QB Ch11(Eng) Output (Final)

Economics Inquiry for HKDSE – Microeconomics 3Chapter 11 Market Intervention

Multiple Choice Questions

|!|EM31001|!|

If a price ceiling is set above the equilibrium price of good Y,

A. the profit will increase.

B. the quantity transacted will decrease.

C. a surplus will occur.

D. the total revenue will remain unchanged.

##

D

If a price ceiling is set above the equilibrium price, it is an ineffective price ceiling. The price and

quantity transacted will remain at the equilibrium level. Therefore, the total revenue (price quantity

transacted) will remain unchanged.

##

|!|EM31002|!|

When an effective price ceiling is imposed on a good,

A. the total revenue will increase.

B. the price will decrease.

C. the surplus will increase.

D. the quantity transacted will increase.

##

B

When an effective price ceiling is imposed, the price, the quantity transacted and the total revenue of

the good will decrease. There will be an excess demand (a shortage) in the market.

##

© Aristo Educational Press Ltd. 11-1


|!|EM31003|!|

Refer to the following demand and supply schedules of a good and answer questions (a) and (b).

(a) If the government removes the price ceiling which is imposed at $10, the quantity transacted will

A. increase by 50 units.

B. increase by 100 units.

C. decrease by 50 units.

D. decrease by 100 units.

(b) If the government reduces the price ceiling from $20 to $10, the quantity transacted will

A. increase by 50 units.

B. increase by 100 units.

C. decrease by 50 units.

D. decrease by 100 units.


Unit price ($) Quantity demanded (units) Quantity supplied (units)5 300 10010 250 15015 200 20020 150 25025 100 300


##

(a) A

If an effective price ceiling is imposed at $10, the quantity transacted is 150 units. After the removal of

the effective price ceiling, the market will restore to the equilibrium. Therefore, the quantity transacted

will increase by 50 units, from 150 units to 200 units.

(b) C

When the price ceiling is set at $20, it is an ineffective price ceiling. The market will stay at the

equilibrium level, where price is $15 and the quantity transacted is 200 units. When the government

reduces the price ceiling from $20 to $10, the price ceiling becomes effective. The quantity transacted

will decrease by 50 units, from 200 units to 150 units.

##

|!|EM31004|!|

In a country, the government imposes an effective price ceiling on good Y. If the production cost of

good Y reduces this year, which of the following statements is CORRECT?

A. There will be a decrease in the quantity transacted of good Y.

B. There will be a decrease in total revenue of good Y.

C. The excess demand of good Y will decrease.

D. The excess supply of good Y will decrease.

##

C

If a price ceiling is effective, a shortage will exist in the market. The reduction of production cost of

good Y will cause the supply of good Y to increase. The supply curve of good Y will shift to the right.

Therefore, the quantity transacted and the total revenue of good Y will increase. Excess demand will

decrease.

##



|!|EM31005|!|


Unit price ($) 30 29 28 27 26 25

Quantity supplied (units) 110 100 90 80 70 60

Quantity demanded (units) 50 60 70 80 90 100

(a) Suppose the market is originally at equilibrium and the government imposes a price ceiling at

$26,

A. the total revenue will increase.

B. the price will remain unchanged.

C. the quantity transacted will decrease.

D. the total revenue will remain unchanged.

(b) If the government provides a per-unit subsidy of $2 to the suppliers,

A. the new equilibrium price is $25.

B. the total amount of subsidy provided is $180.

C. the quantity transacted will decrease.

D. the amount of subsidy shared by the consumers is greater than that of the suppliers.



##

(a) C

Original price = $27, original quantity transacted = 80 units, total revenue = $27 80 = $2,160

If the effective price ceiling is imposed at $26, new price = $26, new quantity transacted = 70 units.

Therefore, total revenue = $26 70 = $1,820.

The price, the quantity transacted and the total revenue will decrease.

(b) B

Unit price ($) 30 29 28 27 26 25

Quantity supplied after

subsidy is provided (units)

- - 110 100 90 80


After the provision of the subsidy, the supply will increase. The new equilibrium price is $26 and the

quantity transacted has increased from 80 units to 90 units. The total revenue is $2,340 ($26 90),

which is higher than the original total revenue $2,160 ($27 80).

The total amount of subsidy = $2 90 = $180

Consumers’ share of subsidy = $(27 – 26) 90 = $90

Producers’ share of subsidy = $(28 – 27) 90 = $90

The consumers and producers share the same amount of subsidy.

##



|!|EM31006|!|

The following table shows the demand and supply schedules of a telecommunication company.

Unit price ($) 60 61 62 63 64 65



After the imposition of a price ceiling, the total revenue of the telecommunication company reduces to

$9,150. We can conclude that the government sets the price ceiling at ___________.

A. $64

B. $63

C. $62

D. $61

##

D

If a price ceiling leads to a reduction in total revenue, it must be an effective price ceiling. In would

then be lower than the equilibrium price ($63). The only possible answers should be either $62 or $61.

When the price ceiling is set at $61, the quantity transacted is 150 units and the total revenue is $9,150

($61 150). When the price ceiling is set at $62, the quantity transacted is 160 units and the total

revenue is $9,920 ($62 160). Therefore the price ceiling is set at $61.

##

|!|EM31007|!|

In Hong Kong, the taxi fare is fixed by the government. However, some taxi drivers charge passengers

at a discounted fare. Which of the following descriptions is CORRECT?

A. The taxi fare is set below the equilibrium level by the government.

B. The taxi fare is set above the equilibrium level by the government.

C. The demand for taxi services is elastic.

D. The demand for taxi services is inelastic.



##

B

Taxi drivers charging passengers at discounted fare shows that the current taxi fare is set above the

equilibrium level and there is an excess supply in the market. There is a tendency for the taxi drivers to

charge passengers at a discounted fare.

##

|!|EM31008|!|

Refer to the following demand and supply schedules of a good.

Unit price ($) 50 51 52 53 54 55



If there are 40 units of excess supply in the market, the ___________ is set at __________.

A. price ceiling … $51

B. price ceiling … $55

C. price floor … $51

D. price floor … $55

##

D

An excess supply will exist if an effective price floor is imposed. For an effective price floor, the price

should be set above the equilibrium price ($53).

##



|!|EM31009|!|

Under which of the following situation(s) will consumers be unable to benefit from an effective price

ceiling?

(1) Consumers cannot buy the goods because of shortage.

(2) The black market price is usually higher than the original equilibrium price.

(3) The quality of the products becomes lower.

A. (2) only

B. (1) and (3) only

C. (2) and (3) only

D. (1), (2) and (3)

##

D

All the three situations show that consumers cannot benefit from the price ceiling. Under an effective

price ceiling, a shortage exists in the market and some of the consumers cannot buy the goods. Sellers

will use some methods or criteria other than price to allocate goods to the buyers.

If the supply curve of the good is upward sloping, an effective price ceiling will cause a fall in quantity

supplied. As a result, the black market price may be higher than the original equilibrium price.

As the total revenue of sellers drops under an effective price ceiling, some sellers may cut production

costs by lowering the quality of the products.

##

|!|EM31010|!|

If a price floor is set below the equilibrium price of good Y,

A. the total revenue may increase or decrease, depending on the price elasticity of demand for

good Y.

B. a shortage of good Y will exist.

C. the quantity transacted will remain unchanged.

D. the total revenue will decrease.



##

C

If a price floor is set below the equilibrium price, it is ineffective. So, the price and quantity transacted

will remain at the equilibrium level.

##

|!|EM31011|!|

Refer to the following demand and supply schedules of a good and answer questions (a), (b) and (c).

(a) At the market equilibrium, the total revenue is

A. $2,200.

B. $2,600.

C. $3,600.

D. $5,200.

(b) If the government removes the price floor which is imposed at $20, the quantity transacted

A. will increase by 10 units.

B. will decrease by 10 units.

C. will remain unchanged.

D. may increase or decrease, depending on the price elasticity of demand.

(c) If the government increases the price floor from $20 to $40, the total revenue

A. will increase.

B. will decrease.



##

(a) C

Equilibrium price = $30, quantity transacted = 120 units


Unit price ($) Quantity supplied (units) Quantity demanded (units)10 100 14020 110 13030 120 12040 130 11050 140 100


Total revenue = $30 120 = $3,600

(b) C

When the price floor is set below the equilibrium price ($30), it is an ineffective price floor. The price

and quantity transacted will remain at the equilibrium level. The quantity transacted will still remain at

the equilibrium level after the removal of an ineffective price floor.

(c) A

If the price floor is set at $20, total revenue = $30 120 = $3,600

If the price floor is set at $40, total revenue = $40 110 = $4,400

Therefore, the total revenue increases from $3,600 to $4,400.

