Chapter 7 Market intervention (II)

Multiple Choice Questions

Question code: B1C07Q045

A unit subsidy is given to a medicine. Producers’ share of the subsidy is smaller than that of consumers if the demand elasticity of the medicine is __________ the supply elasticity. A. greater than B. less than C. equal to D. The distribution of the subsidy is independent of the elasticities of supply and demand.

Question code: B1C07Q046

Which of the following government interventions will increase the quantity transacted? A. Unit tax B. Unit subsidy C. Price ceiling D. Price floor

Question code: B1C07Q047

Study the following table.

Price ($) 1 2 3 4 5 Quantity demanded (units) 10 10 10 10 10

Suppose the equilibrium price is originally $4. When the government provides a $1 per-unit subsidy to the producers, the new equilibrium price is A. $1. B. $2. C. $3. D. $4.

NSS Exploring Economics 1 (2nd edition) 1 © Pearson Education Asia Limited 2014 Question Bank (Chapter 7) Question code: B1C07Q048 If the government stops subsidising education, (1) the price of education will increase. (2) the price of education will decrease. (3) the total income of schools may increase or decrease, depending on the price elasticity of demand. (4) the number of schools may decrease. A. (1) and (3) only B. (1) and (4) only C. (2) and (3) only D. (2) and (4) only

Question code: B1C07Q049

* Suppose the government provides a subsidy to producers of a good with perfectly elastic demand. Which of the following is correct? A. The price of the good will fall. B. There will be excess demand for the good. C. Producers’ total revenue excluding the subsidy will increase. D. The quantity sold will decrease.

Question code: B1C07Q050

Which of the following CANNOT be an effect of ending subsidies on the production of a good? A. The price of the good will increase. B. The quantity transacted will decrease. C. The producers may benefit from the policy as their total revenue may increase. D. The quantity demanded will decrease.

Question code: B1C07Q051

Suppose the government has decided to give a subsidy to private medical organisations. Which of the following is INCORRECT? A. The total revenue (including the subsidy) of private medical organisations will increase. B. The total revenue of public medical organisations will decrease. C. The demand for public medical services will increase. D. The quantity transacted of public medical services will decrease.

NSS Exploring Economics 1 (2nd edition) 2 © Pearson Education Asia Limited 2014 Question Bank (Chapter 7) Question code: B1C07Q052 Suppose the price of a good decreases by $10 after the government provides a $10 per-unit subsidy to the producers. Which of the following is correct? A. The demand for the good is inelastic. B. The demand for the good is elastic. C. The demand for the good is less elastic than the supply of the good. D. The demand for the good is more elastic than the supply of the good.

Question code: B1C07Q053

Suppose the government provides a subsidy to vegetable suppliers in order to encourage the consumption of vegetables. In which of the following situations will the subsidy have no effect on consumption? (1) The demand is perfectly inelastic. (2) The demand is perfectly elastic. (3) The supply is perfectly inelastic. (4) The supply is perfectly elastic. A. (1) only B. (1) and (3) only C. (1) and (4) only D. (2) and (3) only

Question code: B1C07Q054

If the price elasticity of demand is smaller than the price elasticity of supply, A. the benefit of the buyers from a per-unit subsidy is greater than that of the seller. B. the benefit of the buyers from a per-unit subsidy is smaller than that of the seller. C. the benefit of the buyers from a per-unit subsidy is equal to that of the seller. D. buyers cannot benefit from a per-unit subsidy.

Question code: B1C07Q055

NSS Exploring Economics 1 (2nd edition) 3 © Pearson Education Asia Limited 2014 Question Bank (Chapter 7) Study the following table.

Unit price ($) 20 21 22 23 24 25

Quantity demanded (units) 160 150 140 130 120 110 Quantity supplied (units) 100 110 120 130 140 150

Suppose the market is initially at equilibrium level. If the government provides a $2

per-unit subsidy to the supplier, the new equilibrium price is A. $21. B. $22. C. $24. D. $25.

Question code: B1C07Q056 (new)

Study the following table.

