Download A. Multiple-choice Questions

Kiangsu-Chekiang College (Shatin)
Economics April Revision
(2002―2003)
Date : 2003/4/7
Time Allowed:
Minutes
Marks:________/_________
Class: ____________________
Name : ____________________ Class No.:_______________
A. Multiple-choice Questions
1.
Case I:
After imposing $10 per-unit sales tax on the producer of product Y, its per unit price
increases by $8.
Case II: After imposing $10 per-unit tax on the producer of product Y, its per unit price
increases by $6.
It means that product Y in Case I has a __________ elastic supply or has a __________ elastic
demand.
A.
more …… more
B.
less …… more
C.
more …… less
D.
less …… less
C
Under this situation, consumers’ tax burden is higher. It coincides with the situation in Case 1.
2.
From the following demand and supply table of product X., the equilibrium price and quantity
transacted of product X are
1
2
3
4
5
6
7
Quantity Demanded (units)
100
90
80
70
60
50
40
Quantity Supplied (units)
40
50
60
70
80
90
100
Unit Price ($)
A.
$1 and 40 units respectively.
B.
$2 and 50 units respectively.
C.
$3 and 60 units respectively.
D.
$4 and 70 units respectively.
D
Answer the following 9 questions with reference to the following demand and supply table of
product X.
1
2
3
4
5
6
7
Quantity Demanded (units)
100
90
80
70
60
50
40
Quantity Supplied (units)
40
50
60
70
80
90
100
Unit Price ($)
3.
4.
5.
When the unit price of product X increases from $1 to $2, its price elasticity of demand is
A.
elastic.
B.
inelastic.
C.
perfectly inelastic.
D.
perfectly elastic.
B
When the unit price of product X decreases from $6 to $5, its price elasticity of supply is
A.
elastic.
B.
inelastic.
C.
perfectly inelastic.
D.
perfectly elastic.
B
Suppose the government carries out an effective price ceiling control on product X, the
maximum price per unit is set at $3. Which of the following situations is most likely to occur?
A.
There is an excess supply of 20 units.
B.
There is an excess demand of 20 units.
C.
Quantity transacted increases by 10 units.
D.
The government has a surplus.
B
6.
7.
8.
If the government sets the minimum unit price of product X at $2,
A.
there will be an excess supply of product X by 40 units.
B.
the consumer of product X will gain the largest benefit.
C.
shortage of product X will occur.
D.
the equilibrium price of product X will still be $4.
D
If the government sets an import quota of product X at 60 units,
A.
the per unit market price of product X is $5.
B.
the per unit market price of product X is $3.
C.
the quantity transacted of product X is 80 units.
D.
the total market value of product X is $280.
A
Suppose the government imposes $2 per-unit tax to the producer of product X. The total sales
revenue is
A.
$280.
B.
$300.
C.
$320.
D.
$360.
$5 × 60 = $300
B
9.
Suppose the government imposes $2 per-unit tax to the producer of product X. The total sales
tax burden of the sellers is
A.
$50.
B.
$60.
C.
$70.
D.
$80.
B
$1 × 60 = $60
10. Suppose the government gives a $4 per-unit subsidy to the producer of product X. The new
total sales revenue is
A.
$120.
B.
$140.
C.
$160.
D.
$180.
D
$2 × 90 = $180
11. Suppose the government gives a $4 per-unit subsidy to the producer of product X. Consumers’
share of the subsidy is
A.
$120.
B.
$140.
C.
$160.
D.
$180.
D
$2 × 90 = $180
12.
If the demand in the above diagram is unitarily elastic, then
A.
ACMB > MKLE
B.
A0KB = MKLE
C.
ACMB = MKLE
D.
A0KB > C0LE
If it is unitarily elastic, then A0KB = C0LE.
∴ ACMB = MKLE
C
13. If the harvest of rice is bad, and the price elasticity of demand is inelastic,
A.
the income of the farmer will decrease.
B.
the income of the farmer will increase.
C.
the income of the farmer will remain unchanged.
D.
there is no relationship between the income of the farmer and price elasticity.
B
14. Suppose the supply of product X increases. Under which of the following situations, would the
unit price of product X remain unchanged?
15.
A.
Its demand is elastic.
B.
Its demand is inelastic.
