Chapter 16 - NSS Exploring Economics Second Editiondemo.nssecon2e.ilongman.com/.../Eng/ae_b3c16_e.docx · Web view1 NSS Exploring Economics 3 (Second Edition)© Pearson Education

NSS Exploring Economics 3 (Second Edition) © Pearson Education Asia Limited 2014Questions and Answers to Exercises (Chapter 16)

NSS Exploring Economics 3 (Second Edition)Questions and Answers to Exercises

Chapter 16 Competition and efficiency

Questionsp.42Task 16.1Do you know the meaning of ‘efficiency’ in economics?

p.45Test yourself 16.1Refer to the following table.

Calculate the value of the deadweight loss for each of the following output levels. Based on your result, determine which of them is inefficient.a. 2 unitsb. 4 unitsc. 5 units

p.47Task 16.2

Who is right? Why?

1


p.49Task 16.3

Peter is right. Can you explain why?

p.52Test yourself 16.2Summarise the effects of an effective price ceiling and an effective price floor in a perfectly competitive market by choosing the correct answers in the table below.

Effective price ceiling Effective price floorIs MB greater than, equal to or smaller than MC at quantity transacted?

MB > / = / < MC MB > / = / < MC

Change in TSS / / uncertain / / uncertain

Achieve efficiency in resource allocation?

Yes / No(underproduction /

overproduction)

Yes / No(underproduction /

overproduction)Change in Q / / uncertain / / uncertain Change in P / / uncertain / / uncertain Change in CS / / uncertain / / uncertain Change in PS / / uncertain / / uncertain

Test yourself 16.3Suppose the government has imposed an effective price ceiling on rental housing. Without using a diagram, what can you tell about the change in TSS and the state of market efficiency under each of the following situations?a. The price ceiling becomes ineffective due to a decrease in demand for rental housing.b. The government removes the price ceiling.

2


Test yourself 16.4Applying what you have learned in this chapter, explain why an effective minimum wage may NOT benefit the workers.

p.54Test yourself 16.5Summarise the effects of an effective quota in a perfectly competitive market by choosing the correct answers in the table below.

Is MB greater than, equal to or smaller than MC at quantity transacted?

MB > / = / < MC

Change in TSS / / uncertain

Achieve efficiency in resource allocation?Yes / No

(underproduction / overproduction)Change in Q / / uncertain Change in P / / uncertain Change in CS / / uncertain Change in PS / / uncertain

p.56Test yourself 16.6Suppose the government increases a unit tax on a good. Explain how this would affect the following:a. Consumer surplusb. Producer surplusc. Government’s tax revenued. Total social surplus

p.57Task 16.4Carrie: I think a subsidy is different from other government measures such as unit tax, price

ceiling and price floor.Peter: Why?Carrie: Both consumers and producers enjoy the benefit of a subsidy. Thus, no one suffers

from it. The total social surplus must increase.Peter: Oh! I guess you have missed something.Do you agree with Carrie? Has Carrie missed anything?

3


pp.61-62ExercisesMultiple Choice Questions1.Efficiency in resource allocation implies thatA. the total social surplus is maximised.B. marginal benefit is equal to marginal cost.C. there is no deadweight loss.D. All of the above

2.Resource allocation of a good is inefficient ifA. the marginal benefit is greater than zero.B. the marginal cost is zero.C. the marginal benefit is greater than the marginal cost.D. the total benefit is maximised.

3.The following diagram shows the demand and supply curves of a good in a perfectly competitive market.

If a price ceiling is set at P1, thenA. the consumer surplus is equal to Area ABP2.B. the producer surplus is equal to Area P2BGF.C. the deadweight loss is equal to Area CEG.D. the total social surplus is equal to Area ABGF.

4


4.Study the following diagram.

Suppose that a price floor is set at P1 in the above diagram. Which of the following areas represents the deadweight loss due to the price floor?A. Area (F + E)B. Area (A + B + C)C. Area (C + E)D. None of the above as there is no deadweight loss.