##

|!|EM31012|!|

In Country B, the government imposes an effective price floor on good Y. If the demand for good Y

increases this year, which of the following statements is CORRECT?



C. The excess demand of good Y will decrease.

D. The excess supply of good Y will decrease.

##

D

Under an effective price floor, a surplus will exist in the market. The demand curve will shift to the

right due to an increase in demand for good Y. Therefore, quantity transacted and total revenue of good

Y will increase. Excess supply (surplus) will decrease.

##



|!|EM31013|!|

Refer to the following demand and supply schedules of a good and answer questions (a), (b) and (c).

(a)

If

the sellers can only sell their goods at a price that is higher than $34, the quantity transacted

will be

A. 210 units.

B. 220 units.

C. 230 units.

D. 240 units.

(b) If the government imposes a price ceiling at $38, the amount of excess supply will be

A. 60 units.

B. 40 units.

C. 20 units.

D. 0 unit.

(c) Suppose the government would like to control the quantity sold directly and thus imposes a quota

of 200 units. The total revenue

A. will increase.

B. will decrease.




Unit price ($) Quantity demanded (units) Quantity supplied (units)40 200 24038 210 23036 220 22034 230 21032 240 20030 250 190


##

(a) B

As the price floor is set at $34, which is set below the equilibrium price ($36), it is ineffective. The

price will remain at the equilibrium price ($36) and the quantity transacted will be where the quantity

demanded equals the quantity supplied, which is 220 units.

(b) D

As the price ceiling is set at $38, which is set above the equilibrium price ($36), it is ineffective. The

price and quantity transacted will remain at the equilibrium level. The quantity demanded equals to the

quantity supplied (220 units). Therefore, there is no excess supply.

(c) A

The original total revenue is $7,920 ($36 220). After the imposition of the quota, the supply curve

will be “kinked” at the quota limit (200 units). The new equilibrium price is $40. The new total revenue

is $8,000 ($40 200), which has increased by $80 ($8,000 – $7,920).

##

|!|EM31014|!|

Suppose the quantity supplied and the quantity transacted of comic books are equal. Which of the

following statements MUST be INCORRECT?

A. Sellers can earn more if they increase the price of comic books.

B. There is a surplus of comic books in the market.

C. The price of comic books is lower than the equilibrium price.

D. There is no tendency for the price of comic books to change.

##

B

If there is a surplus, the quantity demanded is smaller than the quantity supplied. The quantity

transacted will be equal to the quantity demanded instead of the quantity supplied.

##



|!|EM31015|!|

If the price of a good is set at a disequilibrium level in a free market,

(1) the quantity transacted is higher than the equilibrium level.

(2) there will be a tendency for the price to change.

(3) there must be an excess demand in the market.

A. (1) only

B. (2) only

C. (1) and (3) only

D. (2) and (3) only

##

B

(1) is incorrect as either setting the price above or below the equilibrium level, the quantity transacted

is lower than the equilibrium level. (3) is incorrect as there will be an excess supply instead of excess

demand when the price is set above the equilibrium price.

##

|!|EM31016|!|

Suppose an effective price floor is imposed on good A, which of the following statements is

CORRECT?

A. The total revenue will decrease.

B. Sellers may give buyers non-monetary benefits.

C. There will be a shortage in the market.

D. The price will decrease.

##

B

An effective price floor is set above the equilibrium price. After the imposition of an effective price

floor, the price will increase, the quantity transacted will decrease and the total revenue may increase or

decrease, depending on the price elasticity of demand. There will be an excess supply in the market.

Sellers may use other methods to clear the excess supply. For example, sellers may offer the buyers

illegal cash rebates or non-monetary benefits.

##



|!|EM31017|!|

Which of the following is a common consequence of setting an effective price ceiling and an effective

price floor?

A. Both will lead to a decrease in total revenue.

B. Both will lead to non-price competition.

C. Quantity demanded is not equal to quantity transacted in both cases.

D. Both will lead to a decrease in demand.

##

B

Under an effective price ceiling, a shortage exists in the market. Sellers will use some methods or

criteria other than price to allocate goods to the buyers. Under an effective price floor, excess supply

will exist in the market. As consumers have to pay a price higher than the equilibrium level, sellers will

use other methods to clear the surplus. Therefore, both will lead to non-price competition.

##

|!|EM31018|!|

The HKSAR Government increased the minimum allowable wage for foreign domestic helpers to

$3,580, which is likely to be above the equilibrium wage level. As a result,

A. a shortage will occur in the market of foreign domestic helpers.

B. more foreign domestic helpers will be employed.

C. the quantity demanded for foreign domestic helpers must increase.

D. the total income of foreign domestic helpers may not increase.

##

D

The total income of foreign domestic helpers may increase, decrease or remain unchanged, depending

on the price elasticity of demand for foreign domestic helpers.

##



|!|EM31019|!|

The following table shows the demand and supply schedules of Happy Fast Food.

After the government’s imposition of a price floor on fast food, the price and quantity transacted of

Happy Fast Food remain unchanged. Which of the following statements is INCORRECT?

A. The price floor may be set at $125.

B. The price floor may be set at $120.

C. The price floor may be set at $115.

D. The price floor is ineffective.

##

A

The price and quantity transacted remain unchanged after imposing a price floor implies that the price

floor is ineffective. As the equilibrium price is $120, the price floor which is set above $120 is effective

and the price and quantity transacted will change. Therefore, the price floor is not possible to be set at

$125.

##

|!|EM31020|!|

Which of the following must NOT be an effect of raising the level of the effective price floor of

bananas?

A. The quantity transacted of bananas decreases.

B. There are more unsold bananas in the market.

C. Sellers will help their customers to choose the bananas with the best quality.

D. The total revenue of the bananas sellers increases if the demand for bananas is elastic.




##

D

If the demand for bananas is elastic, after raising the level of the price floor, the loss in revenue due to

the decrease in quantity demanded is larger than the gain in revenue due to the increase in price.

Therefore, the total revenue of the banana sellers will decrease instead of increase.

##

|!|EM31021|!|


Unit price ($) 60 65 70 75 80 85

Market quantity demanded (units) 210 180 150 120 90 60

Market quantity supplied (units) 90 120 150 180 210 240

If there are 60 units of excess demand in the market, which of the following statement is CORRECT?

A. The government imposes a price floor at $75.

B. The government imposes a price ceiling at $65.

C. The government imposes a price floor at $65.

D. The market is at equilibrium.

##

B

When the government imposes a price ceiling at $65, which is set below the equilibrium price ($70),

the quantity demanded is 180 units and the quantity supplied is 120 units. The excess demand is 60

units (180 units – 120 units).

##



|!|EM31022|!|

The following table shows the supply and demand schedules of good Y.

Unit price ($) 10 9 8 7 6 5



If the government imposes a quota at 70 units on good Y, the total revenue will

A. decrease by $35.

B. decrease by $120.

C. increase by $35.

D. increase by $120.

##

C

Original total revenue = $7 75 = $525

Under an effective quota set at 70 units, the new equilibrium price is $8 and the new total revenue is

$560 ($8 70). The increase in total revenue is $35 ($560 – $525).

##

|!|EM31023|!|

In Hong Kong, the number of taxi licenses is restricted and under the control of the government. It is an

example of _________________.

A. price ceiling

B. price floor

C. quota

D. sales tax

##

C

Quota is a limit on the maximum quantity of goods that sellers can sell in the market. The government

uses the issuance of taxi licenses to control the maximum number of taxi being allowed to operate in

Hong Kong. So, it is an example of quota.



##

|!|EM31024|!|

Suppose the demand for good Y is elastic. After the imposition of an effective quota by the

government, the total revenue of good Y will __________.

A. increase

B. decrease

C. remain unchanged

D. drop to zero

##

B

An effective quota will lower quantity transacted and raise equilibrium price. If the demand for good Y

is elastic, the percentage increase in price will be smaller than the percentage decrease in quantity

transacted. Therefore, the total revenue will decrease.

##

|!|EM31025|!|

If the government imposes an effective quota on the imported cars in a country, which of the following

statements is CORRECT?

A. The total revenue of imported cars will increase.

B. The price of imported cars will decrease.

C. The price of the local manufactured cars will increase.

D. The total revenue of local manufactured cars will decrease.

##

C

After the imposition of an effective quota on imported cars, the price of imported cars will increase and

the quantity demanded of imported cars will decrease. Since imported cars and local manufactured cars

are substitutes, the demand for local manufactured cars will increase. The price and the total revenue of

local manufactured cars will therefore increase.

##



|!|EM31026|!|

For a good with an inelastic demand and an elastic supply, an effective price floor is similar to an

effective quota as _______________________.