C.
Its demand is perfectly inelastic.
D.
Its demand is perfectly elastic.
D
In the above diagram, S0, S1, D are unitarily elastic. The total revenue of the producer is $400,
Q1
= 0.4. What is the value of P1?
Q2
A.
2.50
B.
3.00
C.
3.75
D.
5.00
D
16. The feedback of ‘Anti-smoking campaign for the youth’ is very successful under huge
promotions last six months. The price of cigarettes decreases by 18%, and the quantity sold
decreases by 8%. It implies that
A.
the supply of cigarettes is inelastic.
B.
the demand of cigarettes is inelastic.
C.
whether the total income of the cigarette producers will increase or not depends on the
demand elasticity of cigarettes.
D.
substitutes for cigarettes are limited.
A
Anti-smoking promotions lead to a decrease in demand for cigarettes. It reflects the elasticity
of supply indirectly.
17. Suppose the supply of a certain product increases. Under which of the following situations,
would the price of it increase?
A.
The demand for its complements decreases.
B.
The supply of its substitutes decreases.
C.
The price of its competitive supply good decreases.
D.
The supply of it is perfectly inelastic.
B
Both A and C would lead to a further decrease in price. D has nothing to do with the change in
price.
18.
In the above diagram, the demand is unitarily elastic. The government’s total income from
per-unit sales tax is equal to the producers’ total income after tax. The tax burden of the
producers is
A.
$2 340.
B.
$1 560.
C.
$3 900.
D.
$1 950.
A
The total revenue (before tax) of the producers = $12 × 650 = $7 800
∵ Producers’ total revenue after tax = Government's tax revenue
Producers’ total revenue after tax + Government's tax revenue = $7 800
∴ Producers’ total revenue after tax = $7 800 ÷2 = $3 900
∴ Producers’ tax burden = $12 × 520 - $3 900 = $2 340
19. In late August, students is preparing for going back to school. Thus, the demand for stationery
in the market increases. The market price of stationery increases by 12%, and the total quantity
sold increases by 20%. Which of the following descriptions is LEAST possible?
A.
The total income of producers increases.
B.
Producing stationery is a capital-intensive production.
C.
The number of consumers in the stationery market increases.
D.
The labour engaged in producing stationery needs only simple training.
B
Capital-intensive production has relatively low elasticity. It does not match the descriptions in
the question.
20. Suppose the technology of producing a certain good is improved. Under which of the
following situations, would the market price of that good remain unchanged?
(1) There is an effective price floor in the market.
(2) There is an effective price ceiling in the market.
(3) Only a slight increase in the price will make all the consumers to run away.
(4) Consumers do not care about the price.
A.
(1) and (3) only.
B.
(2) and (3) only.
C.
(1), (2) and (3) only.
D.
(1), (2) and (4) only.
A
Under situation (1), no matter how much the supply is increased, the price will remain
constant.
Under situation (3), the demand is perfectly elastic.
21. PX = the price of good X
PY = the price of good Y
QY = the quantity sold for good Y
Which of the following pair(s) show that product X and Y are NOT substitutes to each other?
(1) PX increases by 20%; QY decreases by 15%.
(2) PX increases by 12%; QY increases by 18%.
(3) PX increases by 15%; QY remains constant.
(4) PX decreases by 10%; PY decreases by 8%.
A.
(1) only
B.
(2) only
C.
(1) and (3) only
D.
(3) and (4) only
A
Except (1), all others may be substitutes.
(2) – PX increases, the demand of product Y increases, QY increases.
(3) – If product Y has a perfectly inelastic supply, an increase in the demand for product Y will
(3) – not affect QY.
(4) – PX decreases, the demand of product Y decreases, PY decreases.
22. Suppose the government gives a per-unit subsidy to the producers of product X.
A.
The demand elasticity will not affect the total income of the producers.
B.
If the demand elasticity is greater than the supply elasticity, the consumers’ share of
subsidy will be larger.
C.
If the demand is unitarily inelastic, producers will enjoy all share of subsidy.
D.
The higher the elasticity of demand, the more the producers' total income will be.
D
A per-unit subsidy will increase the supply. As a result, the price will decrease. The higher the
elasticity of demand, the more total revenue will be resulted from the decrease in price.
