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Chapter 16 Question Bank

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Chapter 16 Competition and efficiency
Multiple Choice Questions
Question code: B3C16Q001
When the marginal benefit of a good is equal to the marginal cost of another good, the
total social surplus will be
A. maximised.
B. minimised.
C. inefficient.
D. None of the above
Question code: B3C16Q002
A rational consumer will continue to buy until
A. the marginal benefit of the good is minimised.
B. the average benefit is equal to average cost.
C. his/her producer surplus is maximised.
D. the marginal benefit is equal to the market price.
Question code: B3C16Q003
*If the marginal benefit of a good is not equal to the marginal cost of producing it,
then
A.
B.
C.
D.
we cannot increase the total social surplus.
the consumer surplus must not be maximised.
we can reallocate resources to increase the total social surplus.
we can increase the consumer surplus by cutting production.
Question code: B3C16Q004
A perfectly competitive market is efficient when
A. the marginal cost of producing a good is greater than the marginal benefit from the
good.
B. the marginal cost of producing a good is equal to the marginal revenue from
selling the good.
C. the price of a good is equal to the marginal cost of the good to a producer.
D. the marginal benefit of a good is equal to the marginal cost of the good.
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Question Bank (Chapter 16)
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Question code: B3C16Q005
If the marginal benefit of a good is greater than the marginal cost of producing the
good, which of the following are correct?
(1) An increase in the output level will not increase the total social surplus.
(2) A decrease in the output level will increase the total social surplus.
(3) There is an underproduction.
(4) There is a deadweight loss.
A. (1) and (2) only
B. (1) and (3) only
C. (2) and (4) only
D. (3) and (4) only
Question code: B3C16Q006
Deadweight loss exists if
A.
B.
C.
D.
the marginal cost of a good is equal to the marginal benefit of the good.
the marginal social surplus is zero.
the marginal benefit of a good is not equal to the marginal cost of the good.
the total social surplus is maximised.
Question code: B3C16Q007
*The existence of inefficiency implies that
A.
B.
C.
D.
there must be underproduction.
there must be overproduction.
the sum of the producer surplus and the consumer surplus is maximised.
there must be a deadweight loss.
Question code: B3C16Q008
If we find that every consumer except Mr Y in a market consumes up to the point
where MB = P, then
A. Mr Y’s consumer surplus has been already maximised.
B. Mr Y is rational because he does what he wants to do.
C. the total social surplus will be maximised when all the producers produce up to
the point where MC = P.
D. Mr Y suffers.
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Question code: B3C16Q009
A decrease in output level must increase the total social surplus if
A. there is a deadweight loss.
B. the marginal cost is not equal to the market price.
C. the marginal benefit is equal to the market price.
D. the marginal cost is greater than the market price.
Question code: B3C16Q010
A consumer will want to buy fewer units if
A. the marginal benefit of a good is greater than the price of the good.
B. the marginal benefit of a good is smaller than the price of the good.
C. the marginal benefit of a good is equal to the price of the good.
D. the total social surplus is not maximised.
Question code: B3C16Q011
*Which of the following imply that resource allocation is efficient?
(1) The total social surplus is maximised.
(2) Producers produce up to a point where MB = P = MC.
(3) Both consumers and producers try to maximise their own interests.
(4) The consumer surplus is maximised.
A. (1) and (2) only
B. (1) and (3) only
C. (2) and (3) only
D. (3) and (4) only
Question code: B3C16Q012
If there is __________, the total social surplus will __________ when the output level
__________.
(1) overproduction; increase; increases
(2) overproduction; increase; decreases
A.
B.
C.
D.
(3) underproduction; decrease; decreases
(1) and (2) only
(1) and (3) only
(2) and (3) only
All of the above
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Question code: B3C16Q013
The deadweight loss will __________ if the output level __________ in the case of
__________.
A. increase; increases; an underproduction
B. decrease; increases; an overproduction
C. exist; is at its efficient level; a perfectly competitive market
D. not exist; is at its efficient level; a perfectly competitive market
Question code: B3C16Q014
*It is __________ to __________ total social surplus by cutting production when
there is an overproduction.
A. impossible; decrease
B. possible; increase
C. impossible; increase
D. None of the above
Question code: B3C16Q015
*It is __________ to __________ total social surplus by __________ production
when there is an underproduction.
A. possible; decrease; expanding
B. impossible; decrease; cutting
C. possible; increase; cutting
D. impossible; decrease; expanding
Question code: B3C16Q016
Which of the following about prices are correct?
(1) Market prices can serve to achieve efficiency in resource allocation.