5.Suppose that a unit tax is imposed on the producer of a good. This would lead to(1) a reduction in consumer surplus and producer surplus.(2) an increase in total consumer expenditure on the good.(3) underproduction.A. (1) and (2) onlyB. (1) and (3) onlyC. (2) and (3) onlyD. (1), (2) and (3)

6.Suppose that a government provides a subsidy to Good X. Which of the following statements about the subsidisation of production of Good X is FALSE?A. The subsidy will lead to an increase in government expenditure.B. The subsidy will lead to an increase in the consumption of Good X.C. The subsidy will lead to a reduction in the production of Good X.D. The subsidy will lead to a deadweight loss.

5


7*.The following diagram shows the demand and supply curves of Good X in a perfectly competitive market.

Suppose D and S1 are the original demand and supply curve; S2 is the new supply curve after a subsidy was provided by the government to the producers of Good X. After the provision of the subsidy,A. the sum of consumer surplus and producer surplus will increase by Area P3CFEP1.B. the deadweight loss is equal to Area CFE.C. the total subsidy amount is Area P3CEP1.D. the price (including the subsidy) that the producers receive will fall from P2 to P1.

8.Which of the following would raise the consumer surplus?A. Effective price floorB. Per unit subsidyC. QuotaD. Per unit tax

p.63Short Questions1.

What is efficiency in resource allocation? What is the condition of efficiency in resource allocation? (4 marks)

2.

Use a supply-demand diagram to illustrate how a perfectly competitive market can lead to efficient allocation of resources. (6 marks)

6


3.a. What is deadweight loss? (2 marks)b. ‘An effective price floor will increase producer surplus.’

Do you agree with the above statement? Illustrate your answer with a diagram. (4 marks)

4.Explain how a price ceilings would lead to inefficient allocation of resources. Illustrate your answer with a supply-demand diagram. (5 marks)

5.The Hong Kong Government has set a minimum wage for foreign domestic helpers. Use a diagram to show the deadweight loss arising from such a policy. (5 marks)

6*.Suppose an effective quota is initially imposed on Good X. Assess the effects on efficiency if the quota is removed. Illustrate your answer with a supply-demand diagram. (5 marks)

pp.63-64Structured Questions1.a. With the use of supply-demand diagrams, compare the effects of a unit tax and a unit

subsidy on the following:i. the market priceii. the quantity transacted (6 marks)

b*. In light of your answer in (a), explain why there is a deadweight loss when the government imposes a unit tax or provides a unit subsidy. Illustrate your answer with the use of the supply-demand diagrams in (a). (6 marks)

2.The following is information about the market for LCD televisions:

a. What are the equilibrium price and output level? (2 marks)

7


b. Is the output level in part (a) efficient? Explain your answer. (2 marks)c*. Explain if there is any deadweight loss in the following cases:

i. The government sets a maximum price at $6,000 per unit; (2 marks)ii. The government sets a maximum price at $10,000 per unit. (2 marks)

3.The following is information about the market for MP3 players:

a. Is 1,000 units an efficient level of output? Is there underproduction or overproduction of MP3 players? Explain. (3 marks)

b. Is 3,000 units an efficient level of output? Is there underproduction or overproduction of MP3 players? Explain. (3 marks)

c. Is 2,000 units an efficient level of output? Is there underproduction or overproduction of MP3 players? Explain. (3 marks)

d*. Suppose the government imposes a quota of 1,000 units on MP3 players.i. What is the quantity transacted in this case? (2 marks)ii. Is the quantity transacted efficient? Is there any underproduction or overproduction?

Explain your answers with a supply-demand diagram. (6 marks)

p.65Economics in the news1.Do you suggest banning smoking? Why or why not? Explain with the economic concepts you have learned.

2.Why has the government imposed a tax on cigarettes? What are the effects of an increase in the cigarette tax on smokers and cigarette producers?