B. Short Questions
1.
A toy factory produces toy A. According to some studies, its price elasticity of demand is 0.5.
If the factory owner wants to maximize the total revenue, how should he change the output of
toy A?
(5 marks)
Demand for toy A is inelastic.
Thus, the supply should be reduced so as to increase the equilibrium price.
(1 mark)
(2 marks)
As the percentage increase in price is greater than the percentage decrease in quantity
demanded, the factory’s total revenue will have a net increase.
(2 marks)
2.
On a demand curve (straight line), find out a point where producers can gain maximum total
revenue. Explain.
(6 marks)
When demand is elastic ( > 1 ), producers can decrease the price so as to increase their total
revenue.
(2 marks)
When demand is inelastic ( < 1 ), producers can increase the price so as to increase their total
revenue.
(2 marks)
In other words, when the elasticity of demand is equal to 1, the total revenue will be
maximized. This is a mid-point on a demand curve.
(2 marks)
3.
(a) Mrs Chan spends a fixed amount ($2 000) on food monthly. With the aid of a diagram,
explain Mrs Chan’s demand elasticity on food.
(4 marks)
Mrs Chan’s expenditure on food is $ 2 000 no matter what the price of food is. It
illustrates that Mrs Chan’s demand for food is unitarily elastic.
(2 marks)
(2 marks)
(b) Suppose Mr Chan is promoted so that Mrs Chan’s household budget also increases. With
the aid of a diagram, explain whether Mrs Chan’s expenditure on food will be changed or
not.
(4 marks)
It depends on whether the food is a superior good or an inferior good for Mrs Chan.
If it is the former, Mrs Chan will increase her expenditure on food.
If it is the latter, Mrs Chan will decrease her expenditure on food.
(2 marks)
(2 marks)
4.
Government imposes two-month-period fishing moratorium (休漁期) for breeding of fishes.
Will the total revenue of the fish ball producers increase or decrease? With the aid of a diagram,
state TWO reasons to support your arguments.
(8 marks)
The imposition of a ban on fishing will lead to a decrease in the supply of fish. The supply of
fish ball will decrease (from S0 to S1) because fish is the main production factor of fish ball.
The price of fish ball will increase and the quantity sold will decrease.
(2 marks)
The effect on the producers’ total revenue depends on the elasticity of fish ball.
(1 mark)
If the demand for fish ball is elastic, the percentage increase in price is smaller than the
percentage decrease in quantity demanded. As a result, the total revenue will decrease.
Conversely, if the demand for fish ball is inelastic, the percentage increase in price is greater
than the percentage decrease in quantity demanded. As a result, the total revenue will increase.
(3 marks)
(2 marks)
5.
In order to protect bears, the Hong Kong government decides to prohibit the sale of all
medicine made with the ingredient of bear in April 2000 (i.e., 2 months later). Some Chinese
medical practitioners say that it is very difficult for them to find substitutes for bear-made
medicine.
(a) State the elasticity of the demand and supply of bear-made Chinese medicine within these
2 months. Explain.
(4 marks)
The supply of bear-made Chinese medicine is inelastic. It is because rearing bear takes
time. It is very difficult to produce a large number of bear within a short period of time (2
months).
(2 marks)
The demand for bear-made Chinese medicine is inelastic because there are few substitutes
for bear-made medicine.
(2 marks)
(b) It is expected that the price of the bear-made Chinese medicine will increase after the
prohibition of sale in the market. With the aid of a diagram, explain the market situation
of the bear-made Chinese medicine before the prohibition of sale.
(5 marks)
It is expected that the market price will increase so there will be an increase in demand
(from D0 to D1). The price will increase (from P0 to P1), but the quantity sold will not
increase greatly (from Q0 to Q1).
(3 marks)
(2 marks)
6.
(a) Define price elasticity of demand.
(2 marks)
It is the degree of responsiveness of quantity demanded to a change in price.
(2 marks)
(b) Given that when the price of good X falls from $2 to $1.8, the quantity demanded
increases by 30%. Calculate the price elasticity of demand for X.
(3 marks)
(1 mark)
(1 mark)
It is an elastic demand.
7.
(1 mark)
Explain, with the aid of a demand and supply diagram, why a quota is more effective in
discouraging people from smoking cigarettes than a per-unit tax.