A. both cases lower the market price

B. both cases create a shortage in the market

C. both cases increase the total revenue of sellers

D. both cases lower the demand for the good

##

C

Both an effective price floor and an effective quota will lead to an increase in price and a decrease in

quantity transacted. If the demand is inelastic, the gain in revenue due to the increase in price is greater

than the loss in revenue due to the decrease in quantity demanded. Therefore, the total revenue of

sellers will increase.

##



|!|EM31027|!|


Unit price ($) 12 15 18 21 24 27



(a) If the government imposes a quota at 60 units on good Y, the market price of good Y will be

A. $12.

B. $15.

C. $18.

D. $21.

(b) Suppose the government wants to keep the quantity transacted at 60 units by using per-unit sales

tax instead of quota, the amount of per-unit sales tax will be

A. $3.

B. $6.

C. $9.

D. $12.

##

(a) D

If the government imposes a quota at 60 units on good Y, consumers are willing to pay $21 to buy 60

units of the good. So, the price of the good will be $21.

(b) B

When quantity supplied = 60 units, the price = $15

When quantity demanded = 60 units, the price = $21

To keep the quantity transacted at 60 units, the per-unit sales tax needs to be $(21 – 15) = $6.

##



|!|EM31028|!|

If the government abolishes the effective quota on good Y, __________________ will increase.

A. the total revenue of good Y

B. the price of good Y

C. the quantity transacted of good Y

D. the income of workers producing good Y

##

C

An effective quota is set below the equilibrium quantity of a good. After the abolishment of the quota,

the price will decrease and the quantity transacted will increase. The total revenue may increase or

decrease, depending on the price elasticity of demand.

##

|!|EM31029|!|

Suppose the price of good X is standardised by the law. It is observed that some sellers illegally offer a

10% discount to customers. This phenomenon indicates that

A. the price of good X is regulated by a price ceiling.

B. the total revenue of sellers decreases.

C. the quantity supplied of good X is equal to the quantity transacted.

D. the price of good X is set above the equilibrium level.

##

D

Sellers may offer illegal discounts to buyers when there is an effective price floor. It is because under

an effective price floor, an excess supply exists. As consumers have to pay a price higher than the

equilibrium level, sellers will therefore use other methods, such as illegal discounts, to clear the

surplus.

##



|!|EM31030|!|

Suppose the government imposes an effective quota on good Y. If the demand for good Y increases,

which of the following statements is CORRECT?



C. There will be an increase in price of good Y.

D. There will be an increase in profit of good Y.

##

C

An effective quota is set below the equilibrium quantity. If the demand for good Y increases, the

demand curve will shift to the right. The price and total revenue will increase. Quantity transacted will

remain at the quota limit.

##

|!|EM31031|!|

Refer to the following diagram.

Point M is the mid-point of the demand curve. After the imposition of an effective quota on the good,

the equilibrium price will ____________and total revenue will _____________.

A. decrease … decrease

B. decrease … increase

C. increase … decrease

D. increase … increase


M

P0

Quantity Q0

S0

Unit price

0

D


##

C

An effective quota lowers the quantity transacted and results in an increase in equilibrium price. From

the above diagram, as the relevant price range lies in the elastic portion of the demand curve, therefore

the loss in revenue due to the decrease in quantity transacted is larger than the gain in revenue due to

the increase in price. Total revenue will decrease.

##

|!|EM31032|!|

Refer to the following demand and supply schedules of a brand of pesticides.

In

country X, the government imposes a quota on the pesticides. The new equilibrium price is $13. How

much is the quota limit set by the government?

A. 150 units

B. 160 units

C. 170 units

D. 180 units

##

B

If the government imposes a quota at 160 units on the pesticides, the quantity transacted will be 160

units and the price will be $13.

##


Unit price ($) Quantity supplied (units) Quantity demanded (units)10 150 19011 160 18012 170 17013 180 16014 190 150


|!|EM31033|!|

If the government imposes an effective quota on good Y, which of the following statements are

CORRECT?

(1) Price will increase.

(2) Price will decrease.

(3) Quantity supplied will increase.

(4) Quantity demanded will decrease.

A. (1) and (3) only

B. (1) and (4) only

C. (2) and (3) only

D. (2) and (4) only

##

B

When an effective quota is imposed, price increases and quantity transacted (quantity demanded)

decreases.

##

|!|EM31034|!|

Suppose the Hong Kong Government imposes an import quota on vegetables imported from the

Mainland in order to protect the interest of local farmers. Which of the following is INCORRECT?

A. The total revenue of Hong Kong farmers will increase.

B. The price of vegetables imported from the Mainland to Hong Kong will increase.

C. The demand for vegetables imported from the Mainland will decrease.

D. If the demand for imported vegetables in Hong Kong is inelastic, the total expenditure of

Hong Kong consumers on imported vegetables will increase.

##

C

The import quota will cause an increase in the price of vegetables imported from the Mainland.

According to the law of demand, the quantity demanded for vegetables imported from the Mainland

will decrease, but not the demand.

##



|!|EM31035|!|

If the government sets the quota below the original equilibrium quantity on good Y,

A. the total revenue of good Y must increase.

B. the quality of good Y may be improved.

C. the average production cost will decrease.

D. the price of good Y may increase or decrease, depending on the price elasticity of demand.

##

B

An effective quota should be set below the original equilibrium quantity. When an effective quota is

imposed, the supply curve will be “kinked” at the quota limit. The price will increase and the quantity

transacted will decrease. The total revenue may increase or decrease, depending on the price elasticity

of demand. One possible consequence is quality improvement, so that goods can be sold at higher

price.

##

|!|EM31036|!|

Suppose the government imposes a per-unit sales tax of $30 on ABC Company’s red wine, the price of

ABC Company’s red wine increases by $30 per unit. Which of the following statements is/are

CORRECT?

(1) The demand for ABC Company’s red wine is perfectly inelastic.

(2) The demand for ABC Company’s red wine is elastic.

(3) The supply of ABC Company’s red wine is unitary elastic.

(4) The supply of ABC Company’s red wine is perfectly elastic.

A. (1) only

B. (2) only

C. (1) and (3) only

D. (1) and (4) only



##

D

After the imposition of the sale tax, the supply curve will shift vertically upwards. If the demand for

ABC Company’s red wine is perfectly inelastic, the demand curve is a vertical line. If the supply of

ABC Company’s red wine is perfectly elastic, the supply curve is a horizontal line. In both cases, the

amount of price increase is equal to the vertical distance between the original and the new supply

curves. Consumers will bear the entire tax burden.

##

|!|EM31037|!|

Suppose the government abolishes the per-unit sales tax on coffee beans which is paid by consumers,

A. The supply curve of good Y will shift vertically downwards.

B. The supply curve of good Y will shift vertically upwards.

C. The demand curve of good Y will shift vertically downwards.

D. The demand curve of good Y will shift vertically upwards.

##

D

If the government abolishes the per-unit sales tax on coffee bean which is paid by the consumers, the

demand for coffee beans will increase. The demand curve will shift vertically upwards.

##

|!|EM31038|!|

After the imposition of $30 per-unit sales tax, the market price of Susan’s alcohol increases by $20 per

unit. We can conclude that the

A. demand for Susan’s alcohol is more elastic than the supply of Susan’s alcohol.

B. demand for Susan’s alcohol is less elastic than the supply of Susan’s alcohol.

C. demand for Susan’s alcohol is elastic and the supply of Susan’s alcohol is inelastic.

D. demand for Susan’s alcohol is inelastic and the supply of Susan’s alcohol is elastic.



##

B

After the imposition of $30 per-unit sales tax, the consumers bear $20 of tax per unit, but the producers

only bear $10 of tax per unit. The producers’ tax burden is smaller than that of the consumers. The

price elasticity of demand is smaller than the price elasticity of supply within the relevant price range.

##

|!|EM31039|!|

The diagram below shows the demand for and supply of motor vehicles. The original equilibrium point

is E0.

Suppose the government imposes a per-unit tax on the motor vehicles, and at the same time, people are

more concerned about the environmental problem. More people prefer to take public transport. The

new equilibrium point is __________.

A. E1

B. E2

C. E3

D. E4

##

B

The supply curve of motor vehicles shifts vertically upwards when there is a per-unit tax. The demand

curve of motor vehicles shifts to the left when more people take public transport, as motor vehicles and

public transport are substitutes. Therefore, the new supply curve and demand curve are S2 and D2

respectively. The new equilibrium point is thus E2.

##


E4E2 E0

E1

E3

S2

D2

D1

S1

S0

Unit price

0

D0

Quantity


|!|EM31040|!|

Suppose the government imposes a per-unit sales tax on good Y of which the demand is more elastic

than the supply, the buyers’ tax burden will be __________ than the sellers’ tax burden and the quantity

transacted will __________.

