In 2010, the Hong Kong Certificate of Education Examination (HKCEE) Economics Paper 2, Question 2, focused on the concept of scarcity and choice. Specifically, it dealt with a scenario where a person has to decide how to allocate a limited resource—time—between two competing activities.
Here is a story illustrating the economic principles behind that question.
Leo sat at his desk, staring at the clock. It was 7:00 PM on a Friday. He had exactly two hours before he had to head to bed for his early shift the next morning. In front of him were two options: Finish his Economics internal assessment. Play the new video game his friend had just lent him.
To an outsider, this was just a Friday night. To an economist, Leo was facing the fundamental problem of scarcity. His time was finite, but his desires were not.
Leo looked at the game disc. If he chose to play, he would gain immediate enjoyment. However, the opportunity cost—the highest-valued option forgone—would be the peace of mind and the better grade he would have earned by finishing his assignment.
He then looked at his textbook. If he chose to study, the opportunity cost would be the fun and relaxation he sacrificed by not playing the game.
"Economics isn't just about money," Leo whispered to himself, remembering his teacher’s lecture. "It's about the trade-offs we make every single day."
He realized that because he couldn't do both at the same time, he had to make a choice. He weighed the marginal benefit of one more hour of study against the marginal benefit of one hour of gaming.
Ultimately, Leo picked up his pen. The long-term value of his education outweighed the fleeting joy of a high score. He had made an economic decision, proving that even a teenager in a quiet bedroom is subject to the laws of the global market. 💡 Key Takeaways Scarcity: Resources (time) are limited. Choice: Limited resources force us to pick one path.
Opportunity Cost: The value of the "next best thing" you give up. hkcee 2010 econ paper 2 q2
The HKCEE 2010 Economics Paper 2, Question 2 focuses on the core concept of opportunity cost in the context of investment choices. Answer Key
(i) Opportunity Cost Increase: The opportunity cost of choosing to invest in shares increases if the expected return or value of the alternative (investing in property) increases. For example, if property prices are expected to rise significantly, the cost of "forgoing" that gain becomes higher.
(ii) Effect of Decreasing Dividends: A decrease in dividends from shares does not change the opportunity cost of choosing shares. Opportunity cost is defined as the value of the next best alternative forgone, which in this case is the investment in property. Since the return on property remains unchanged, the opportunity cost remains the same. Step-by-Step Review 1. Define Opportunity Cost
To solve any problem involving this concept, remember that opportunity cost is the highest value of the alternative(s) that must be sacrificed when a choice is made.
Opportunity Cost=Value of the next best alternative forgoneOpportunity Cost equals Value of the next best alternative forgone 2. Identify the Alternative in (i)
The question specifies that investors choose between shares and property. Choice: Investment in shares.
Next Best Alternative: Investment in property.If the return on property (e.g., rental income or capital gains) increases, the sacrifice made to hold shares is greater. Thus, the opportunity cost of holding shares rises. 3. Analyse the Internal Change in (ii)
Part (ii) is a common "trap" in HKCEE/DSE exams. It asks if a change in the chosen option (shares) affects its own opportunity cost.
A decrease in dividends makes shares less attractive, but it does not change what you gave up to get them. In 2010, the Hong Kong Certificate of Education
The opportunity cost is the value of the property investment you didn't take. Since nothing changed regarding the property market, the opportunity cost remains constant. 4. Critical Exam Tip
Students often confuse "cost" with "net gain." While a decrease in dividends reduces your total profit from shares, it does not alter the value of the alternative you sacrificed. Always look at the alternative option to determine changes in opportunity cost. Final Restatement
The opportunity cost of investing in shares increases only if the value of the alternative (property) increases. It does not change if the return on shares (dividends) decreases, because the value of the forgone alternative remains the same.
Even though the HKCEE is history, the question style lives on:
Practice tip: Re-do HKCEE 2010 Q2 with the original data if you can find the authentic paper in your school archive. Then, modify the numbers – change the tax to $3 or the price ceiling to $5 – and recompute everything.
This is the heart of the question. Students need to compute consumer surplus (CS), producer surplus (PS), and deadweight loss (DWL) after the price floor compared to free market equilibrium.
Step 1: Free market equilibrium (from part a)
Consumer surplus (free market): CS = area of triangle above price and below demand. [ CS_free = \frac12 \times (100 - 68) \times 16 = \frac12 \times 32 \times 16 = 256 ]
Producer surplus (free market): PS = area below price and above supply. [ PS_free = \frac12 \times (68 - 20) \times 16 = \frac12 \times 48 \times 16 = 384 ] Total surplus = ( 256 + 384 = 640 ). Section 6: How to Use This Analysis for
Step 2: With price floor at $80, Q traded = ( Q_d = 10 ) (the smaller of Qd and Qs, because only 10 units are actually bought/sold)
Consumer surplus (after floor): CS_new = area under demand from 0 to 10, above price $80. [ CS_new = \frac12 \times (100 - 80) \times 10 = \frac12 \times 20 \times 10 = 100 ] CS decreases by ( 256 - 100 = 156 ).
Producer surplus (after floor): Careful – producers supply 20 units but only sell 10 at $80. The government may buy surplus, but here standard analysis assumes producers receive $80 for the 10 units sold. However, producer surplus also includes the area below price but above supply for all units supplied up to 20? No – PS is based on actual output sold unless government purchase is specified. Typical HKCEE approach: PS = revenues – variable cost for quantity sold.
Compute PS as area under price $80 down to supply curve, from Q=0 to Q=10 (quantity sold). That’s a trapezoid? Actually simpler: PS = [price × quantity sold] – area under supply curve from 0 to 10.
Area under supply from 0 to 10: Supply P=20+3Q, integral = ( 20Q + 1.5Q^2 ) evaluated 0 to 10 = ( 200 + 150 = 350 ). Revenue = ( 80 \times 10 = 800 ). So PS_new = ( 800 - 350 = 450 ).
Alternatively, geometric: PS_new = rectangle (0 to 10, price 80 to supply at Q=10? Wait, need triangle + rectangle). Better: PS = area above supply and below price. At Q=10, supply price = ( 20+30=50 ). So PS = rectangle (10 × (80-50)) + triangle beneath that? No – actually supply is linear: PS = area between P=80 and supply from Q=0 to 10 = trapezoid: average height = (80-20 + 80-50)/2 = (60+30)/2 = 45; area = 45 × 10 = 450. Yes.
Change in PS: ( 450 - 384 = +66 ) (producers gain from price floor, but only if they sell the 10 units; if they produce 20, unsold stock reduces profit unless subsidized).
Deadweight loss: DWL = loss in total surplus = (original total surplus 640) – (new CS+PS = 100+450=550) = 90.
Answer: CS falls by 156, PS rises by 66, DWL = 90.
Subject: Economics Level: HKCEE (Secondary 5) Paper: Paper 2 (Multiple Choice Questions) Topic: Demand and Supply / Market Intervention