NSS Exploring Economics 3 (Second Edition) : Consolidation Worksheets

NSS Exploring Economics 3 (Second Edition)
Consolidation Worksheets
Chapter 16 Competition and efficiency
Test yourself
16.1 Refer to the following table.
Quantity MB
MC ($)
(units) ($)
1 13 1
2 11 2
3 8 3
4 4 4
5 0 5
Calculate the value of the deadweight loss for each of the following output
levels. Based on your result, determine which of them is inefficient.
a. 2 units
b. 4 units
c. 5 units
Answers:
a. Deadweight loss = (______ of 3rd unit – ______ of 3rd unit) + (______ of 4th
unit – ______ of 4th unit) = $__ + $__ = $__  Efficient / Inefficient
b. Deadweight loss = $__  Efficient / Inefficient
c. Deadweight loss = ______ of 5th unit – ______ of 5th unit = $__  Efficient /
Inefficient
16.2 Summarise the effects of an effective price ceiling and an effective price floor
in a perfectly competitive market by choosing the correct answers in the table
below.
NSS Exploring Economics 3 (Second Edition) 1 © Pearson Education Asia Limited 2014
Consolidation Worksheets (Chapter 16)
Answers:
Effective price Effective price

ceiling floor
Is MB greater than, equal
to or smaller than MC at MB > / = / < MC MB > / = / < MC
quantity transacted?
Change in TSS  /  / uncertain  /  / uncertain
Yes / No Yes / No
Achieve efficiency in
(underproduction / (underproduction /
resource allocation?
overproduction) overproduction)
Change in Q  /  / uncertain  /  / uncertain
Change in P  /  / uncertain  /  / uncertain
Change in CS  /  / uncertain  /  / uncertain
Change in PS  /  / uncertain  /  / uncertain
16.3 Suppose the government has imposed an effective price ceiling on rental
housing. Without using a diagram, what can you tell about the change in TSS
and the state of market efficiency under each of the following situations?
a. The price ceiling becomes ineffective due to a decrease in demand for rental
housing.
b. The government removes the price ceiling.
Answers:
a. TSS will increase / decrease but market efficiency is / is not achieved.
b. TSS will increase / decrease and market efficiency is / is not achieved.
16.4 Applying what you have learned in this chapter, explain why an effective
minimum wage may NOT benefit the workers.
Answers:
In terms of producer surplus (PS), workers as a whole may be worse off under
an effective minimum wage if the gain / loss in PS (due to wage increase) is
greater / smaller than the gain / loss in PS (due to quantity decrease).
16.5 Summarise the effects of an effective quota in a perfectly competitive market
by choosing the correct answers in the table below.
Answers:

to or smaller than MC at MB > / = / < MC
Change in TSS  /  / uncertain
Yes / No
(underproduction
/overproduction)
Change in Q  /  / uncertain
Change in P  /  / uncertain
Change in CS  /  / uncertain
Change in PS  /  / uncertain
16.6 Suppose the government increases a unit tax on a good. Explain how this would
affect the following:
a. Consumer surplus
b. Producer surplus
c. Government’s tax revenue
d. Total social surplus
Answers:
a. Increase / Decrease. This is because the market price increases / decreases
and the quantity consumed increases / decreases.
b. Increase / Decrease. This is because both the price received and the quantity
sold increase / decrease.
c. Uncertain. The change in tax revenue depends on the __________ of
demand and supply.
d. Increase / Decrease. Even if the tax revenue increases, the extra tax revenue
collected is still greater / smaller than the increase / decrease in the sum of
the consumer surplus and the producer surplus.
Short Questions
1. What is efficiency in resource allocation? What is the condition of efficiency in

resource allocation? (4 marks)
Answers:
Efficiency in resource allocation is attained when the total social surplus (TSS) is
__________.
When only consumers and producers are in the market, TSS is the sum of the
consumer surplus (CS) and the producer surplus (PS). __________ is attained
when the sum of CS and PS is maximised. This requires that the marginal benefit
of a good be equal to its _____________.
2. Use a supply-demand diagram to illustrate how a perfectly competitive market

can lead to efficient allocation of resources. (6 marks)
Answers:
 In a perfectly competitive market, the demand curve reflects MB / MC
curve while the supply curve reflects MB / MC curve.
 When the market is in equilibrium, the demand curve intersects the supply
curve, so ___ = MC.
 This means the allocation of resources is efficient.
$
S = MC
Pe MB = MC
D = MB
0 Q
Qe
3. a. What is deadweight loss? (2 marks)

b. ‘An effective price floor will increase producer surplus.’
Do you agree with the above statement? Illustrate your answer with a
diagram. (4 marks)
Answers:
a. Deadweight loss is
 potential gains not being captured when MB > / = / < MC;
 the loss in total social surplus when MB > / = / < MC.
b.  Yes / No.
 If the gain in producer surplus is smaller than (or equal to) the loss in
producer surplus, the producer surplus will ________ (remain
unchanged).
Show the gain and the loss in producer surplus in the following
diagram respectively.
$
S = MC
Pf
Price floor
Pe
D = MB
0 Qf Qe Q
4. Explain how price ceilings would lead to inefficient allocation of resources.