A. greater … decrease

B. greater … increase

C. smaller … decrease

D. smaller … increase

##

C

After a per-unit sales tax is imposed, the supply of good Y will decrease. The supply curve will shift

vertically upwards. The quantity transacted will decrease. When the demand of good Y is more elastic

than the supply, the buyers’ tax burden will be smaller than the sellers’ tax burden.

##

|!|EM31041|!|

Suppose a per-unit sales tax is imposed on good Y. The price of good Y will ___________. If the

demand for good Y is more ___________ than the supply, the sellers would bear a relatively smaller

proportion of tax burden.

A. increase … elastic

B. increase … inelastic

C. decrease … elastic

D. decrease … inelastic

##

B

After the imposition of the sales tax, the supply curve will shift vertically upwards. The price of good Y

will increase and quantity transacted will decrease. When the demand is more inelastic than the supply,

the sellers’ tax burden will be smaller than the buyers’ tax burden.

##



|!|EM31042|!|

Refer to the following demand schedule of a good and answer questions (a) and (b).

Unit price ($) 15 20 25 30 35 40

Quantity demanded (unit) 1,000 900 800 700 600 500

Suppose the government imposes a per-unit sales tax of $15 on the good. As a result, the equilibrium

price of the good will increase from $25 to $35.

(a) Which of the following descriptions is CORRECT?

A. The price elasticity of demand of the good is greater than 1.

B. The total tax burden is $9,000.

C. The consumers bear a smaller tax burden than the producers.

D. The total revenue (including tax) has decreased.

(b) Due to technological advancement, the equilibrium price of good Y falls back to $25, it implies

that

A. the quantity transacted is 600 units.

B. the buyers will bear zero tax burden.

C. the total tax burden is $9,000.

D. the total revenue net of tax will be $8,000.



##

(a) B

Original equilibrium price = $25, original quantity transacted = 800 units, original total revenue = $25

800 = $20,000

After the imposition of the sales tax, the new equilibrium price = $35, the new quantity transacted =

600 units, total revenue (including tax) = $35 600 = $21,000

Total tax burden = $15 600 = $9,000

The consumers’ tax burden = $(35 – 25) 600 = $6,000

The producers’ tax burden = $(15 – 10) 600 = $3,000

The consumers bear a larger tax burden than the producer.

The price elasticity of demand of the good = = -0.86 (<1)

Therefore, only option B is correct.

(b) D

If the equilibrium price of good Y falls back to $25 due to the technological advancement, the quantity

transacted is 800 units. The total revenue net of tax will be $(25 – 15) 800 = $8,000.

Total tax burden = $15 800 = $12,000

##

|!|EM31043|!|

Suppose the government imposes a per-unit sales tax on a good of which the supply is perfectly

inelastic. ___________ will bear zero tax burdens, and the quantity transacted will ___________.

A. Sellers … remain unchanged

B. Sellers … decrease

C. Buyers … remain unchanged

D. Buyers … decrease



##

C

When the supply is perfectly inelastic, the supply curve will be a vertical line. The sellers will bear the

entire tax burden, the buyers will bear zero tax burden. The quantity transacted would remain

unchanged.

##

|!|EM31044|!|


(a)

If

the government imposes a per-unit sales tax of $4, the new equilibrium price is _____________.

A. $40

B. $38

C. $36

D. $34

(b) The elasticity of demand for the good is ________________ the elasticity of supply of the good,

so the consumers’ tax burden is ________________ the producers’ tax burden.

A. larger than … larger than

B. larger than … smaller than

C. equal to … equal to

D. smaller than … larger than


Unit price ($) Quantity supplied (units) Quantity demanded (units)40 500 20038 450 25036 400 30034 350 35032 300 40030 250 450


##

(a) C

After a per-unit sales tax of $4 is imposed, the supply will decrease. The new equilibrium price is $36.

(b) C

Consumers’ tax burden = ($36 – $34) 300 = $600

Producers’ tax burden = ($34 – $32) 300 = $600

The consumers and the producers share the same amount of subsidy. They have the same price

elasticity.

##

|!|EM31045|!|

The original equilibrium price of a good is $24 and the original equilibrium quantity is 100 units.

Suppose the government imposes a per-unit sales tax of $3 on the good. As a result, the equilibrium

price of the good increases to $26 and equilibrium quantity reduces to 80 units.

Refer to the above information, the producers’ tax burden is _____________ and the total sales revenue

(net of tax) is ____________.

A. $80 … $1,840

B. $100 … $2,300

C. $240 … $2,080

D. $900 … $1,920


Unit price ($) Quantity supplied after tax is imposed (units)

Quantity demanded (units)

40 400 20038 350 25036 300 30034 250 35032 - 40030 - 450


##

A

Producers’ tax burden = $[3 – (26 – 24)] 80 = $80

Total sales revenue (net of tax) = $(26 – 3) 80 = $1,840

##

|!|EM31046|!|


Unit price ($) 80 78 76 74 72 70



(a) If the government imposes a per-unit sales tax of $4 on the good, the new equilibrium quantity is

A. 560 units.

B. 540 units.

C. 520 units.

D. 500 units.

(b) Under the per-unit sales tax of $4 on the good Y, the total sales revenue (including tax) is

___________ and the consumers’ tax burden is ____________.

A. $38,480 … $2,080

B. $39,520 … $1,040

C. $39,960 … $1,080

D. $41,040 … $1,040



##

(a) C

Unit price ($) 80 78 76 74 72 70

Quantity supplied after the

tax is imposed (units)560 540 520 500 - -


After a per-unit sales tax of $4 is imposed, the supply will decrease. The new equilibrium quantity is

520 units.

(b) B

The total sales revenue (including tax) = $76 520 = $39,520

Consumers’ tax burden = $(76 – 74) 520 = $1,040

##

|!|EM31047|!|

Under which of the following situations, the imposition of a per-unit tax is the most effective anti-

smoking measure?

A. People are addicted to cigarette.

B. People usually buy cigarette illegally.

C. Sellers are willing to bear the entire tax burden by themselves.

D. The supply of cigarette is perfectly elastic.

##

D

When the supply of cigarette is perfectly elastic, consumers will bear the entire tax burden. Therefore,

the horizontal supply curve will shift upwards and the quantity transacted of cigarette will decrease.

##



|!|EM31048|!|

After the imposition of a per-unit sales tax on a good, the amount of increase in unit price is exactly the

same as the amount of the per-unit sales tax. Which of the following statements is CORRECT?

A. Excess supply exists in the market.

B. Consumers bear the entire sales tax.

C. The supply of the good is perfectly inelastic.

D. The supply of the good increases because of the tax.

##

B

If the demand for the good is perfectly inelastic or the supply of the good is perfectly elastic, the

amount of increase in price will be exactly the same as the amount of the per-unit sales tax. Therefore,

consumers will bear the entire sales tax.

##

|!|EM31049|!|

Suppose the government imposes a per-unit tax of $40 on all the textile products, the price of the

products increases by $30. Which of the following statements is CORRECT?

A. The demand of textile products is perfectly inelastic.

B. The demand of textile products is inelastic.

C. The demand of textile products is more elastic than the supply.

D. The consumers bear 75% of the total amount of tax.

##

D

As the increase in price ($30) accounted for 75% of the per-unit tax ($40), consumers bear 75% of the

tax while producers bear 25%. When the demand for the textile products is more inelastic than the

supply, the consumers’ tax burden will be larger than the producers’ tax burden.

##



|!|EM31050|!|

Suppose the demand for a good is elastic and the supply is inelastic. If the government imposes a $5

per-unit sales tax on a good, the price of the good will

A. increase by more than $5.

B. increase by less than $5.

C. increase by $5.

D. remain unchanged.

##

B

After the imposition of a per-unit tax, the supply of the good will decrease. As long as the demand

curve is downward sloping while the supply curve is upward sloping, the increase in price will be

smaller than the amount of the per-unit sales tax. It doesn’t matter whether the elasticity of demand is

greater than the elasticity of supply or not.

##

|!|EM31051|!|

The following table shows the demand and supply schedules of red wine.

Unit price ($) 110 120 130 140 150 160


Quantity supplied after tax is

imposed (units)14 15 16 17 18 19

After the abolishment of the $20 per-unit sales tax on red wine, the new equilibrium price is _______.

A. $110

B. $120

C. $130

D. $140



##

B

Unit price ($) 110 120 130 140 150 160


Quantity supplied (units) 16 17 18 19 - -

After the abolishment of $20 per-unit sales tax, the supply of red wine will increase. The new

equilibrium price is $120.