(2) Prices transmit information about market demand and market supply.
(3) The higher price of a good transmits to consumers the information that it is
necessary to consume more of the good.
A.
B.
C.
D.
(1) and (2) only
(1) and (3) only
(2) and (3) only
All of the above
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Question code: B3C16Q017
Which of the following are NOT functions of prices?
(1) Transmitting market information to consumers and producers
(2) Providing incentives by cash
(3) Evenly distributing income
A. (1) and (2) only
B. (1) and (3) only
C. (2) and (3) only
D. All of the above
Question code: B3C16Q018
Which of the following persons will be rewarded for following price signals?
(1) After the price of bananas decreases, Judy buys more bananas than before.
(2) After his cost of production decreases, Alex sells fewer computers than before.
A.
B.
C.
D.
(3) John adopts the highest-cost technique and sells his soymilk to those who
most value the soymilk.
(1) and (2) only
(1) and (3) only
(2) and (3) only
All of the above
Question code: B3C16Q019
Which of the following penalties must apply to consumers who do NOT follow
price signals?
A. There will be an increase in total expenditure.
B. The consumer surplus is smaller.
C. A smaller deadweight loss results.
D. There will be a decrease in total benefit.
Question code: B3C16Q020
When the relative price of a good __________ due to a decrease in demand for it,
producers will allocate __________ resources to decrease the quantity supplied of the
good as the good is __________ profitable.
A. decreases; fewer; less
B. increases; fewer; more
C. increases; more; less
D. decreases; more; more
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Question code: B3C16Q021
The price mechanism rations goods because
A. it determines who can get the goods and who cannot.
B. it controls the resource allocation and output level.
C. it maintains even distribution in society.
D. it is an invisible hand which maximises total social surplus.
Question code: B3C16Q022
Which of the following is NOT an example of government intervention?
A. A legal upper limit set on taxi fares in Hong Kong
B. Auctions of ordinary and special vehicle registration marks in Hong Kong
C. A duty on cigarettes
D. Imperfect information about government preferences
Question code: B3C16Q023
After the imposition of a price ceiling,
A. the new quantity transacted must be lower than before.
B. the new quantity transacted must be higher than before.
C. the new market price must be lower than before.
D. the total social surplus may still be maximised.
Question code: B3C16Q024
After the imposition of an effective price ceiling,
A. a deadweight loss will exist.
B. the consumer surplus must increase.
C. the producer surplus may not decrease.
D. the sum of the producer surplus and the consumer surplus may not decrease.
Question code: B3C16Q025
*The society will benefit from the removal of the price ceiling on a good if
A.
B.
C.
D.
the quantity transacted is lower after the removal.
the market price remains unchanged.
there is no excess supply after the removal.
the price ceiling is effective before the removal.
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Question code: B3C16Q026
$
S = MC
Px
P0
$P0c
$c
X
0
Px
Price ceiling
X
Qc
Q0
D = MB
Q
P0
Referring
to the diagram above, which of the following are correct?
Qc
Q0(1) The price ceiling is effective.
Pr(2) The grey area is the deadweight loss.
ic (3) X represents excess demand.
A.e (1) and (2) only
B.ce(1) and (3) only
C.ili(2) and (3) only
D.ngAll of the above
S
Question
code: B3C16Q027
=
Referring
to the diagram below, which area will be the consumer surplus after the
M
imposition
of a price ceiling?
C
D$
=
A
M
Px
B
Q
P0
$c
P
P0
B
0
A.
B.
C.
D.
S = MC
C
F
E
Price ceiling
Qc
Q0
D = MB
Q
Area APcEC
Area CEF
Area PcBE
Area ABEC
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Question Bank (Chapter 16)
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Question code: B3C16Q028
Referring to the diagram below, which area will be the producer surplus after the
imposition of a price ceiling?
$
S = MC
A
C
Px
F
P0
E
Pc
Price ceiling
B
0
Qc
Q0
D = MB
Q
A. Area APcEC
B. Area CEF
C. Area PcBE
D. Area ABEC
Question code: B3C16Q029
Referring to the diagram below, which area will be the deadweight loss caused by the
imposition of a price ceiling?
$
S = MC
A
C
Px
F
P0
Pc
E
Price ceiling
B
0
A.
B.
C.
D.
Qc
Q0
D = MB
Q
Area APcEC
Area CEF
Area PcBE
Area ABEC
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Question Bank (Chapter 16)
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Question code: B3C16Q030
*Referring to the diagram below, which area represents the potential gain from the
removal of a price ceiling?