(9 marks)
A quota is more effective because its quantity supplied is fixed at Q1.
Quantity consumed will be restricted regardless of the change in demand.
(2 marks)
(1 mark)
Cigarette
Price ($)
D2
S
P2
D1
P1
D2
S
0
D1
Quantity/period
Q1
(2 marks)
Consumption will not be affected even there is an increase in demand.
While the effect of a per-unit tax is uncertain if there is a change in demand.
(2 marks)
Cigarette
Price ($)
S2
D2
S1
D1
S2
0
D2
S1
D1
Q1
Q2
Quantity/period
(2 marks)
Consumption will increase when there is an increase in demand.
8.
No matter what price a cup of coffee is, Mr Chan spends $300 on coffee per month. What is
Mr Chan’s price elasticity of demand for coffee? Explain.
(4 marks)
For unitarily elastic demand, total expenditure (revenue) will not be changed when price
changes.
(2 marks)
Now Mr Chan’s total expenditure remains constant at $300 when price changes, therefore its
demand for coffee is unitarily elastic.
(2 marks)
9.
Explain which item is less elastic in each of the following cases.
(a) The supply of vegetables in this week and the supply of vegetables in a year
(3 marks)
A week is too short for the farmers to increase the production of vegetables. Thus the
elasticity of supply is smaller.
(3 marks)
(b) The demand for vegetables and the demand for choi sum
(3 marks)
Vegetables are a special kind of food. There are fewer substitutes for it and so it is less
elastic. However, choi sum is only a kind of vegetables. Other vegetables can replace it.
(3 marks)
10. As a tradition, Chinese in Hong Kong usually go to worship their ancestors at Ching Ming
Festival.
Explain, with the aid of a demand and supply diagram, how the fares of the mini-bus taking
people to the graveyard are affected and how would the total earnings of the mini-bus
drivers/owners be affected at Ching Ming Festival.
(6 marks)
The demand for mini-bus services would increase on that day.
(1 mark)
The equilibrium price would increase.
(1 mark)
Mini-bus Services
Price ($)
D2
S
D1
P2
P1
D2
S
0
D1
Q1
Q2
Quantity/period
The revenue of the mini-bus drivers would increase from P1 × Q1 to P2 × Q2.
(2 marks)
(2 marks)
11. Suppose the government gives a per-unit subsidy to all students to buy a computer so as to
encourage information education. Indicate on a well-labelled demand and supply diagram how
the benefit is shared among the sellers and consumers.
(5 marks)
Computers
Price ($)
S1
D
S2
Sellers' benefits
P0
Consumers' benefits
P1
Per-unit subsidy
S1
D
S2
Quantity/period
0
(5 marks)
12. MD sellers claimed that when they have decreased the price of MDs, their total sales revenue
increased. Explain this phenomenon in terms of elasticity of demand.
(7 marks)
When the demand for MDs is elastic, % increase in quantity demanded will be greater than %
decrease in price.
(2 marks)
Gain in revenue will be greater than the loss in revenue.
(2 marks)
Total revenue thus increases.
(1 mark)
MD
Price ($)
D
P1
P2
Loss
D
Gain
0
Q1
Q2
Quantity/period
(2 marks)
13. Assuming that in the cigarette market, the majority of consumers are habitual smokers, explain
whether total revenue will increase if the cigarette producers raise the price of cigarettes.
Illustrate with a diagram.
(10 marks)
For habitual smokers, cigarettes have become a necessity. There are no substitutes for
cigarettes to habitual smokers.
(2 marks)
Therefore, the demand for cigarettes tends to be inelastic.
(2 marks)
If demand is inelastic, total revenue will increase if the price increases.
(2 marks)
With an increase in price, P2 × Q2 exceeds P1 × Q1.
(2 marks)
Cigarettes
Price ($)
P2
Gain
Loss
P1
D
0
Q2
Q1
Packets/period
(2 marks)
14. When the price of Good A falls from $10 to $9.8, the quantity demanded rises from 200 units
to 210 units. Calculate the price elasticity of demand of Good A over the given price range.
(5 marks)
(5 marks)
Demand for product A is elastic.
15. Name FOUR factors that affect elasticity of supply.
16.