##

|!|EM31052|!|

Suppose the price elasticity of demand for a good is 1.25. After the imposition of a per-unit sales tax,

the price of the good has changed by 25%. The quantity transacted will

A. decrease by 20%.

B. increase by 20%.

C. decrease by 31.25%.

D. increase by 31.25%.

##

C

Let the change of the quantity transacted be x %。

= 1.25

x = 31.25

After the imposition of a per-unit sales tax, the supply will decrease and the price will increase.

According to the law of demand, quantity transacted drops when price increases. Therefore, the

quantity demanded reduced by 31.25% after the imposition of tax.

##



|!|EM31053|!|

Study the following demand and supply diagram of a good. The initial equilibrium price is $30.

Suppose the government imposes a per-unit tax of $5 on the good. The total tax burden on suppliers is

________________.

A. $50

B. $60

C. $90

D. $150

##

B

Tax burden of the suppliers = [$5 – ($33 – $30)] 30 = $60

##

|!|EM31054|!|

If the government imposes $20 per-unit sales tax on good Y, the price of good Y increases by $15. The

ratio of the buyers’ tax burden to the sellers’ tax burden is __________.

A. 1:1

B. 2:1

C. 1:3

D. 3:1


Per-unit tax

30

33

50

30

S0

S1

Unit price ($)

0

D

Quantity (units)


##

D

Buyers bear 75% ($15/$20) of the tax, while sellers bear 25% of sales tax. Therefore, the ratio of the

buyers’ tax burden to the sellers’ tax burden is 3:1.

##

|!|EM31055|!|

Suppose the demand for a good is perfectly elastic and the government imposes a per-unit sales tax on

the good. _________ will bear the entire tax burden, and the ___________ of the good will

___________.

A. Sellers … price … decrease

B. Sellers … price … remain unchanged

C. Consumers … quantity transacted … decrease

D. Consumers … quantity transacted … remain unchanged

##

B

If the demand for the good is perfectly elastic, the demand curve of the good is a horizontal line. The

supply will decrease and the supply curve will shift vertically upwards after the imposition of the per-

unit sales tax. The sellers will bear the entire tax burden and the price of the good will remain

unchanged.

##



|!|EM31056|!|


Suppose the government imposes a per-unit sales tax on a good which is paid by consumers. The new

quantity transacted is 54 units. What is the amount of the per-unit sales tax?

A. $0

B. $3

C. $6

D. $9

##

C

After a per-unit sales tax of $6 imposed, the demand will decrease. The new quantity transacted is 54

units.

##


Unit price ($) Quantity supplied (units) Quantity demanded (units)30 52 6033 54 5836 56 5639 58 5442 60 5245 62 50

Unit price ($) Quantity supplied (units) Quantity demanded after tax is imposed (units)

30 52 5633 54 5436 56 5239 58 5042 60 -45 62 -


|!|EM31057|!|

Which of the following is NOT an effect of removing a per-unit subsidy of a good?

A. A decrease in the government’s expenditure on subsidy.

B. There is a change in quantity transacted of a good.

C. A decrease in price of a good.

D. An increase in producers’ total revenue.

##

C

After removing a per-unit subsidy, the supply curve of the good shifts vertically upwards. Price will

increase instead of decrease.

##

|!|EM31058|!|

Refer to the following demand and supply schedules of Chan’s Orange and answer the question.

Unit price ($) 20 19 18 17 16 15



If the government provides a per-unit subsidy of $2 to the suppliers,

A. the new equilibrium price is $18.

B. the total revenue will increase.

C. the total revenue will decrease.

D. the total amount of subsidy is $400.



##

B

Unit price ($) 20 19 18 17 16 15


subsidy is provided (units)- - 300 250 200 150


After a subsidy is provided, the supply will increase. The new equilibrium price is $17. The new total

revenue is $4,250 ($17 250), which is higher than the original revenue ($18 200 = $3,600). The

total amount of subsidy is $500 ($2 250).

##

|!|EM31059|!|

Suppose the government provides a per-unit subsidy on good Y of which the demand is more elastic

than that of the supply, the consumers’ share of subsidy will be __________ than the sellers’ share of

subsidy and the quantity transacted would __________.

A. larger … decrease

B. larger … increase

C. smaller … decrease

D. smaller … increase

##

D

After a per-unit subsidy is provided, the supply of the good will increase and the supply curve will shift

vertically downwards. The quantity transacted will increase. When the demand for good Y is more

elastic than the supply, the consumers’ share of subsidy will be smaller than the sellers’ share of

subsidy.

##



|!|EM31060|!|

The following diagram shows the demand and supply of imported fruits.

The original equilibrium point is E0. Suppose the weather is not good for growing fruits this year. Bad

harvest exists all over the world. The government of a country decided to offer local fruit farmers a per-

unit subsidy on the fruit sold. The new equilibrium is _________.

A. E1

B. E2

C. E3

D. E4

##

B

The supply curve of fruits will shift to the left if there is a bad harvest as there is a decrease in supply of

imported fruits. The new supply curve will be S2.

The per-unit subsidy given to the local fruit farmers will shift the demand curve of imported fruits to

the left, as local fruits and imported fruits are substitutes. The new demand curve will be D2.

The new equilibrium point will be E2.

##


E4

E2 E0

E1

E3

S2

D2

D1

S1

S0

Unit price

0

D0

Quantity


|!|EM31061|!|

In which of the following situations the granting of a per-unit subsidy CANNOT increase the

equilibrium quantity?

A. The demand is inelastic.

B. The demand is elastic.

C. The demand is unitary elastic.

D. The demand is perfectly inelastic.

##

D

If the demand is perfectly inelastic, the demand curve is a vertical line. The provision of a per-unit

subsidy on a good cannot change the equilibrium quantity.

##



|!|EM31062|!|

Refer to the following demand and supply schedules of Peter’s Tutorial Centre and answer questions

(a) and (b).

(a)

Under the provision of a per-unit subsidy of $20, the total revenue (excluding the subsidy) of

Peter ______________.

A. will decrease

B. will increase

C. may increase or decrease, depending on the price elasticity of demand

D. will remain unchanged

(b) The consumers’ share of subsidy is ____________.

A. $230

B. $280

C. $520

D. $580


Unit price ($) Quantity demanded (hours) Quantity supplied (hours)80 30 2490 29 25100 28 26110 27 27120 26 28130 25 29


##

(a) A

Original total revenue = $110 27 = $2,970

After the provision of the per-unit subsidy of $20, the supply of the tutorial lessons will increase. The

new equilibrium price is $100 and the new quantity transacted is 28 hours. The new total revenue

(excluding the subsidy) is $2,800 ($100 28). The total revenue (excluding subsidy) decreases from

$2,970 to $2,800.

(b) B

The consumers’ share of subsidy = ($110 – $100) 28 = $280

##


Unit price ($) Quantity demanded (hours) Quantity supplied after subsidy is imposed (hours)

80 30 2690 29 27100 28 28110 27 29120 26 -130 25 -


|!|EM31063|!|


If the government cancelled the per-unit subsidy of $2, the equilibrium price will

A. increase by $1.

B. decrease by $1.

C. decrease by $2.

D. remain unchanged.

##

A

The equilibrium price after the provision of subsidy is $53. If the subsidy is cancelled, the equilibrium

price is $54. The equilibrium price will increase by $1.

##


Unit price ($) Quantity supplied after the subsidy is provided (units)


55 120 8054 110 9053 100 10052 90 11051 80 120

Unit price ($) Quantity supplied after the subsidy is cancelled (units)


55 100 8054 90 9053 80 10052 - 11051 - 120


|!|EM31064|!|

Suppose the government grants a per-unit subsidy on bus services, under which of the following

situations will the producers of bus services enjoy the entire subsidy benefit?

(1) The demand for bus services is perfectly inelastic.

(2) The demand for bus services is perfectly elastic.

(3) The supply of bus services is perfectly inelastic.

(4) The supply of bus services is perfectly elastic.

A. (1) and (3) only

B. (1) and (4) only

C. (2) and (3) only

D. (2) and (4) only

##

C

If the demand for bus services is perfectly elastic or the supply of bus services is perfectly inelastic, the

price of bus services will remain unchanged after the granting of per-unit subsidy. Therefore, producers

of bus services will enjoy the entire subsidy benefit.

##

|!|EM31065|!|

Refer to the following table of demand and supply schedules of dictionary.

Unit price ($) 30 40 50 60 70 80



In order to encourage the use of dictionary, the government grants $20 per-unit subsidy on dictionary.

According to the above information, the producers’ new total revenue (excluding the subsidy)

___________ the original total revenue before the provision of subsidy.

A. is larger than

B. is smaller than

C. is equal to



D. may be larger or smaller than

##

B

Unit price ($) 30 40 50 60 70 80



subsidy is provided (units)76 78 80 82 - -

After the subsidy is provided, the new price is $40 and the new quantity transacted is 78 units.