$
S = MC
A
C
Px
F
P0
Pc
E
Price ceiling
B
0
A.
B.
C.
D.
Qc
Q0
D = MB
Q
Area APcEC
Area CEF
Area PcBE
Area ABEC
Question code: B3C16Q031
After an imposition of an effective price floor,
A.
B.
C.
D.
the total social surplus must not be maximised.
the consumer surplus must increase.
the deadweight loss may not exist.
the producer surplus must increase.
Question code: B3C16Q032
The society will benefit from the removal of a price floor if
A. the market price remains unchanged after the removal.
B. the quantity transacted is lower after the removal.
C. excess supply disappears after the removal.
D. the price floor is not effective before the removal.
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Question Bank (Chapter 16)
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Question code: B3C16Q033
Referring to the diagram below, which of the following statements are INCORRECT?
$
S = MC
Y
Price floor
Pf
P0
Px
0
Qf
Q0
D = MB
Q
(1) The price floor is not effective.
(2) Y represents excess supply.
A.
B.
C.
D.
(3) The grey area represents the deadweight loss.
(1) and (2) only
(1) and (3) only
(2) and (3) only
All of the above
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Question Bank (Chapter 16)
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Question code: B3C16Q034
Referring to the diagram below, which of the following statements are correct?
$
S = MC
Y
Price floor
Pf
P0
Px
0
Qf
Q0
D = MB
Q
(1) The new price is Pf.
(2) The grey area represents the loss in consumer surplus and producer surplus
A.
B.
C.
D.
due to the price floor.
(3) After the introduction of a price floor, the supply of a good decreases by the
amount (Q0 – Qf).
(1) and (2) only
(1) and (3) only
(2) and (3) only
None of the above
Question code: B3C16Q035
*The potential gain from the removal of an effective price floor for a good is
A. the producer surplus.
B. the consumer surplus.
C. the sum of the producer surplus and consumer surplus.
D. the deadweight loss under a price floor.
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Question Bank (Chapter 16)
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Question code: B3C16Q036
*Referring to the diagram below, which area represents the potential gain from the
removal of a price floor?
$
S = MC
W
Pf
Price floor
Y
X
Z
Px
0
Qf
D = MB
Q
A. Area W
B. Area X
C. Area Y
D. Area Z
Question code: B3C16Q037
Referring to the diagram below, which area represents the consumer surplus after the
imposition of a price floor?
$
S = MC
Pf
W
Price floor
X
Px
0
Z
Y
Qf
D = MB
Q
A. Area W
B. Area (X + Y)
C. Area (X + Z)
D. None of the above
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Question Bank (Chapter 16)
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Question code: B3C16Q038
Referring to the diagram below, which of the following is correct?
$
S = MC
Y
Price floor
Pf
Px
0
Qf
D = MB
Q
A. Y represents excess demand.
B. Y shows a situation of overproduction.
C. If we increase the output level by Y units, deadweight loss will not exist.
D. If quantity demanded at every price increases by Y units, the market will become
efficient.
Question code: B3C16Q039
*Referring to the diagram below, when the output level is at Qf, there is a deadweight
loss because
$
S = MC
Price floor
Pf
Px
0
Qf
D = MB
Q
A. the market price is at Px, which is lower than the equilibrium price.
B. Pf > Px implies that there is a potential loss from an increase in the output level.
C. Pf > Px implies that the marginal social surplus is greater than zero.
D. the market price is at Pf, which implies that producers do not maximise their
producer surplus.
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Question code: B3C16Q040
Referring to the diagram below, when the output level is at Qq, there is a deadweight
loss because
$
S’’
S = MC
Pq
P0
Px
0
Qq
Q0
D = MB
Q
A. P0 > Px, which implies that there is a potential gain from a decrease in the output
level.
B. Pq > Px, which implies that there is a potential loss from an increase in the output
level.
C. Pq > P0, which implies that there is a potential gain from an increase in the market
price.
D. Pq > Px, which implies that there is a potential gain from an increase in the
quantity transacted.
Question code: B3C16Q041
An effective imposition of a quota implies that
A. the market price is lower than before.
B. there was an overproduction before the imposition.
C. there was an underproduction before the imposition.
D. the quantity transacted decreases after the imposition.
Question code: B3C16Q042
After the imposition of an effective quota,
A. efficiency will be attained.
B. the consumer surplus must increase.
C. the producer surplus must not decrease.
D. total benefit must decrease.
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Question code: B3C16Q043
Society will gain from an increase in the quota of a good when
A. the marginal social surplus is higher than before.
B. the price of the good is higher than before.
C. deadweight loss is lower than before.
D. total social surplus is not lower than before.
Question code: B3C16Q044
Referring to the diagram below, which of the following statements about the provision
of a quota are correct?