•
Time
•
The easiness of entering the industry
•
The cost of attracting inputs from alternative uses
•
The nature of inputs
(4 marks)
(1 mark each, total: 4 marks)
Food prices in restaurants have been kept low all these days. Apply the concept of demand
elasticity to explain why restaurants tend to cut prices.
(8 marks)
There are many substitutes for the food provided in a particular restaurant, e.g., food at home,
food in other restaurants.
(2 marks)
Thus, the demand for restaurant food is elastic.
(2 marks)
Cutting prices will increase total revenue if demand is elastic, since the gain in revenue is
bigger than the loss in revenue.
(2 marks)
Restaurant Food
Price ($)
P1
Loss
Gain
P2
0
Q1
D
Q2
Quantity/period
(2 marks)
C. Structured Questions
1.
In Hong Kong, there are two markets for student textbook, i.e., new textbook market and
second-hand textbook market. They are substitutes to each other. (The following are two
isolated cases.)
(a) Suppose the production cost of new textbook increases, and the total revenues of the
sellers in the two markets increase. Explain this situation in both markets.
(7 marks)
The increase in the production cost of new textbook will lead to a decrease in the supply.
Thus, the price will increase and the sales volume will decrease.
(2 marks)
The total revenue of new textbook sellers will increase because the demand for new
textbook is inelastic. The percentage increase in price is greater than the percentage
decrease in quantity sold.
(2 marks)
As the price of new textbook increases, the demand for old textbook (substitutes) will
increase. Thus the price, quantity transacted and total revenue will increase.
(3 marks)
(b) Suppose new textbook is a superior good, old textbook is an inferior good. In a certain
year, Hong Kong’s economy experienced recession, people’s income decreased, and the
production cost of textbook remained constant. With the aid of a diagram, explain the
changes in the revenues for the 2 markets and the textbook sellers.
(10 marks)
The decrease in income will decrease the demand for new textbook (superior goods). The
price, quantity sold and total revenue will decrease.
(3 marks)
The decrease in income will increase the demand for old textbook (inferior goods). The
price, quantity sold and total revenue will all increase.
(3 marks)
(4 marks)
2.
Mrs Tung goes shopping at ‘Best Price Supermarket’ every week. The following table shows
the price changes of the goods at ‘Best Price Supermarket’ and the quantity of goods bought by
Mrs Tung this week.
Product
(I)
Wine
Original Price
New Price
$700 / bottle
$750 / bottle
Quantity Bought By
Mrs Tung
Decrease in consumption:
From 2 bottles to 1 bottle
(II) Orange
$4 / piece
$5 / piece
Decrease in consumption:
From 12 pieces to 10 pieces
(III) Apple
$2 / piece
$1.5 / piece
Increase in consumption:
From 10 pieces to 18 pieces
(IV) Coffee
$20 / can
$25 / can
Keep constant: 2 cans
(V) Toilet Paper
$30 / pack
$10 / pack
Increase in consumption:
(12 rolls)
(a) Calculate the demand elasticity for the above five products.
From 1 pack to 3 packs
(10 marks)
(I) Ed = −[
]
= 9.67
(II) Ed = −[
(2 marks)
]
= 0.82
(III) Ed = −[
(2 marks)
]
=2
(IV) Ed = −[
(2 marks)
]
=0
(V) Ed = −[
(2 marks)
]
=1
(2 marks)
(b) State THREE possible factors that may affect Mrs Tung’s consumption.
(6 marks)
Factors affecting the elasticity of demand:
•
The more substitutes a good has, the higher will be its price elasticity of demand.
•
The higher degree of necessity a good is, the lower will be its price elasticity of
demand.
•
The more function a good has, the higher will be its price elasticity of demand.
•
The greater the proportion of consumers’ income spent on a good, the more will be
its price elasticity of demand.
•
The more durable a good is, the higher will be its price elasticity of demand.
•
If a good can make consumers addict to it, its price elasticity of demand will be
lower.
•
The longer the duration is, the higher will be the good’s price elasticity of demand.
(Any 3 points, 2 marks each, maximum: 6 marks)
3.