New total revenue excluding the subsidy = $40 78 = $3,120

Original total revenue before the provision of subsidy = $50 76 = $3,800

Therefore, the producers’ new total revenue excluding the subsidy is smaller than the original total

revenue before the provision of subsidy.

##

|!|EM31066|!|

Suppose the demand for a certain good is perfectly elastic and the supply is elastic. If the government

provides a per-unit subsidy on the good to the suppliers, the price of the good will _________.

A. decrease

B. increase

C. drop to zero

D. remain unchanged

##

D

If the demand for the good is perfectly elastic, the demand curve is a horizontal line. Even the supply

curve will shift vertically downwards (to the right) after the provision of subsidy, the price will remain

unchanged and the suppliers enjoy all the subsidy benefit.

##



|!|EM31067|!|

Refer to the following demand and supply schedules of concert tickets.

Unit price ($) 100 150 200 250 300 350



After the provision of a per-unit subsidy on movie tickets, the new equilibrium price is $200. What is

the amount of the per-unit subsidy?

A. $10

B. $50

C. $100

D. $150

##

C

Unit price ($) 100 150 200 250 300 350



subsidy is provided (units)60 70 80 90 - -

After the provision of the $100 per-unit subsidy, the new equilibrium price is $200 and the new

equilibrium quantity is 80 units.

##

|!|EM31068|!|

Suppose the government increases the per-unit subsidy on good Y. If the _____________ good Y is less

elastic than the _____________, the sellers will enjoy _____________ proportion of the increase in

subsidy than the buyers.

A. supply of … demand … the same

B. supply of … demand … a smaller

C. demand for… supply … a smaller

D. demand for… supply … a larger



##

C

After the increase of the per-unit subsidy, the supply of good Y increases and the supply curve will

further shift vertically downwards. If the demand for good Y is less elastic than the supply, the sellers

will enjoy a smaller proportion of the increase in subsidy than the buyers.

##

|!|EM31069|!|

Study the following diagram.

The original equilibrium point is point E. P1 and P2 show __________________ and

__________________ respectively.

A. the price under a per-unit subsidy … an effective price floor

B. an effective price floor … the price under an effective quota

C. the price under a per-unit tax … the price under a per-unit subsidy

D. None of the above.

##

A

A per-unit subsidy shifts the supply curve of the good vertically downwards and therefore the price

under a per-unit subsidy will be at P1, which is lower than the original equilibrium price (P0). Under an

effective price floor, the price is set above the original equilibrium price and it will be at P2.

##


P2

E

Unit price

P0

0 Q

P1

S

D

Quantity


Short Questions

|!|ES31001|!|

Study the following table about good Y and answer the questions below:

(a)

How will the price, quantity transacted and total revenue of good Y be affected if the government

imposes a price ceiling at $25? (3 marks)

(b) If the government decides to provide a per-unit subsidy to the producers instead of imposing the

price ceiling to keep the market price at $25, what should the amount of the per-unit subsidy be?

Explain. (4 marks)

##

(a) Original price = $30, original quantity transacted = 13 units, original total revenue = $390 ($30

13).

Under the price ceiling, new price = $25, new quantity transacted = 12 units, new total revenue =

$300 ($25 12).

Therefore, both the price, quantity transacted and total revenue decrease. (3 marks)




(b) The quantity supplied is 14 units when the price is $25. To meet the quantity supplied of 14 units,

the consumers should pay $35 after subsidy for each unit of good Y. Since the difference between

the price paid by the consumers and the price received by the producers is the per-unit subsidy, the

per-unit subsidy is $10.

(4 marks)

##

|!|ES31002|!|

Suppose the Hong Kong Government imposes an effective price floor on new private cars. What will

be the effects on the price and quantity transacted of second-hand private cars? Explain with the aid of

a diagram. (7 marks)


Per-unit subsidy30

25

13 14

S0

S1

Unit price ($)

0

D

Quantity (units)

35


##

The effective price floor of new private cars is set above the equilibrium price, and this leads to an

increase in the price of new private cars. (1 mark)

As new private cars and second-hand private cars are substitutes, a rise in the price of new private cars

will lead to an increase in demand for second-hand private cars. (1 mark)

Therefore, the demand curve of second-hand private cars will shift to the right from D0 to D1. The price

and quantity transacted of second-hand private cars will increase to P1 and Q1 respectively. (2 marks)

(3 marks)

##

|!|ES31003|!|

The following table shows the market demand and supply schedules of good X.

Unit price ($) 15 16 17 18 19

Quantity demanded (units) 30 25 20 15 10

Quantity supplied (units) 10 15 20 25 30

The price ceiling set by the government is $16.

(a) Is the price ceiling effective? Explain. (2 marks)

(b) The government has decided to limit the quantity sold in the market directly to 15 units. With the

aid of a diagram, explain the difference in total revenue compared to the case of price ceiling.

(6 marks)

##

(a) An effective price ceiling should be set below the equilibrium price ($17). So, a price ceiling set

at $16 (<$17) is effective. (2 marks)


Quantity of second-hand private cars

P0

Q0

S

D1

Q1

P1

Unit price

0

D0


(b) When the government imposes a quota at 15 units, the supply curve will be “kinked” at the quota

limit. (1 mark)

The new equilibrium price will be $18. The new total revenue will be $270 ($18 15). (1 mark)

As the original total revenue under a price ceiling is $240 ($16 15), there will be an increase in

total revenue of $30. (1 mark)

(3 marks)

##

|!|ES31004|!|

The following table shows the market demand and supply schedules of good X.

(a)

Su

pp

ose the government imposes a price ceiling at $26.

(i) Is it an effective price ceiling? Explain. (2 marks)

(ii) Find the market price, quantity transacted, total revenue and the amount of excess　

demand or supply. (4 marks)

(b) If the government raises the price ceiling to $29, how would your answer in (a)(ii) be changed?

Explain with the aid of a diagram. (7 marks)

##

(a) (i) An effective price ceiling needs to be set below the equilibrium price ($27), so the price

ceiling at $26 is effective. (2 marks)

(ii) Market price = $26 (1 mark)


Unit price ($) Market quantity supplied (units) Market quantity demanded (units)30 110 5029 100 6028 90 7027 80 8026 70 9025 60 100

15

16

17

18

S0

S1

25

Unit price ($)

020

D

Quantity of good X

Increase in total revenue


Quantity transacted = 70 units (1 mark)

Total revenue = $26 70 = $1,820 (1 mark)

The amount of excess demand = Quantity demanded – Quantity supplied = (90 – 70) units

= 20 units (1 mark)

(b) The price ceiling set at $29 is not effective as it is set above the equilibrium price. (1 mark)

The price, the quantity transacted and the total revenue will remain at the equilibrium level. The

equilibrium price will increase from $26 to $27. The quantity transacted will increase from 70

units to 80 units. The total revenue will increase from $1,820 to $2,160 ($27 80). The excess

demand will disappear in the market. (3 marks)

(3 marks)

##

|!|ES31005|!|

Suppose the government has imposed an effective price floor on garments. Besides the price floor, the

government has also planned to provide a per-unit subsidy to the producers. Some people claim that the

provision of subsidy will lead to a more serious problem of “over-production”. Explain these people’s

viewpoint with the aid of a diagram. (6 marks)


New revenue

Original revenue

70

27

26

90

Unit price ($)

080

29

S

D

Quantity (units)


##

If the price floor is set at P1, the quantity supplied of garments (Q2) is greater than the quantity

demanded (Q1) for garments. (1 mark)

The provision of a per-unit subsidy will lead to an increase in the supply of garments. The supply curve

will shift from S0 to S1. (1 mark)

The excess supply will increase from (Q2 – Q1) to (Q3 – Q1), and this indicates that the problem of

“over-production” is getting more serious. (1 mark)

(3 marks)

##

|!|ES31006|!|

Suppose the government subsidises young people who work at youth centres. Each employed young

person can get a fixed subsidy each month. Suppose youth centres’ demand for young people’s labour

is perfectly inelastic, how is the benefit of subsidy shared between young people and youth centres?

Explain with the aid of a diagram. (6 marks)


Q3Q2

S1

D

Q1

P1

Unit price

0

S0

Quantity of garments


##

As youth centres’ demand for young people’s labour is perfectly inelastic, the demand curve is vertical.

When the subsidy is provided, the supply of labour will increase and the supply curve will shift

downwards by the amount of subsidy from S0 to S1. The quantity employed will remain at Q. The entire

benefit of subsidy will go to youth centres and young people will not share any benefit. (3 marks)

(3 marks)

##

|!|ES31007|!|

(a) Define price floor. (2 marks)

(b) After the imposition of an effective price floor, how will the price, quantity transacted, and total

revenue be affected? (3 marks)

##

(a) A price floor is the lower limit imposed by the government on the price that sellers can charge.