Illustrate your answer with a supply-demand diagram. (5 marks)
Answers:
 An effective price ceiling will raise / lower the quantity supplied above /
below the efficient level.
 Therefore, resource allocation is efficient / inefficient.
Show the deadweight loss in the following diagram.

$
S = MC
Pc
Price ceiling
D = MB
0 Qc Qe Q
5. The Hong Kong Government has set a minimum wage for foreign domestic
helpers. Use a diagram to show the deadweight loss arising from such a policy.
(5 marks)
Answers:
 The effective minimum wage will raise / lower the quantity transacted
above / below the efficient level.
 MB > / = / < MC at the new quantity transacted.
 The shaded area represents the deadweight loss from overproduction /
underproduction.
Show the minimum wage in the following diagram.
$
Deadweight loss
S = MC
D = MB
0 Qe Q
Qm
*6. Suppose an effective quota is initially imposed on Good X. Assess the effects on
efficiency if the quota is removed. Illustrate your answer with a supply-demand
diagram. (5 marks)
Answers:
 After the removal of an effective quota, perfectly competitive market
equilibrium is attained.
 The quantity transacted will increase so that MB > / = / < MC.
 Efficiency in resource allocation will be achieved. The gain in TSS will be
the deadweight loss under the quota.
0
$
Quota
Qq
Qe
D = MB
S = MC
Quantity of Good X
Deadweight loss under quota

Gain from removal of quota =
Structured Questions
1. a. With the use of supply-demand diagrams, compare the effects of a unit tax
and a unit subsidy on the following:
i. the market price
ii. the quantity transacted (6 marks)
*b. In light of your answer in (a), explain why there is a deadweight loss when
the government imposes a unit tax or provides a unit subsidy. Illustrate your
answer with the use of supply-demand diagrams in (a). (6 marks)
Answers:
a. i. The market price of a good will increase / decrease under a unit tax but
will increase / decrease under a unit subsidy.
ii. The quantity transacted of a good will increase / decrease under a unit
tax but will increase / decrease under a unit subsidy.
$ $
S’ = MC + unit tax
S = MC S = MC
Tax S’ = MC–unit subsidy
Pt Subsidy
Pe Pe
Py
D = MB D = MB
0 Q 0 Q
Qt Qe Qe Qy
b. In both cases, MB ≠ MC. Thus, the total social surplus can be increased by
adjusting (increasing or decreasing) the ____________. This implies that
there is a deadweight loss from government intervention.
Show the deadweight loss in the following diagrams.

$ $
S = MC S = MC
Pt Subsidy
Pe Pe
Py
D = MB D = MB
0 Q 0 Q
Qt Qe Qe Qy
2. The following is information about the market for LCD televisions:
Price ($) Quantity demanded (units) Quantity supplied (units)

10,000 3,000 5,000
8,000 3,500 3,500
6,000 4,000 2,000
4,000 4,500 500
a. What are the equilibrium price and output level? (2 marks)
b. Is the output level in part (a) efficient? Explain your answer. (2 marks)
*c. Explain if there is any deadweight loss in the following cases:
i. The government sets a maximum price at $6,000 per unit; (2 marks)
ii. The government sets a maximum price at $10,000 per unit. (2 marks)
Answers:
a. Equilibrium price is $______.
Equilibrium output level is ______ units.
b. Yes / No. The output level is efficient / inefficient.
This is because marginal benefit _______ marginal cost (= $8,000) at that
output level.
c. i. Since the maximum price is effective / not effective, the output is more
than / still at / less than the efficient level (of 3,500 units).
Thus, there is a deadweight loss associated with overproduction /
underproduction.
ii. Since the maximum price is effective / not effective, the output is more
than / still at / less than the efficient level.
Thus, there is no deadweight loss.
3. The following is information about the market for MP3 players:
Quantity (units) Marginal benefit ($) Marginal cost ($)

