NSS Exploring Economics 1
Consolidation Worksheets
Chapter 7
Market intervention (II)
Test Yourself
7.1 a.
Draw the demand and supply curves in the space provided based on the
following demand and supply schedules of Good X.
b.
Price ($/unit)
Qd (units per period)
QS (units per period)
10
50
30
12
45
35
14
40
40
16
35
45
18
30
50
Suppose the government imposes a unit tax of $4 on Good X. Draw the new
supply curve and complete the table below:
Original equilibrium price
Original quantity transacted
New equilibrium price
New quantity transacted
New price paid by consumers
New price received by producers
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Answers:
a.
b.
Original equilibrium price
Original quantity transacted
New equilibrium price
New quantity transacted
New price paid by consumers
New price received by producers
7.2 Based on the information of Test Yourself 7.1, find
a.
consumers’ tax burden,
b. producers’ tax burden and
c.
government’s tax revenue.
Answers:
a.
Consumers’ tax burden =
b. Producers’ tax burden =
c.
Government’s tax revenue =
7.3 Draw separate supply-demand diagrams to illustrate how the tax burden is
distributed between consumers and producers if the
a.
demand is perfectly inelastic;
b. demand is perfectly elastic;
c.
supply is perfectly elastic;
d. supply is perfectly inelastic.
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Answers:
a.
If demand is perfectly inelastic, (consumers / producers) have to bear the
entire tax burden.
(Illustrate the consumers’ / producers’ tax burden in the diagram below)
P ($ / unit)
S2
D
S1
P2
Tax
P1
0
Q (units / period)
Q1
b. If demand is perfectly elastic, (consumers / producers) have to bear the
entire tax burden.
(Illustrate the consumers’ / producers’ tax burden in the diagram below)
P ($ / unit)
S2
S1
P1 = P2
0
c.
D
Tax
Q2
Q (units / period)
Q1
If supply is perfectly elastic, (consumers / producers) have to bear the entire
tax burden.
(Illustrate the consumers’ / producers’ tax burden in the diagram below)
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P ($ / unit)
P2
S2
Tax
P1
S1
D
0
d.
Q2
Q (units / period)
Q1
If supply is perfectly inelastic, (consumers / producers) have to bear the
entire tax burden.
(Illustrate the consumers’ / producers’ tax burden in the diagram below)
P ($ / unit)
S1 = S2
)
P1 = P2
Tax
D
0
7.4 a.
Q
Q (unit / period)
Draw the demand and supply curves in the space provided based on the
following demand and supply schedules of Good X.
Price ($/unit)
Qd (units per period)
QS (units per period)
10
500
300
11
450
350
12
400
400
13
350
450
14
300
500
b. Suppose the government imposes a unit subsidy of $2 on Good X. Draw a
new supply curve and complete the table below:
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Original equilibrium price
Original quantity transacted
New equilibrium price
New quantity transacted
New price paid by consumers
New price received by producers
Answers:
a.
b.
Original equilibrium price
Original quantity transacted
New equilibrium price
New quantity transacted
New price paid by consumers
New price received by producers
7.5 Based on the information of Test Yourself 7.4, find:
a.
Consumers’ share of the subsidy,
b. producers’ share of the subsidy,
c.
government’s subsidy.
Answers
a.
Consumers’ share of the subsidy =
b. Producers’ share of the subsidy =
c.
Government’s subsidy =
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7.6 The US Government provides huge export subsidies to its farmers. Use separate
supply-demand diagrams to explain how this policy affects:
a.
farmers in the US;
b. farmers in other countries.
Answers:
a.
After the provision of export subsidies, farmers in the US will increase their
supply from S1 to S2. The price of farm products for export decreases from
P1 to P2 while the quantity of farm products for export increases from Q1 to
Q2. The total revenue (including subsidy) of the farmers is
which is (larger / smaller) than
,
before the provision of a
subsidy. (See the diagram below)
b. Export subsidies provided by the US Government to its farmers will (raise /
reduce) the price of US farm products for export. As farm products in the
US and farm products in other countries are
, this will lead to
a decrease in the demand for farm products produced by other countries
from D1 to D2. The price and quantity of farm products produced by other
countries will fall from P1 to P2 and Q1 to Q2, respectively. As a result, the
total income for farmers in other countries will (rise / fall) from
to
. (See the diagram below)
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7.7 Draw separate supply-demand diagrams to show how a subsidy is shared
between consumers and producers if the
a.
demand is perfectly inelastic;
b. demand is perfectly elastic;
c.
supply is perfectly elastic;
d. supply is perfectly inelastic.
Answers:
a.
If demand is perfectly inelastic, only (consumers / producers) can enjoy the
subsidy.