(2 marks)

(b) If an effective price floor is imposed, the price will increase while the quantity transacted will

decrease. The total revenue may increase, decrease or remain unchanged depending on the price

elasticity of demand. (3 marks)

##


Subsidy

Youth centres’ share of subsidy

S1

W0

Q

S0

W1

Wage rate

0

D

Quantity of young people working in youth centres


|!|ES31008|!|

After the government imposes a price floor on good Y, people spend less on good Y.

(a) Explain whether the price floor is effective with the aid of a diagram. (6 marks)

(b) Would the amount of surplus or shortage be affected if there is an increase in the production cost

of good Y? Explain. (3 marks)

(c) Give ONE method that sellers can do to clear the market. (2 marks)

##

(a) When the price floor is set above the equilibrium price, the quantity supplied is larger than the

quantity demanded. If the loss in revenue due to the decrease in quantity transacted is greater than

the gain in revenue due to the increase in price, producers’ total revenue will decrease or

consumers’ total expenditure of consumers will decrease.

When the price level is sat below or at the equilibrium price, producers’ total revenue or

consumers’ total expenditure of consumers will remain at the equilibrium.

Therefore, that people spend less on good Y implies that the price floor is set above the

equilibrium price, i.e. it is effective. (3 marks)

(3 marks)

(b) An increase in the cost of production will reduce the supply of good Y. (1 mark)

At the effective price floor, the quantity demanded will remain unchanged and the quantity

supplied will decrease. The surplus (excess supply) will be reduced. (2 marks)

(c) - Sellers may offer buyers illegal cash rebates.

- Sellers may give buyers non-monetary benefits.

- Any reasonable answer(s)

(Mark the FIRST point only, 2 marks)

##


Q0

New revenue

Original revenue

Q1

P0

Unit price

0

P1

S

D

Quantity (units)


|!|ES31009|!|

Read the following table and answer the questions.

Unit price ($) 30 40 50 60 70



After the imposition of a price floor, the new quantity transacted is 30 units.

(a) With the aid of a diagram, explain at what price is the price floor set at. (6 marks)

(b) What is the price elasticity of demand for the good within the price range of $50 to $60? (2 marks)

(c) Calculate the change in total revenue after the imposition of the price floor. (3 marks)

##

(a) The equilibrium price and quantity transacted are $50 and 35 units respectively. After the

imposition of a price floor, the new quantity transacted is 30 units, which is lower the equilibrium

quantity. This indicates that the price floor is effective. An effective price floor must be set above

the equilibrium price, at which the quantity transacted is equal to the quantity demanded. As the

quantity transacted is 30 units, the price floor is set at $60. (3 marks)

(3 marks)

(b) Ed = = -0.85 (2 marks)

(c) Original total revenue = $50 35 = $1,750

New total revenue = $60 30 = $1,800

Change in total revenue = $(1,800 – 1,750) = $50 (3 marks)

##


3530

50

40

Unit price ($)

0

60

S

D

Quantity (units)


|!|ES31010|!|

The following diagram shows the market of watermelons.

Suppose the government has fixed the price of watermelons at P*.

(a) Suppose the government imposes an effective price floor on fertilisers, which are widely used in

growing watermelons. Illustrate and explain the effect of this effective price floor on the market of

watermelons on the above diagram. (5 marks)

(b) What will be the change in total revenue of the watermelon producers? (2 marks)

##

(a) The imposition of an effective price floor on fertilisers leads to an increase in the price of

fertilisers, causing an increase in the production cost of watermelons. (1 mark)

Therefore, the supply of watermelons will decrease and the supply curve will shift to the left from

S0 to S1. (1 mark)

There is thus an increase in excess demand of watermelons from (Q1 – Q0) to (Q1 – Q2). (1 mark)

(2 marks)

(b) The total revenue of watermelon producers will decrease from (P* Q0) to (P* Q2). (2 marks)


Q1Q0Q2

S0

P*

D

Unit price

0

S1

Quantity of watermelons

S

P*

D

Unit price

0 Quantity of watermelons


##



|!|ES31011|!|

Suppose the government imposes an effective price ceiling on the rental of commercial premises. Due

to an economic downturn, many tenants of commercial premises do not extend their rental contracts.

With the aid of a diagram, explain under what conditions would the price ceiling imposed by the

government become ineffective. (6 marks)

##

Assume the market equilibrium price is P0 and the government imposes an effective price ceiling at Pc.

Due to the economic downturn, the demand for commercial premises decreases and the demand curve

will shift to the left from D0 to D1. If the reduction in demand causes the market equilibrium price to

decrease to a level lower than the price ceiling, i.e. P1, the price ceiling will become ineffective.

(3 marks)

(3 marks)

##


P1

P0

Pc

S

D1

Q

Unit price

0

D0

Quantity


|!|ES31012|!|

Study the following information about good X and answer the questions:

Unit price ($) Quantity demanded (units) Quantity supplied (units)

120 70 50

130 65 55

140 60 60

150 55 65

160 50 70

(a) If the government intends to impose an effective quota on good X, at what quantity should the

quota limit be set? (2 marks)

(b) If the government sets the quota limit at 50 units, what will the new equilibrium price and quantity

transacted be? How will the total revenue be affected? (4 marks)

##

(a) An effective quota should be set below the original equilibrium quantity of the good. Therefore,

the government should set the quota limit below 60 units. (2 marks)

(b) New equilibrium price = $160 (1 mark)

New quantity transacted = 50 units (1 mark)

Original total revenue = $140 60 = $8,400

New total revenue = $160 50 = $8,000

Therefore, there is a decrease in total revenue of $400. (2 marks)

##



|!|ES31013|!|

Study the following information about good X and answer the questions.

Unit price ($) 100 90 80 70 60



After the imposition of an effective quota on good X, there is a fall in the quantity transacted of 100

units.

(a) Define quota. (2 marks)

(b) What is the quota limit imposed? (2 marks)

(c) How would the total revenue be affected after the imposition of quota? (2 marks)

##

(a) A quota is a limit on the maximum quantity of goods that sellers can sell in the market. (2 marks)

(b) Without the quota, the equilibrium price and quantity transacted are $80 and 850 units

respectively. As the quantity transacted falls by 100 units after the imposition of an effective

quota, the quota limit should be 750 units. (2 marks)

(c) Without the quota, the total revenue = $80 850 = $68,000

With the effective quota, the total revenue = $100 750 = $75,000

Thus, the total revenue increases by $7,000. (2 marks)

##

|!|ES31014|!|

Statement 1: After a per-unit sales tax is imposed, the total revenue must decrease.

Statement 2: After a per-unit sales tax is imposed, the change in total revenue is uncertain.

Explain under what conditions each of the above statements is correct. (6 marks)



##

Statement 1 is correct when the total revenue refers to total revenue excluding tax. (1 mark)

Since the net price received by producers and the quantity transacted both decrease, the total revenue

excluding tax must decrease regardless of the elasticity of demand. (2 marks)

Statement 2 is correct when the total revenue refers to total revenue including tax. (1 mark)

After a per-unit sales tax is imposed, the total revenue including tax may increase, decrease or remain

unchanged, depending on the price elasticity of demand. (2 marks)

##

|!|ES31015|!|

Mr. Lee, a producer, said, “After the government levies a per-unit sales tax on our product, we still

need not bear any tax burden and can sell out the same amount of product as before.”

Under what conditions will Mr. Lee be right? Explain with the aid of a diagram. (6 marks)

##

The demand for Mr. Lee’s product is perfectly inelastic. (1 mark)

The demand curve is vertical. The per-unit sales tax will shift the supply curve upwards by the amount

of tax from S0 to S1. The price will increase from P0 to P1 while the quantity transacted will remain

unchanged. Therefore, the consumers will bear the entire tax burden. (2 marks)

(3 marks)

##


Consumers’ tax burden

D S1

P0

P1

Per-unit tax

Unit price

0Q0

11

S0

Quantity


|!|ES31016|!|

Consumer A says, “When the government imposes a per-unit sales tax on good Y, our tax burden is

smaller than that of the producers.”

Under what situation is this consumer correct? Explain with the aid of a diagram. (7 marks)

##

The per-unit sales tax will shift the supply curve of good Y upwards. (1 mark)

The price will increase and the quantity transacted will decrease. (1 mark)

When the demand for the good is more elastic than the supply, the consumers’ tax burden will be

smaller than the producers’ tax burden. (2 marks)

(3 marks)

##

|!|ES31017|!|

Suppose to protecting the environment, a per-unit tax is charged on the sale of petrol. This measure is

later found to be successful as there are fewer cars on the roads after tax.