Unit price ($) 20 21 22 23 24 25

Quantity demanded (units) 160 150 140 130 120 110 Quantity supplied (units) 100 110 120 130 140 150

Suppose the market is initially at equilibrium level. If the government provides a $2

per-unit subsidy to the supplier, the ratio of consumers’ share of subsidy to producers’ share of subsidy is A. 1:1. B. 1:2. C. 2:1. D. None of the above

Question code: B1C07Q057

Suppose parents’ demand for textbooks is perfectly inelastic. If the government gives out a per-unit subsidy on textbooks, A. the market price of textbooks will increase. B. the quantity transacted will increase. C. consumers get all the benefit of the subsidy. D. total revenue, including the subsidy, will decrease.

NSS Exploring Economics 1 (2nd edition) 4 © Pearson Education Asia Limited 2014 Question Bank (Chapter 7) Question code: B1C07Q058 Study the following supply-demand diagram for Good Y after the government imposes a per-unit subsidy of $30 on the good.

Price ($) S0 S1

100 A 90 B

D 0 Quantity 100 120

Producers’ share of subsidy is equal to

A. $1,000. B. $1,200. C. $2,000. D. $2,400.

Question code: B1C07Q059 (new)

Study the following supply-demand diagram for Good Y after the government imposes a per-unit subsidy of $30 on the good. Price ($) S0 S1

100 A 90 B

D 0 Quantity 100 120

The ratio of consumers’ share of the subsidy to producers’ share of the subsidy is A. 1:1. B. 1:2.

NSS Exploring Economics 1 (2nd edition) 5 © Pearson Education Asia Limited 2014 Question Bank (Chapter 7) C. 2:1. D. None of the above

Question code: B1C07Q060 (new)

If the demand elasticity of a good is less than the supply elasticity of the good, (1) the consumers’ tax burden will be greater than the producers’ tax burden if a unit tax is imposed. (2) the consumers’ tax burden will be smaller than the producers’ tax burden if a unit tax is imposed. (3) the consumers’ share of the subsidy will be greater than the producers’ share of the subsidy if a unit subsidy is provided. (4) the consumers’ share of the subsidy will be smaller than the producers’ share of the subsidy if a unit subsidy is provided. A. (1) and (3) only B. (1) and (4) only C. (2) and (3) only D. (2) and (4) only

Question code: B1C07Q061

Which of the following statements is INCORRECT? A. Generally, the provision of a subsidy will lower the price of subsidised goods. B. If the demand curve is downward sloping and the supply curve is upward sloping, the tax burden is shared among both the buyers and sellers. C. The greater the price elasticity of demand, the greater the tax burden borne by the buyers. D. The greater the price elasticity of demand, the greater the benefit from a per-unit subsidy enjoyed by the sellers.

Question code: B1C07Q062 (new)

Which of the following statements is correct if the demand for a good is elastic? A. An increase in the unit tax on the good cannot reduce consumption of the good. B. If a unit tax is imposed on the good, consumers will spend more on the good. C. An increase in the unit subsidy on the good cannot increase producers’ total revenue (excluding subsidy). D. A unit subsidy cannot reduce consumers’ expenditure on the good.

NSS Exploring Economics 1 (2nd edition) 6 © Pearson Education Asia Limited 2014 Question Bank (Chapter 7) Short Questions

Question code: B1C07Q305

Study the following information regarding the market for imported cigarettes with a unit tax of $2 imposed.

Unit price ($) 30 31 32 33 34 35 36 37

Quantity demanded (units) 20 18 16 14 12 10 8 6 Quantity supplied (units) 1 2 4 6 8 10 12 14

If the government removes the unit tax, calculate:

(a) the loss in tax revenue collected by the government. (3 marks) (b) the change in importers’ total revenue (excluding tax). (3 marks)

Answers:

NSS Exploring Economics 1 (2nd edition) 7 © Pearson Education Asia Limited 2014 Question Bank (Chapter 7) Question code: B1C07Q306 (new) * Study the following table.

Quantity demanded of Quantity supplied of

Unit price of bananas ($) bananas (units) bananas (units) 6 102 186 5 114 142 4 128 128 3 142 114 2 186 102

(a) What are the market price and quantity transacted? (2 marks) (b) Suppose the government imposes a $2 per-unit sales tax on banana producers. (i) Construct the supply schedule after the imposition of the unit tax. (2 marks) (ii) Explain how this will affect the market price and quantity transacted of bananas. (4 marks) (iii) Calculate the consumers’ tax burden and the producers’ tax burden.(2 marks)