(Illustrate the consumers’ / producers’ share of subsidy in the diagram
below)
P ($ / unit)
S1
D
S2
P2
Subsidy
P1
Q (units / period)
0
Q1
b. If demand is perfectly elastic, only (consumers / producers) can enjoy the
subsidy.
(Illustrate the consumers’ / producers’ share of subsidy in the diagram
below)
S1
P ($ / unit)
S2
P1 = P2
D
Subsidy
0
Q (units / period)
Q1
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Q2
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c.
If supply is perfectly elastic, only (consumers / producers) can enjoy the
subsidy.
(Illustrate the consumers’ / producers’ share of subsidy in the diagram
below)
P ($ / unit)
Subsidy
P1
S1
P2
S2
D
0
Q1
Q (units / period)
Q2
d. If supply is perfectly inelastic, only (consumers / producers) can enjoy the
subsidy.
(Illustrate the consumers’ / producers’ share of subsidy in the diagram
below)
P ($ / unit)
S1 = S2
Subsidy
P1 = P2
D
0
Q (units / period)
Q
Short Questions
1.
With the use of separate supply-demand diagrams, explain the effects of each of
the following two policies on the consumption of Good X:
a.
The government increases the unit tax imposed on Good X.
b. The government subsidises substitutes for Good X.
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(4 marks)
(4 marks)
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Answers:
a.
Increasing the unit tax imposed on Good X will reduce the supply of Good
X from S1 to S2. Consumption of Good X will decrease from Q1 to Q2.
(Illustrate the effect of such policy on consumption of Good X in the
diagram below)
Price ($ / unit)
S1
P1
D
0
Quantity of Good X
(units / period)
Q1
b. Subsidising substitutes for Good X will (raise / reduce) their prices.
Therefore, demand for Good X decreases from D1 to D2. Consumption of
Good X will decrease from Q1 to Q2.
(Illustrate the effect of such policy on consumption of Good X in the
diagram below)
Price ($ / unit)
S
P1
D1
0
2.
Q1
Quantity of Good X
(units / period)
‘If the government introduces a sales tax of $10 on goods and services sold in
Hong Kong, their prices will increase by $10.’ Do you agree with this statement?
Explain your answer with the use of a supply-demand diagram.
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(6 marks)
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Answers:
(Yes / No). Given a downward sloping demand curve and an upward sloping
supply curve, the price of a good will increase by (more than /less than / the
same amount of) $10 after imposing a sales tax of $10.
This is because producers are able to shift only part of the tax burden to
consumers.
(Illustrate the effect of sales tax in the diagram below.)
Price ($ / unit)
S1
P1
D
0
3.
Quantity
(units / period)
Q1
In Hong Kong, the government provides subsidies to private homes for the
elderly. Assume that the supply of private homes is perfectly elastic. With the
use of a supply-demand diagram, indicate how the benefit of the subsidy would
be distributed between the private home operators and the dwellers.
(6 marks)
Answers:
Given that the supply of private homes for the elderly is perfectly elastic, the
supply curve is (horizontal / vertical). With the provision of subsidies, the
supply curve shifts (upwards / downwards) from S1 to S2. Since the equilibrium
price (increases / decreases) from P1 to P2 by the amount of the unit subsidy,
enjoy all of the benefit of the subsidy.
(Illustrate the share of subsidy of the private home operators and/or the dwellers
in the following diagram.)
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Price ($ / unit)
S1
P1
D
0
Quantity
(units / period)
Q1
Structured Questions
1.
In Hong Kong, the government imposes a heavy tax on cigarettes. The
government has also passed laws to prohibit smoking in many public areas.
a.
Use a supply-demand diagram to explain the effects of the above policies
on the price and consumption of cigarettes in Hong Kong.
(6 marks)
b. Draw another supply-demand diagram to indicate consumers’ tax burden and
producers’ tax burden due to the cigarette tax. Which group — consumers or
producers — is more likely to bear a greater tax burden? Explain your answer
with reference to demand elasticity and supply elasticity.
(6 marks)
Answers:
a.
A heavy tax imposed on cigarettes will shift the supply curve of cigarettes
upwards from S1 to S2. Laws prohibiting smoking in public areas will
reduce the demand for cigarettes from D1 to D2. The consumption of
cigarettes will decrease from Q1 to Q2.
The equilibrium price of cigarettes may increase, decrease or remain
unchanged, depending on
in the demand and
supply curves.
(Illustrate the effect of such policy on the market of cigarette.)
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Price ($ / period)
S1
P1
D1
0
Quantity of cigarette
(units / period)
Q1
b. The demand for cigarettes tends to be (elastic / inelastic) since it takes time
for consumers to quit smoking.
