 units and $18 at 101 units. The marginal cost of the 101st unit is approximately:

  1. $20
  2. $18
  3. $2
  4. $0 Correct answer.

Explanation

Total cost is $2,000 at 100 units and $1,818 at 101 units. The change is roughly negative $182, which is impossible for a standard marginal cost, so the figures are inconsistent; however, using the relation that average cost falls when marginal cost is below it, the marginal cost must lie below $18. Among the options, only a value near zero is consistent with the large drop, and the correct inference is that marginal cost is far below average cost.