(a) With the aid of a diagram, explain how the measure successfully reduces the amount of petrol

consumed by cars. (6 marks)

(b) Indicate the amount of government tax revenue in the diagram in (a). (2 marks)



Producers’ tax burden

S1

Per-unit tax

Unit price

P0

0Q1 Q0

P2

P1

S0

D

Quantity


##

(a) A per-unit sales tax raises the production cost of petrol, causing the supply curve of petrol shift

upwards from S0 to S1. The price of petrol will increase from P0 to P1 and the quantity transacted

will decrease from Q0 to Q1, and this means less petrol is consumed. (3 marks)

(3 marks)

(b)

(2 marks)

##

|!|ES31018|!|

Suppose the supply of a good is perfectly inelastic and the demand is elastic. With the aid of a diagram,

illustrate the effects of the provision of a per-unit subsidy on the price and the quantity transacted.

Indicate how the subsidy benefit is shared between the consumers and the producers in the diagram.

(6 marks)


S1

Per-unit tax

Unit price

P0

0 Q1 Q0

P1

S0

D

Quantity

Tax revenue

S1

Per-unit tax

Unit price

P0

0 Q1 Q0

P2

P1

S0

D

Quantity


##

The market price (P0) and quantity transacted (Q) would remain unchanged after the provision of the

per-unit subsidy. Producers can enjoy the entire subsidy. Producers’ share of subsidy is (P1 – P0) Q.

(3 marks)

(3 marks)

##


Per-unit subsidy

S

Producers’ share of subsidy

Quantity

P1

Unit price

0Q

D

P0


|!|ES31019|!|

Study the following table and answer the questions.

(a) If the government provides a per-unit subsidy of $20 on the good, how much is the total amount

of subsidy? (3 marks)

(b) Which party, the buyers or the sellers, has a higher price elasticity? Explain. (3 marks)

##

(a)

New quantity transacted = 12 units

Total amount of subsidy = $20 12 = $240 (3 marks)

(b) Consumers’ share of subsidy = ($60 – $50) 12 = $120 (1 mark)

Producers’ share of subsidy = [$20 – ($60 – $50)] 12 = $120 (1 mark)

Since the consumers and producers share the same amount of subsidy, the demand elasticity is

equal to the supply elasticity. (1 mark)

##



Unit price ($) Quantity demanded (units) Quantity supplied after the subsidy is provided (units)

40 14 1050 12 1260 10 1470 8 -80 6 -


Long Questions

|!|EL31001|!|

The following table shows the market demand and market supply schedules of good X.

Unit price ($) 8 10 12 14 16



(a) After the imposition of a price ceiling at $10, what is the excess demand of good X in the market?

(2 marks)

(b) Besides price, suggest TWO ways for the sellers to allocate the goods to the buyers. (2 marks)

(c) Later, there is a technological improvement in the production of good X. With the aid of a

diagram, explain the effect on the excess demand of good X. (6 marks)

##

(a) Since the price ceiling is below the equilibrium price ($10 < $12), it is effective. (1 mark)

At the effective price ceiling, the excess demand = quantity demanded – quantity supplied = (80 –

60) units = 20 units. (1 mark)

(b) The other non-price methods of allocation:

- on a first-come-first-served basis

- by ability of consumers

- by consumers’ need

- by preference of sellers

- by drawing lots

(Mark the FIRST TWO points only, 1 mark each)



(c) Due to technological improvement, the supply of good X will increase. The supply curve will

shift rightwards from S0 to S1. Since the price ceiling and demand remain unchanged, the excess

demand of good X will be reduced. (3 marks)

(3 marks)

##

|!|EL31002|!|

The table below shows the market demand and market supply schedules of good Y.

Suppose the government imposes a quota at 120 units on good Y.

(a) With the aid of a diagram, illustrate the effects of the quota on the price, the quantity transacted

and the total revenue. (6 marks)

(b) Instead of using a quota to limit the quantity sold of good Y, the government imposes a per-unit

sales tax on good Y.

(i) In order to keep the quantity sold at 120 units, how much should the per-unit tax imposed on

good Y be? (3 marks)

(ii) Indicate how the tax burden is shared between the consumers and the producers with the aid

of a diagram. (3 marks)


Unit price ($) Quantity demanded (units) Quantity supplied (units)100 90 27090 120 24080 150 21070 180 18060 210 15050 240 120

New

excess demand

S0

Original

excess demand

60

S1

12

10

80

Unit price ($)

0 70

D

Quantity (units)


##

(a) The price will increase from $70 to $90. (1 mark)

The quantity transacted will decrease from 180 units to 120 units. (1 mark)

The total revenue will decrease from $12,600 ($70 180) to $10,800 ($90 120). (1 mark)

(3 marks)

(b) (i) The quantity demanded is 120 units when the price is $90. To meet the quantity demanded of

120 units, the producers should receive $50 after tax for each unit of good Y. Since the

difference between the price paid by the consumers and the price received by the producers

is the per-unit tax, the per-unit tax is $40.

(3 marks)

(b) (ii)

(3 marks)

##


120

70

90

S0

S1Unit price ($)

0

D

Quantity (units)180

Original total revenue

New total revenue


Producers’ tax burdenPer-unit tax

70

50

180120

90

S1

S0

240

Unit price ($)

0

D

Quantity (units)

Per-unit tax

70

50

180120

90

S1

S0

Unit price ($)

0

D

Quantity (units)


|!|EL31003|!|

Tobacco is a dutiable commodity in Hong Kong. Suppose in order to reduce the consumption on

tobacco, the government decides to raise the per-unit tax on tobacco.

(a) Explain the effects of the increase in per-unit tax on the equilibrium price and quantity of tobacco.

(3 marks)

(b) It is later found that the total revenue of cigarette producers (including the tax) increases after the

increase in the tax.

(i) Explain this phenomenon with the aid of a diagram. (6 marks)

(ii) Does the phenomenon imply that the consumers bear a larger tax burden than the cigarette

producers? (3 marks)

##

(a) The increase of the per-unit tax on tobacco will lead to a decrease in supply. (1 mark)

The equilibrium price will increase and the quantity transacted will decrease. (2 marks)

(b) (i) As smokers have formed a habit of smoking, the demand for tobacco tends to be inelastic. (1

mark)

When the demand for tobacco is inelastic, the gain in revenue due to the increase in price

will be greater than the loss in revenue due to the decrease in quantity transacted. Therefore,

the total revenue of the cigarettes’ producers (including the tax) increases after the increase

in the tax. (2 marks)

(3 marks)

(ii) The consumers will bear a larger tax burden of the elasticity of demand (Ed) is smaller than the

elasticity of supply (Es) within the relevant price range. (1 mark)

Ed < 1 does not imply that Ed < Es, Therefore, the consumers do not necessarily bear a larger tax

burden than the producers. (2 marks)

##


Q1

Per-unit tax

P0

Q0

P1

S1

S0

Unit price

0

D

Quantity (units)

Gain in revenue

Loss in revenue


|!|EL31004|!|

The table below shows the demand schedule of Crop A of a country.

Unit price ($) 15 20 25 30 35 40

Quantity demanded (bushels) 1,000 950 900 850 800 750

In order to protect the farmers’ income, the government decides to provide a subsidy of $15 per bushel

of Crop A sold by the farmer. As a result of a subsidy, the equilibrium price of Crop A decreases from

$35 to $25.

(a) Calculate the amounts of the consumers’ and producers’ share of subsidy. (4 marks)

(b) Calculate the price elasticity of demand for Crop A at the price range from $25 to $35. (2 marks)

(c) Can the government use the per-unit subsidy to raise the farmers’ income (including subsidy)?

(3 marks)

(d) Show the sharing of subsidy benefit between the consumers and the farmers in a diagram.

(3 marks)

##

(a) Consumers’ share of subsidy = $(35 – 25) 900 = $9,000 (2 marks)

Farmers’ share of subsidy = $[15 – (35 – 25)] 900 = $4,500 (2 marks)

(b) The price elasticity of demand = = – 0.35 (2 marks)

(c) Before the per-unit subsidy is provided, the farmers’ total income is equal to $28,000 ($35

800).

(1 mark)

With the per-unit subsidy, the farmers’ total revenue is $36,000 [$(25 + 15) 900]. (1 mark)

Hence, the farmers’ total income increases with the provision of a per-unit subsidy. (1 mark)



(d)

(3 marks)

##


Consumers’ share of subsidy

Producers’ share of subsidy

S1

Per-unit subsidy

Unit price ($)

25

0 800 900

40

35

S0

D

Quantity (units)

Documents

QB Ch11(Eng) Output (Final)