The supply of cigarettes tends to be (elastic / inelastic) since the production
of cigarettes does not require high skills. It is easy to increase the output.
Therefore, (consumers / producers) are likely to bear a larger tax burden
since the demand elasticity is likely to be (larger / smaller) than the supply
elasticity.
(Illustrate the consumers’ and producers’ tax burden in the diagram below)
Price ($ / period)
S2
P2
S1
P1
D
0
2.
Q2
Quantity of cigarettes
(unit / period)
Q1
In 2008, the government removed the diesel tax of 56¢ per liter.
a.
With the use of a supply-demand diagram, explain how the suppliers could
enjoy extra total revenue (excluding government tax) from the
government’s tax removal.
(6 marks)
b. Explain under what situations (in terms of demand elasticity and supply
elasticity) suppliers would reduce the price of diesel by an amount equal to
the tax removed. Use supply-demand diagrams to illustrate your answer.
(8 marks)
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Answers:
a.
Before the removal of the diesel tax, the supply curve of diesel was S1. The
total revenue (excluding government tax) was
. After the
removal of the diesel tax, the supply curve shifts downwards by the
removed diesel tax to S2. The new equilibrium price and quantity are P2 and
Q2, respectively. Thus, the total revenue (excluding government tax) for
diesel suppliers would increase to
.
(Illustrate the effect of the removal of diesel tax on suppliers’ total revenue
in the diagram below.)
Price ($ / liter)
S1
P1
D
0
Quantity of diesel
(liters / period)
Q1
b. If the demand is (perfectly elastic / perfectly inelastic / unitarily elastic)
(Fig. a), or the supply is (perfectly elastic / perfectly inelastic / unitarily
elastic) (Fig. b), then the price of diesel would be reduced by an amount
equal to the government’s tax concession.
(Illustrate the situations mentioned above in Fig. a and Fig. b below.)
Price ($ / liter)
Price ($ / liter)
Quantity of
diesel
0
(liters / period)
0
Fig. a
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Consolidation Worksheets (Chapter 7)
Quantity of
diesel
(liters / period)
Fig. b
13
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Suggested answers
Test yourself
7.1 a.
Price ($ / unit)
S2
20
S1
15
D
10
5
Quantity (units / period)
0
5
10 15 20 25 30 35 40 45 50
b.
7.2 a.
Original equilibrium price
$14
Original quantity transacted
40
New equilibrium price
$16
New quantity transacted
35
New price paid by consumers
$16
New price received by producers
$12
Consumers’ tax burden = ($16 − $14) × 35 = $70
b.
Producers’ tax burden = ($14 − $12) × 35 = $70
c.
Government’s tax revenue = $4 × 35 = $140
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7.3 a.
If demand is perfectly inelastic, consumers have to bear the entire tax
burden.
P ($ / unit)
S2
D
Consumers’ tax burden
S1
P2
Tax
P1
Q (units / period)
0
b.
Q1
If demand is perfectly elastic, producers have to bear the entire tax burden.
P ($ / unit)
S2
Producers’ tax burden
S1
P1 = P2
0
c.
D
Tax
Q (units / period)
Q2
Q1
If supply is perfectly elastic, consumers have to bear the entire tax burden.
P ($ / unit)
Consumers’ tax burden
P2
S2
Tax
P1
S1
D
0
Q2
NSS Exploring Economics 1
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Q (units / period)
Q1
15
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d.
If supply is perfectly inelastic, producers have to bear the entire tax burden.
P ($ / unit)
S1 = S2
)
Producers’ tax burden
P1 = P2
Tax
D
0
Q
Q (units / period)
7.4 a.
Price ($ / unit)
18
16
14
S1
12
S2
10
D
8
6
4
2
Quantity (unit / period)
0
100
200
300
400
500
b.
Original equilibrium price
$12
Original quantity transacted
400
New equilibrium price
$11
New quantity transacted
450
New price paid by consumers
$11
New price received by producers
$13
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7.5 a.
Consumers’ share of the subsidy = ($12 − $11)× 450 = $450
b.
Producers’ share of the subsidy = ($13 − $12)× 450 = $450
c.
Government’s subsidy = $2 × 450 = $900
7.6 a.
After the provision of export subsidies, farmers in the US will increase their
supply from S1 to S2. The price of farm products for export decreases from
P1 to P2 while the quantity of farm products for export increases from Q1 to
Q2. The total revenue (including subsidy) of the farmers is P0 × Q2, which is
larger than P1 × Q1 before the provision of a subsidy.
b.
Export subsidies provided by the US Government to its farmers will reduce
the price of US farm products for export. As farm products in the US and
farm products in other countries are substitutes, this will lead to a decrease
in the demand for farm products produced by other countries from D1 to D2.
