Hkcee 2010 Econ Paper 2 Q2 📌 ✨

A second part of Q2 often introduced a change in the market for a substitute. For example: “Suppose the government reduces the fare of the MTR. At the same time, a new bus route with lower fares is introduced. Explain the combined effect on the total revenue of the MTR company.”

Step 1 – Own-price effect (MTR fare reduction):
As per part (a), if MTR demand is inelastic, reducing its fare alone would lower MTR’s total revenue.

Step 2 – Cross-price effect (substitute bus route):
The introduction of a lower-fare bus route is a substitute for MTR travel. For substitutes, a decrease in the price of the substitute (bus) reduces demand for the original good (MTR), shifting the MTR demand curve to the left.

Step 3 – Combined effect on MTR’s total revenue:
Two forces act simultaneously:

The net effect on MTR’s total revenue is ambiguous without elasticity magnitudes, but the examiner’s expected answer was that total revenue would likely fall further because:

HKCEE 2010 Economics Paper 2, Question 2 tested foundational microeconomic tools: equilibrium determination, supply shifts, price controls, and elasticity-revenue relationship. Mastery requires precise diagram analysis, accurate labeling, and logical cause-effect chains. These concepts remain central in DSE Economics and first-year university microeconomics. hkcee 2010 econ paper 2 q2

References (hypothetical for paper completeness):

Reasoning:

Diagram explanation:

Answer:
Equilibrium price rises, equilibrium quantity falls.

Common mistakes:

Therefore, the correct combination is (1) and (3).

Answer: C

Step 1 – Identify the binding condition.

Step 2 – Determine new quantity traded.

Step 3 – Compute surplus changes (refer to standard supply-demand diagram). A second part of Q2 often introduced a

Initial equilibrium (P=$6, Q=80):

After price ceiling ($4, Q=60):

(A precise answer without exact diagram coordinates):

Step 4 – Total Social Surplus & Deadweight Loss (DWL).