$
Quota
S = MC
Pq
P0
Px
D = MB
0
Q0
Qq
Q
(1) The market price will be either Pq or Px, depending on whether producers need
to pay for the quota.
A.
B.
C.
D.
(2) The grey area represents the deadweight loss.
(3) The government has imposed an effective quota to increase the output level
from Q0 to Qq.
(1) and (2) only
(1) and (3) only
(2) and (3) only
None of the above
Question code: B3C16Q045
Total social surplus under a unit tax includes
A. the consumer surplus only.
B. the consumer surplus and producer surplus only.
C. the tax revenue and producer surplus only.
D. the tax revenue, consumer surplus and producer surplus.
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Question code: B3C16Q046
An imposition of a unit tax on a good will
A. shift the marginal cost curve downwards.
B. shift the marginal benefit curve upwards.
C. increase the price paid by consumers.
D. increase the quantity transacted.
Question code: B3C16Q047
Referring to the diagram below, which of the following statements about a unit tax are
INCORRECT?
$
S’ = MC + Unit tax
A
S = MC
B
Pt
F
G
P0
Px
C
E
0
Qt
Q0
D = MB
Q
(1) The grey area represents the deadweight loss.
(2) Area PtECB represents the new producer surplus after the imposition of the
A.
B.
C.
D.
tax.
(3) The new total social surplus includes Area APtB and Area PxEC only.
(2) only
(1) and (3) only
(2) and (3) only
None of the above
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Question code: B3C16Q048
Referring to the diagram below, which of the following statements about a unit tax are
INCORRECT?
$
S’ = MC + Unit tax
A
S = MC
B
Pt
E
P0
G
Px
F
0
Qt
Q0
D = MB
Q
(1) Area AP0GB represents the new consumer surplus after the imposition of the
tax.
(2) Px is the new price paid by consumers.
(3) Area PtPxFB represents the increase in the government’s tax revenue.
A. (1) and (2) only
B. (1) and (3) only
C. (2) and (3) only
D. All the statements are correct.
Question code: B3C16Q049
*After the imposition of a unit tax, the total social surplus includes the government’s
tax revenue as
A. the tax revenue must be used to help the poor.
B. the tax revenue is a public fund.
C. the tax revenue is a part of the total social surplus which is transferred from
consumers and/or producers.
D. None of the above
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Question code: B3C16Q050
Referring to the diagram below, which of the following statements about a unit
subsidy are INCORRECT?
$
S = MC
S’ = MC – Unit subsidy
P0
P1
Px
0
Q0
Q1
D = MB
Q
(1) The quantity transacted should be Q1 when the market is efficient.
A
B.
C.
D.
(2) The grey area represents the deadweight loss caused by the subsidy.
(3) P1 represents the price paid by consumers.
(1) and (2) only
(1) and (3) only
(2) and (3) only
All of the above
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Question code: B3C16Q051
*Referring to the diagram below, which of the following statements about the unit
subsidy are correct?
$
A
P1
P0
P2
S’ = MC – Unit subsidy
E
F
B
I
G
D = MB
C
0
S = MC
H
Q
Q0 Q1
(1) Area BCIE represents the net increase in the total social surplus.
(2) P1 is the new price (including subsidy) received by producers after the
provision of the subsidy.
(3) The total social surplus after the provision of the subsidy is equal to Triangle
AEB minus Triangle EHI.
A. (1) and (2) only
B. (1) and (3) only
C. (2) and (3) only
D. None of the above
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Short Questions
Question code: B3C16Q301
*In his book ‘The Wealth of Nations’, Adam Smith, the father of modern economics,
said, ‘It is not from the benevolence of the butcher, the brewer, or the baker, that we
expect our dinner, but from their regard to their own interest. We address ourselves,
not to their humanity but to their self-love, and never talk to them of our necessities
but of their advantages.’
Do you agree? Use the concept of efficiency in resource allocation to explain your
answer.
(5 marks)
Question code: B3C16Q302
Suppose you are the Chief Executive of Country A and would like to increase the total
social surplus in a perfectly competitive market. Would you agree to the following
suggestions? Why?
(a) Setting a minimum price control
(b) Setting a quota
(c) Providing a unit subsidy
(2 marks)
(2 marks)
(2 marks)
Question code: B3C16Q303
Suppose you are the Chief Executive of Country A and your target is to increase the
total social surplus in a perfectly competitive market. Would you agree to the
following suggestions? Why?