8


Answersp.42Task 16.1In economics, efficiency in resource allocation is attained when the total social surplus is maximised.

p.45Test yourself 16.1a. Deadweight loss = (MB of 3rd unit – MC of 3rd unit) + (MB of 4th unit – MC of 4th unit) =

$5 + $0 = $5 Inefficient (Underproduction)b. Deadweight loss = $0 Efficientc. Deadweight loss = MC of 5th unit – MB of 5th unit = $5 Inefficient (Overproduction)

p.47Task 16.2Peter is right. Even though the market price decreases, consumers as a whole may not gain because the quantity transacted decreases after the imposition of an effective price ceiling. Consumer surplus (CS) may decrease. The change in consumer surplus depends on the size of the gain in CS (due to price decrease) relative to the loss in CS (due to quantity decrease) (refer to Fig. 16.6).

p.49Task 16.3As discussed in Chapter 6 of Book 1, some workers will become unemployed. In terms of producer surplus (PS), workers as a whole may be worse off if the gain in PS (due to wage increase) is smaller than the loss in PS (due to quantity decrease) [refer to Fig. 16.8(b)].

p.52Test yourself 16.2

9


Test yourself 16.3a. TSS will decrease but market efficiency is achieved.b. TSS will increase and market efficiency is achieved.

Test yourself 16.4In terms of producer surplus (PS), workers as a whole may be worse off under an effective minimum wage if the gain in PS (due to wage increase) is smaller than the loss in PS (due to quantity decrease) [see Fig. 16.8 (b)].

p.54Test yourself 16.5

p.56Test yourself 16.6a. Decrease. This is because the market price increases and the quantity consumed

decreases.b. Decrease. This is because both the price received and the quantity sold decrease.

10


c. Uncertain. The change in tax revenue depends on the elasticities of demand and supply.d. Decrease. Even if the tax revenue increases, the extra tax revenue collected is still smaller

than the decrease in the sum of the consumer surplus and the producer surplus.

p.57Task 16.4No, Carrie is wrong.Carrie has missed the point that the subsidy is paid by the government. The total subsidy paid by the government is greater than the increase in the sum of CS and PS. The economy as a whole suffers as TSS decreases.

pp.61-62ExercisesMultiple Choice Questions1. D2. C3. D4. A5. B

Option (2): The change in total consumer expenditure on the good depends on the price elasticity of demand between the old price and new price (after tax).

6. COption C: A subsidy provided for a good will increase its supply. Both the production and consumption of the good will increase.

7. AThe deadweight loss (Area BFC), total subsidy amount and price (including subsidy) should be measured at the new quantity, not the original quantity.

8. B

p.63Short Questions1.

Efficiency in resource allocation is attained when the total social surplus (TSS) is maximised. (2 marks)

When only consumers and producers are in the market, TSS is the sum of the consumer surplus (CS) and the producer surplus (PS). Efficiency is attained when the sum of CS and PS is maximised. This requires that the marginal benefit of a good be equal to its marginal cost.

11


(2 marks)

2.

Indicate on the diagram:

● D curve = MB curve (1 mark)

● S curve = MC curve (1 mark)

● Equilibrium point (1 mark)

Verbal elaboration:● In a perfectly competitive market, the demand curve reflects the MB curve while the

supply curve reflects the MC curve. (1 mark)● When the market is in equilibrium, the demand curve intersects the supply curve, so MB

= MC. (1 mark)● This means the allocation of resources is efficient. (1 mark)

3.a. Deadweight loss is

● potential gains not being captured when MB > MC; (1 mark)● the loss in total social surplus when MB < MC. (1 mark)

b. Indicate on the diagram:● Effective price floor (1 mark)● Loss in PS > Gain in PS OR Loss in PS = Gain in PS (1 mark)

12


Verbal elaboration:● No. (1 mark)● If the gain in producer surplus is smaller than (or equal to) the loss in producer

surplus, the producer surplus will decrease (remain unchanged). (1 mark)

4.Indicate on the diagram:● Effective price ceiling (1 mark)● MB > MC (1 mark)● Deadweight loss (1 mark)

Verbal elaboration:● An effective price ceiling will lower the quantity transacted below the efficient level.