1,000 500 300
2,000 350 350
3,000 200 400
4,000 50 450
a. Is 1,000 units an efficient level of output? Is there underproduction or

overproduction of MP3 players? Explain. (3 marks)
b. Is 3,000 units an efficient level of output? Is there underproduction or
c. Is 2,000 units an efficient level of output? Is there underproduction or
*d. Suppose the government imposes a quota of 1,000 units on MP3 players.
i. What is the quantity transacted in this case? (2 marks)
ii. Is the quantity transacted efficient? Is there any underproduction or
overproduction? Explain your answers with a supply-demand diagram.
(6 marks)
Answers:
a. It is efficient / inefficient. There is underproduction / overproduction.
This is because MB > MC ($500 > $300) at this output level.
b. It is efficient / inefficient. There is underproduction / overproduction.
This is because MB < MC ($200 < $400) at this output level.
c. It is efficient / inefficient (there is no underproduction or overproduction).
This is because MB = MC ($350 = $350) at this output level.
d. i. The quantity transacted will be restricted to the quota limit of ______
units.
ii.  The quantity transacted is efficient / not efficient. There is
underproduction / overproduction.
 This is because MB > MC at this output level.
$ Quota = 1000 units
500 S = MC
450
400
350
300
250
200
150
100
D = MB
50
0 Q
1000 2000 3000 4000 5000
Suggested Answers
Test yourself
16.1 a. Deadweight loss = (MB of 3rd unit – MC of 3rd unit) + (MB of 4th unit –
MC of 4th unit) = $5 + $0 = $5 → Inefficient
b. Deadweight loss = $0 → Efficient
c. Deadweight loss = MC of 5th unit – MB of 5th unit = $5 → Inefficient
16.2
Effective price Effective price
ceiling floor
to or smaller than MC at MB > MC MB > MC
Change in TSS  
Achieve efficiency in No No
resource allocation? (underproduction) (underproduction)
Change in Q  
Change in P  
Change in CS uncertain 
Change in PS  uncertain
16.3 a. TSS will decrease but market efficiency is achieved.

b. TSS will increase and market efficiency is achieved.
16.4 In terms of producer surplus (PS), workers as a whole may be worse off under
an effective minimum wage if the gain in PS (due to wage increase) is smaller
than the loss in PS (due to quantity decrease).
16.5
to or smaller than MC at MB > MC
Change in TSS 
No (underproduction)
Change in Q 
Change in P 
Change in CS 
Change in PS uncertain
16.6 a. Decrease. This is because the market price increases and the quantity
consumed decreases.
b. Decrease. This is because both the price received and the quantity sold
decrease.
c. Uncertain. The change in tax revenue depends on the elasticities of demand
and supply.
d. Decrease. Even if the tax revenue increases, the extra tax revenue collected
is still smaller than the decrease in the sum of the consumer surplus and the
producer surplus.
Short Questions
1. Efficiency in resource allocation is attained when the total social surplus (TSS) is
maximised.
When only consumers and producers are in the market, TSS is the sum of the
consumer surplus (CS) and the producer surplus (PS). Efficiency is attained
when the sum of CS and PS is maximised. This requires that the marginal benefit
of a good be equal to its marginal cost.
2.  In a perfectly competitive market, the demand curve reflects MB curve

while the supply curve reflects MC curve.
 When the market is in equilibrium, the demand curve intersects the supply
curve, so MB = MC.
 This means the allocation of resources is efficient.
$
S = MC
Pe
MB = MC
D = MB
0 Qe Q
3. a. Deadweight loss is
 potential gains not being captured when MB > MC;
 the loss in total social surplus when MB < MC.
b.  No.
 If the gain in producer surplus is smaller than (or equal to) the loss in
producer surplus, the producer surplus will decrease (remain
unchanged.)
$ X: Gain in PS
Y: Loss in PS
S = MC
Pf
Price floor
Pe X X < Y
Y
D = MB Producer surplus
0 Qf Qe Q
4.  An effective price ceiling will lower the quantity supplied below the
efficient level.
 Therefore, resource allocation is inefficient.
$
S = MC Deadweight loss
Pc
Price ceiling
D = MB
0 Qc Qe Q
5.  The effective minimum wage will lower the quantity transacted below the
efficient level.
 MB > MC at the new quantity transacted.
 The shaded area represents the deadweight loss from underproduction.
$
S = MC
Deadweight loss
Wm Minimum wage
D = MB
0 Qe Q
Qm
6.  After the removal of an effective quota, perfectly competitive market

equilibrium is attained.
 The quantity transacted will increase so that MB = MC.
 Efficiency in resource allocation will be achieved. The gain in TSS will be
the deadweight loss under the quota.
0
$
Quota
Qq
Qe
D = MB
S = MC
Quantity of Good X
Deadweight loss under quota

Gain from removal of quota =
Structured Questions
1. a. i. The market price of a good will increase under a unit tax but will
decrease under a unit subsidy.
ii. The quantity transacted of a good will decrease under a unit tax but
will increase under a unit subsidy.
$ $
S = MC S = MC
Pt Subsidy
Pe Pe
Py
D = MB D = MB
0 Q 0 Q
Qt Qe Qe Qy
b. In both cases, MB ≠ MC. Thus, the total social surplus can be increased by
adjusting (increasing or decreasing) the output level. This implies that
there is a deadweight loss from government intervention.
Deadweight loss
$ $
S = MC S = MC
Pt Subsidy
Pe Pe
Py
D = MB D = MB
0 Q 0 Q
Qt Qe Qe Qy
2. a. Equilibrium price is $8,000.