(a) Lower the level of an effective maximum price control (which is still effective
after the change)
(2 marks)
(b) Removal of an effective quota
(2 marks)
(c) Increase a unit subsidy
(2 marks)
(d) Removal of a unit tax
(2 marks)
Question code: B3C16Q304
John said, ‘As the price mechanism determines who can get the goods and who
cannot, it allocates resources efficiently.’ Comment on John’s statement.
(6 marks)
Question code: B3C16Q305
Florence said, ‘The price mechanism rations goods by using prices to determine who
can get the goods and who cannot.’ Do you agree? Explain your answer.
(4 marks)
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Question code: B3C16Q306
*Stephy said, ‘If there is a difference between marginal benefit and marginal cost at
the quantity transacted, the total social surplus is not maximised. But if the total social
surplus is maximised, the total benefit is equal to the total cost as MB = MC.’
Comment on Stephy’s statement.
(6 marks)
Question code: B3C16Q307
Which function(s) do prices perform in the following situations?
(a) Consumers know from the price that the availability of beef has decreased.
(1 mark)
(b) Producers know from the price that more people enjoy drinking wine.
(1 mark)
(c) Consumers buy more cans of soft drinks because the price of aluminium has
decreased.
(2 marks)
(d) John values a second-hand diamond ring and ultimately gets the ring by bidding at
an auction
(1 mark)
Question code: B3C16Q308
Island Alpha’s government announces that the minimum wage of foreign domestic
helpers will increase from $3,500 to $3,600 per month. Suppose all the helpers had
the same marginal cost at $3,200. Will the helpers gain from the increase in the
minimum wage in terms of the following? Explain your answers with ONE diagram
only.
(a) The surplus earned by all the helpers (Hint: you can apply the concept of producer
surplus.)
(3 marks)
(b) The number of helpers employed
(2 marks)
(c) The surplus that each of the employed helpers earned
(2 marks)
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Question code: B3C16Q309
In Country A, there is an employee retraining levy of $400 per month on the
employers of foreign domestic helpers. The government decides to suspend this levy
for two years.
Suppose all foreign domestic helpers have the same marginal cost at $3,300. What
will the effects of the suspension of the employee retraining levy be on the following
items?
(a) The wages that foreign domestic helpers receive (Hint: The supply of foreign
helpers is perfectly elastic.)
(2 marks)
(b) The number of foreign domestic helpers employed
(1 mark)
*(c) The surplus earned by employers and the surplus earned by all foreign domestic
helpers (Hint: you can apply the concept of a consumer surplus to find the surplus
earned by the employers.)
(2 marks)
Structured Questions
Question code: B3C16Q501
The government in City X finds that the prices of school textbooks rose to a record
high in 2010. Some textbook publishers claim that the increase in the price is caused
by the increase in the cost of paper and other production costs.
(a) Explain why publishers and parents will suffer when paper prices increase.
Illustrate your answer with a diagram.
(7 marks)
(b) What will the effect on the efficiency of the textbook market be if the government
imposes an effective price ceiling on the market?
(3 marks)
(c) Suppose a unit subsidy is given to textbook publishers. Who will gain and who
will lose from the provision of the subsidy, parents or publishers? Explain your
answer with a diagram.
(7 marks)
*(d) Suppose there is an increase in the demand for textbooks due to higher quality.
Explain whether the parents and publishers will gain or lose if the quantity
transacted remains unchanged after the increases in demand for textbooks and
paper prices. Illustrate your answer with a diagram.
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Question Bank (Chapter 16)
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(6 marks)
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Question code: B3C16Q502
最低工資
= $3,580
Thanks to the 2008 Olympic Games, hotel room rates in Beijing skyrocketed by
nearly 700%. The price of a standard room per night was around RMB¥718 in July
2008, but rose rapidly to more than RMB¥4,000 during the Games. The occupancy
rate of five-star hotels was nearly 80% but two-to-four star hotels were lower than
50%. A hotel reservation agent claimed that expectations for an increase in the
number of overseas visitors during the Games were too high and the high price scared
away potential visitors. Some two-to-four star hotels decided to slash (大幅減價)
their rates by 10 to 20% in order to increase their occupancy rates. Some, however,
stuck with their plans and kept their room rates at high levels.
(a) Explain why hotel room rates rose so rapidly during the Games.
(1 mark)
(b) Who gained and who lost from the situation mentioned above?
(c) What functions did prices perform in this case?
(4 marks)
(8 marks)
(2 marks)
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