NSS Exploring Economics 1 (2nd edition) 8 © Pearson Education Asia Limited 2014 Question Bank (Chapter 7) Question code: B1C07Q307 (a) What is the price elasticity of demand? (2 marks) (b) Give ONE example to illustrate that inelastic demand does NOT necessarily imply a smaller share of the tax burden for producers. Explain with the aid of a diagram. (4 marks)

Question code: B1C07Q308

(a) What is the price elasticity of supply? (2 marks) (b) Must the seller’s tax burden be smaller than the consumer’s tax burden if the price elasticity of supply is greater than one? Explain. (3 marks)

NSS Exploring Economics 1 (2nd edition) 9 © Pearson Education Asia Limited 2014 Question Bank (Chapter 7) Question code: B1C07Q309 (new) Last year, Country Q started to import farm products. As a result, many farmers in Country Q complained that they suffered a loss of income. The government decided to grant a unit subsidy to local farm products. With the aid of a diagram, explain how the unit subsidy affects the market price, quantity transacted of local farm products and the total income of local farmers. (7 marks)

Question code: B1C07Q310 (new)

(a) ‘As the unit subsidy is provided to producers, they must benefit more than consumers,’ said Timmy. With the aid of a diagram, suggest ONE condition to explain why Timmy is wrong. (5 marks) (b) ‘As both an effective price ceiling and a unit subsidy can lower the price of a good, they have the same effect on total revenue,’ said Brian. Do you agree with him? Explain briefly. (5 marks)

NSS Exploring Economics 1 (2nd edition) 10 © Pearson Education Asia Limited 2014 Question Bank (Chapter 7) Question code: B1C07Q507 (new) Country A would like to lower the volume of imports from Country B. After the imposition of a $10 per-unit tariff (關稅) on Country B’s imports, the volume of imports did not fall although the price of imports has increased. (a) Explain the above phenomenon with the aid of a diagram. Indicate the consumers’ tax burden after the per-unit tariff is imposed. (7 marks) (b) An economics teacher said, ‘Under the situation mentioned in (a), the government can increase its tax revenue by increasing the tariff rate.’ Do you agree? Explain. (3 marks) (c) Under the situation mentioned in (a), suggest ONE measure that the government can use to reduce the volume of imports. Explain your answer. (3 marks) (d) Suppose Country A can import similar goods from Country C instead of Country B. Explain how the situation mentioned in (a) can be improved. (3 marks)

NSS Exploring Economics 1 (2nd edition) 11 © Pearson Education Asia Limited 2014 Question Bank (Chapter 7) Question code: B1C07Q508 An economist says, ‘If the government removes the subsidies for education, the total education expenditure of parents on their children will increase.’ (a) Based on this, draw a diagram to explain the price elasticity of demand for children’s education. (7 marks) (b) Draw another diagram to explain how the removal of the education subsidy will affect the price of textbooks. (6 marks)

NSS Exploring Economics 1 (2nd edition) 12 © Pearson Education Asia Limited 2014 Question Bank (Chapter 7) Question code: B1C07Q509 * A Chinese fruit grower says, ‘The removal of tariffs (關稅) imposed by the Chinese government on fruit imported from Taiwan will cause the total revenue of fruit growers in China to fall.’ Explain the statement made by the fruit grower with the aid of a diagram. How can the Chinese government compensate the fruit growers for the loss in revenue by providing a per-unit subsidy? Explain with the same diagram. (15 marks) Question code: B1C07Q510 * The following table shows the market demand and supply schedules for Ganoderma Spore (靈芝孢子).

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

10,000 100,000 60,000 20,000 90,000 70,000 30,000 80,000 80,000 40,000 70,000 90,000 50,000 60,000 100,000

(a) Find the market clearing price and quantity transacted. (2 marks) (b) Suppose the government provides a $20,000 per-unit subsidy to producers of Ganoderma Spore. (i) Find the new market clearing price and quantity transacted. (2 marks) (ii) Using the well-labelled diagram to indicate how the subsidy is shared between consumers and producers. (4 marks) (iii) Based on the diagram in (b)(ii), can we know whether the price elasticity of demand or the price elasticity of supply is higher? Explain your answer with calculation. (4 marks) (iv)Calculate the total revenue of producers (including the subsidy) after the provision of the subsidy. (3 marks)

NSS Exploring Economics 1 (2nd edition) 13 © Pearson Education Asia Limited 2014 Question Bank (Chapter 7)