(1 mark)● Therefore, resource allocation is inefficient. (1 mark)

5.Indicate on the diagram:● Minimum wage (effective price floor) (1 mark)● Deadweight loss (1 mark)

13


Verbal elaboration:● The effective minimum wage will lower the quantity transacted below the efficient level.

(1 mark)● MB > MC at the new quantity transacted. (1 mark)● The shaded area represents the deadweight loss from underproduction. (1 mark)

6.Indicate on the diagram:● Effective quota removed (1 mark)● Gain from removal of quota = Deadweight loss under quota (1 mark)

Verbal elaboration:● After the removal of an effective quota, perfectly competitive market equilibrium is

attained. (1 mark)● The quantity transacted will increase so that MB = MC. (1 mark)● Efficiency in resource allocation will be achieved. The gain in TSS will be the

deadweight loss under the quota. (1 mark)

pp.63-64Structured Questions

14


1a.Indicate on the diagram:● Decrease in supply under a unit tax (1 mark)● Change in equilibrium under a unit tax (1 mark)● Increase in supply under a unit subsidy (1 mark)● Change in equilibrium under a unit subsidy (1 mark)

i. Verbal elaboration:The market price of a good will increase under a unit tax but will decrease under a unit subsidy. (1 mark)

ii. Verbal elaboration:The quantity transacted of a good will decrease under a unit tax but will increase under a unit subsidy. (1 mark)

1b.Indicate on the diagram:● MB > MC under a unit tax (1 mark)● Deadweight loss under a unit tax (1 mark)● MB < MC under a unit subsidy (1 mark)● Deadweight loss under a unit subsidy (1 mark)

Verbal elaboration:

15


In both cases, MB ≠ MC. Thus, the total social surplus can be increased by adjusting (increasing or decreasing) the output level. This implies that there is a deadweight loss from government intervention. (2 marks)

2a.Equilibrium price is $8,000. (1 mark)Equilibrium output level is 3,500 units. (1 mark)

2b.Yes. The output level is efficient. (1 mark)This is because marginal benefit equals marginal cost (= $8,000) at that output level. (1 mark)

16


2c.i. Since the maximum price is effective, the output is less than the efficient level (of 3,500

units). (1 mark)Thus, there is a deadweight loss associated with underproduction. (1 mark)

ii. Since the maximum price is not effective, the output is still at the efficient level. (1 mark)Thus, there is no deadweight loss. (1 mark)

3a.It is inefficient. There is underproduction. (2 marks)This is because MB > MC ($500 > $300) at this output level. (1 mark)

3b.It is inefficient. There is overproduction. (2 marks)This is because MB < MC ($200 < $400) at this output level. (1 mark)

3c.It is efficient (there is no underproduction or overproduction) (2 marks)This is because MB = MC ($350 = $350) at this output level. (1 mark)

3d.i. The quantity transacted will be restricted to the quota limit of 1,000 units. (2 marks)ii. Indicate on the diagram:

● S curve = MC curve (1 mark)● D curve = MB curve (1 mark)● Effective quota of 1,000 units (1 mark)

17


Verbal elaboration:● The quantity transacted is not efficient. There is underproduction. (2 marks)● This is because MB > MC at this output level. (1 mark)

p.65Economics in the news1.Free answer.Teaching notes:The argument can be based on efficiency. As long as smoking can generate a positive total social surplus, the government should not ban smoking.Besides efficiency, students may also consider other problems caused by smoking. For example, it harms the health of workers and so may affect labour productivity.

2.The government imposed a tax on cigarettes to prevent children and teenagers from smoking, as well as to encourage people to quit smoking.An increase in the cigarette tax will● reduce smokers’ quantity demanded and CS.● reduce cigarette producers’ quantity sold and PS.

18

Documents

Chapter 16 - NSS Exploring Economics Second Editiondemo.nssecon2e.ilongman.com/.../Eng/ae_b3c16_e.docx · Web view1 NSS Exploring Economics 3 (Second Edition)© Pearson Education