News Extracts:
No. 1: Petroleum exporting countries reduce their production, leading to an increase in the
petroleum price. Both bus and taxi companies in Hong Kong request for increasing
their fares. The spokesman of these companies insists that this request is not for the
purpose of increasing their profit. On the contrary, their revenue would decrease.
No. 2: The government has regulated that wordings “Cigarette is Hazardous to Health”
should be printed on the package of cigarettes and imposed sales tax on the cigarette
sellers. However, the anti-smoking campaign seems not so successful.
No. 3: A few people have eaten poisonous vegetables incautiously. The vegetable sellers say
that the recent sales volume of Choi Sum (菜心) has decreased by 50%.
No. 4: Although the government has increased the first registration fee to a great extent, the
spokesman of Mercedes Benz says that their revenue increases sharply.
No. 5: Daimaru Department Store (大丸百貨公司) will close its business soon. In order to
clear their stocks, the store has decreased the prices of products for many times. A lot
of people queue outside the store for buying cheaper goods.
(a) Which of the above news extracts is unrelated to the price elasticity of demand? Explain
with the aid of a diagram.
(5 marks)
The incidence of poisonous vegetables decreases the demand for Choi Sum because
consumers worry that their health will be affected adversely after eating those vegetables.
The demand curve shifts from D0 to D1.
(1 mark)
Quantity sold decreases from Q0 to Q1.
It is unrelated to the price elasticity of demand. It is only a decrease in demand. (2 marks)
(2 marks)
(b) (i)
With the aid of a diagram explain why an increase in the fare of taxi would lead to a
decrease in their revenue.
(6 marks)
The demand for taxi in the market is elastic. As the passengers can choose to take
other means of transportation, there are many substitutes for taxi.
(1 mark)
If the price of oil increases sharply, the cost of running taxi business will increase
and the supply of taxi will decrease. The supply curve will shift leftward from S0 to
S1. The price will increase to P1 and the quantity supplied will decrease to Q1.(1 mark)
The increase in revenue resulting from the changes in price (P0P1AB) will be smaller
than the decrease in revenue resulting from the fall in quantity transacted (Q0Q1BC).
Thus, the total revenue of the taxi company will decrease.
(2 marks)
(2 marks)
(ii) Would the bus company face the same situation as taxi? Explain with the aid of a
diagram.
(6 marks)
The demand for bus is inelastic.
(1 mark)
As bus is the most common means of transportation for the public, it is very difficult
to find substitutes for bus services.
(1 mark)
The increase in revenue resulting from the increase in price (P0P1AB) will be more
than the decrease in revenue resulting from the fall in quantity transacted (Q0Q1BC).
Thus, the total revenue of the bus company will increase.
(2 marks)
(2 marks)
(c) The anti-smoking campaign in Hong Kong is not very successful. Is there any
relationship between such result and the price elasticity of demand? Explain.
(3 marks)
Smokers are addicted to smoking. Thus, the smokers’ demand for cigarette is inelastic or
even perfectly inelastic. As a result, the anti-smoking campaign is not very successful.
(3 marks)
(d) (i)
According to the news extract no. 4, what is the price elasticity of demand for Benz
in Hong Kong? Explain.
(2 marks)
An increase in the first registration fee makes the supply curve shift upward. The
price increases but the quantity sold decreases. An increase in price will lead to an
increase in total revenue only if the demand is inelastic.
(2 marks)
(ii) Explain why the demand for Benz belongs to this type of price elasticity of demand.
(2 marks)
Factors contributing to an inelastic demand for Benz:
•
Few substitutes – The consumers of Benz are rich. Benz is the symbol of social
status and it is difficult to find substitutes (moreover, the prices of its
substitutes, i.e., other valuable automobiles, will also increase because of the
increase in first registration fee).
•
Degree of necessity – For the rich, a valuable automobile may be a necessity.
•
Proportion to their income – For the rich, the increase in the price of
automobiles resulting from the increase in the first registration fee occupy only
a very little proportion of their income.
(Any 1 point, 2 marks each, maximum: 2 marks)
(e) (i)
What is the price elasticity of supply for the clearance sale of Daimaru Department
Store?
(1 mark)
The supply of Daimaru’s product is perfectly inelastic.
(ii) With the aid of a diagram, explain the phenomenon of the long queue.
(1 mark)
(5 marks)
As the number of stocks is fixed, the supply is perfectly inelastic.