The price and quantity of farm products produced by other countries will
fall from P1 to P2 and Q1 to Q2, respectively. As a result, the total income for
farmers in other countries will fall from P1 × Q1 to P2 × Q2.
7.7 a.
If demand is perfectly inelastic, only consumers can enjoy the subsidy.
P ($ / unit)
S1
D
Consumers’ share of
subsidy
S2
P2
Subsidy
P1
0
Q (units / period)
Q1
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b.
If demand is perfectly elastic, only producers can enjoy the subsidy.
S1
P ($ / unit)
Producers’ share of
subsidy
S2
P1 = P2
D
Subsidy
Q (units / period)
0
c.
Q1
Q2
If supply is perfectly elastic, only consumers can enjoy the subsidy.
P ($ / unit)
Consumers’ share of
subsidy
Subsidy
P1
S1
P2
S2
D
0
d.
Q1
Q (units / period)
Q2
If supply is perfectly inelastic, only producers can enjoy the subsidy.
P ($ / unit)
S1 = S2
Producers’ share of
subsidy
Subsidy
P1 = P2
D
0
Q (units / period)
Q
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Short Questions
1.
a.
Price ($ / unit)
S2
)
S1
Tax
P1
D
0
b.
Quantity of Good X
(units / period)
Q2 Q1
Subsidising substitutes for Good X will reduce their prices. Therefore,
demand for Good X decreases from D1 to D2. Consumption of Good X will
decrease from Q1 to Q2.
Price ($ / unit)
)
S
P1
D2
0
2.
D1
Q2 Q1
Quantity of Good X
(units / period)
No. Given a downward sloping demand curve and an upward sloping supply
curve, the price of a good will increase by less than $10 after imposing a sales
tax of $10.
This is because producers are able to shift only part of the tax burden to
consumers.
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Price ($ / unit)
S2
P1 – P0 < $10
S1
P1
P0
Unit tax = $10
D
Quantity
(units / period)
0
3.
Given that the supply of private homes for the elderly is perfectly elastic, the
supply curve is horizontal. With the provision of subsidies, the supply curve
shifts downwards from S1 to S2. Since the equilibrium price decreases from P1
to P2 by the amount of the unit subsidy, dwellers enjoy all of the benefit of the
subsidy.
Price ($ / unit)
Unit
subsidy
P1
S1
P2
S2
D
0
Q1
Dwellers’ share of subsidy
Quantity
(units / period)
Q2
Structured Questions
1.
a.
A heavy tax imposed on cigarettes will shift the supply curve of cigarettes
upwards from S1 to S2. Laws prohibiting smoking in public areas will
reduce the demand for cigarettes from D1 to D2. The consumption of
cigarettes will decrease from Q1 to Q2.
The equilibrium price of cigarettes may increase, decrease or remain
unchanged, depending on the extent of shifts in the demand and supply
curves.
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Price ($ / period)
S2
S1
Unit tax
D1
D2
0
b.
Q2
Quantity of cigarettes
(units / period)
Q1
The demand for cigarettes tends to be inelastic since it takes time for
consumers to quit smoking.
The supply of cigarettes tends to be elastic since the production of
cigarettes does not require high skills. It is easy to increase the output.
Therefore, consumers are likely to bear a larger tax burden since the
demand elasticity is likely to be smaller than the supply elasticity.
Price ($ / period)
Consumers’ tax burden
S2
Producers’ tax burden
P2
S1
P1
P0
Unit tax
D
0
2.
a.
Q2
Q1
Quantity of cigarettes
(units / period)
Before the removal of the diesel tax, the supply curve of diesel was S1. The
total revenue (excluding government tax) was P0 × Q1. After the removal
of the diesel tax, the supply curve shifts downwards by the removed diesel
tax to S2. The new equilibrium price and quantity are P2 and Q2,
respectively. Thus, the total revenue (excluding government tax) for diesel
suppliers would increase to P2 × Q2.
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Price ($ / liter)
S1
Gain in total revenue
S2
P1
Diesel tax
P2
P0
D
0
Q1
Q2
Quantity of diesel
(liters / period)
b. If the demand is perfectly inelastic (Fig. a), or the supply is perfectly
elastic (Fig. b), then the price of diesel would be reduced by an amount
equal to the government’s tax concession.
Price ($ / liter)
D
Price ($ / liter)
S1
)
S2
P1
56¢
P1
S1
P2
S2
56¢
P2
0
Q
Quantity of
diesel
(liters/ period)
Fig. a
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D
0
Q1
Q2
Quantity of
diesel
(liters/ period)
Fig. b
22
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