Daimaru Department Store further decreases the prices of their products. When the
price is set lower than the equilibrium price (P1), excess demand will exist (Q1 – Q0).
It leads to a long queue outside the department store.
(3 marks)
(2 marks)
4.
Mr Ma says, “As long as I can afford it, regardless of the price, I will not consume less
cigarettes.”
Mr Mak says, “I want to set a good example for my daughter. Thus, I will stop smoking
immediately.”
(a) Suppose all of the smokers’ behaviours in Hong Kong are the same as that of Mr Ma and
the government imposes a per-unit tax on cigarette producers. With the aid of a diagram,
explain
(i)
how would the equilibrium price and quantity transacted of cigarette change?
(7 marks)
As the demand for cigarette is perfectly inelastic, the demand curve is a vertical
straight line.
(2 marks)
When the government imposes a per-unit tax $t, the supply curve moves leftward
from S to S1.
(1 mark)
The equilibrium price of cigarette increase from P0 to P1.
(1 mark)
The quantity transacted remains constant at Q0.
(1 mark)
(2 marks)
(ii) how much tax burden would the cigarette producers bear?
(4 marks)
The government imposes a per-unit tax $t (i.e., P0P1) on each pack of cigarette sold;
the quantity transacted of cigarette is Q0 packs so the total tax will be P0P1AB.
(2 marks)
As the demand is perfectly inelastic, the cigarette sellers will transfer all tax burdens
to the consumers. They use the increased revenue resulting from the increase in price
to pay the tax, so the sellers do not need to take any tax burdens on cigarette.
(2 marks)
(b) (i)
What is “the law of demand”?
(2 marks)
The law of demand states that the quantity demanded varies inversely with prices,
ceteris paribus in a certain period of time and other factors being unchanged, and
vice versa.
(2 marks)
(ii) Explain whether these two people's behaviours violate the law of demand. (4 marks)
Mr Ma would not change his quantity demanded whatever the price of cigarette is.
His behaviour violates the law of demand.
(2 marks)
Mr Mak's behaviour shows the change in demand for cigarette. The change in
demand is caused by factors other than the change in price, such as setting a good
example for his daughter. Mr Mak’s behaviour does not violate the law of demand.
(2 marks)
5.
Since 1999, the fishing moratorium was enforced in South China Sea between June and July.
All fishermen should return to Hong Kong and cannot catch fishes.
(a) Explain the situation of the imported frozen seafood market between June and July with
the aid of diagrams.
(6 marks)
Imported frozen seafood is a substitute for local fresh fishes.
(1 mark)
As the supply of local fresh fishes decreases, the price increases. It leads to an increase in
the demand for frozen seafood (from D0 to D1). Both prices and quantity sold of frozen
seafood will increase.
(3 marks)
(2 marks)
(b) After the fishing moratorium, the number of fishes in the South China Sea increases
largely; however, many fishermen still worry that the ending of fishing moratorium may
not have positive effects on their income. Explain the fishermen's worry with the aid of a
diagram.
(6 marks)
After the fishing moratorium, the supply of local fresh fishes increases sharply (from S0 to
S1). The price decreases and the quantity sold increases.
(2 marks)
If the demand for fresh fishes is inelastic, the percentage decrease in price will be greater
than the percentage increase in quantity sold. As a result, the total income of fishermen
will decrease.
(2 marks)
(2 marks)
6.
Consider the following supply schedule of tomatoes.
Price ($) per Kg
Quantity Supplied (Kg) per Day
2
100
4
250
(a) Calculate the elasticity of supply over the price range from $2 to $4.
(5 marks)
(5 marks)
(b) Explain how time affects the elasticity of supply of tomatoes.
(4 marks)
It takes time to grow tomatoes. Therefore, in a short period of time, the supply of
tomatoes is inelastic.
(2 marks)
In a longer period of time, the supply of tomatoes becomes more elastic.
(2 marks)
(c) Heavy rain has destroyed a huge crop of tomatoes. With the aid of a diagram, explain how
this affects the supply of tomatoes.
(4 marks)
The rain causes a decrease in the supply of tomatoes.
(2 marks)
Tomatoes
Price ($)
S2
0
S1
Quantity/period
(2 marks)