Equilibrium output level is 3,500 units.
b. Yes. The output level is efficient.
This is because marginal benefit equals marginal cost (= $8,000) at that
output level.
c. i. Since the maximum price is effective, the output is less than the
efficient level (of 3,500 units).
Thus, there is a deadweight loss associated with underproduction.
ii. Since the maximum price is not effective, the output is still at the
efficient level.
Thus, there is no deadweight loss.
3. a. It is inefficient. There is underproduction.

This is because MB > MC ($500 > $300) at this output level.
b. It is inefficient. There is overproduction.
This is because MB < MC ($200 < $400) at this output level.
c. It is efficient (there is no underproduction or overproduction).
This is because MB = MC ($350 = $350) at this output level.
d. i. The quantity transacted will be restricted to the quota limit of 1,000
units.
ii.  The quantity transacted is not efficient. There is
underproduction.
 This is because MB > MC at this output level.
$ Quota = 1000 units
500 S = MC
450
400
350
300
250
200
150
100
D = MB
50
0 Q
1000 2000 3000 4000 5000

NSS Exploring Economics 3 (Second Edition) : Consolidation Worksheets

Uploaded by

Document Information

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

NSS Exploring Economics 3 (Second Edition) : Consolidation Worksheets

Uploaded by

Copyright:

Available Formats

NSS Exploring Economics 3 (Second Edition)

Chapter 16 Competition and efficiency

unit – ______ of 4th unit) = $__ + $__ = $__  Efficient / Inefficient

b. Deadweight loss = $__  Efficient / Inefficient

Effective price Effective price

b. TSS will increase / decrease and market efficiency is / is not achieved.

an effective minimum wage if the gain / loss in PS (due to wage increase) is

greater / smaller than the gain / loss in PS (due to quantity decrease).

Is MB greater than, equal

and the quantity consumed increases / decreases.

sold increase / decrease.

c. Uncertain. The change in tax revenue depends on the __________ of

demand and supply.

the consumer surplus and the producer surplus.

1. What is efficiency in resource allocation? What is the condition of efficiency in

of a good be equal to its _____________.

2. Use a supply-demand diagram to illustrate how a perfectly competitive market

 In a perfectly competitive market, the demand curve reflects MB / MC

curve while the supply curve reflects MB / MC curve.

curve, so ___ = MC.

 This means the allocation of resources is efficient.

3. a. What is deadweight loss? (2 marks)

 potential gains not being captured when MB > / = / < MC;

 the loss in total social surplus when MB > / = / < MC.

producer surplus, the producer surplus will ________ (remain

4. Explain how price ceilings would lead to inefficient allocation of resources.

Show the deadweight loss in the following diagram.

 The quantity transacted will increase so that MB > / = / < MC.

 Efficiency in resource allocation will be achieved. The gain in TSS will be

the deadweight loss under the quota.

Deadweight loss under quota

will increase / decrease under a unit subsidy.

tax but will increase / decrease under a unit subsidy.

adjusting (increasing or decreasing) the ____________. This implies that

there is a deadweight loss from government intervention.

Show the deadweight loss in the following diagrams.

2. The following is information about the market for LCD televisions:

Price ($) Quantity demanded (units) Quantity supplied (units)

Equilibrium output level is ______ units.

b. Yes / No. The output level is efficient / inefficient.

This is because marginal benefit _______ marginal cost (= $8,000) at that

Thus, there is a deadweight loss associated with overproduction /

than / still at / less than the efficient level.

Thus, there is no deadweight loss.

3. The following is information about the market for MP3 players:

Quantity (units) Marginal benefit ($) Marginal cost ($)

a. Is 1,000 units an efficient level of output? Is there underproduction or

16.3 a. TSS will decrease but market efficiency is achieved.

2.  In a perfectly competitive market, the demand curve reflects MB curve

6.  After the removal of an effective quota, perfectly competitive market

 Efficiency in resource allocation will be achieved. The gain in TSS will be

the deadweight loss under the quota.

Deadweight loss under quota

2. a. Equilibrium price is $8,000.

3. a. It is inefficient. There is underproduction.

You might also like

unit – ____ of 4th unit) = $ + $ = $  Efficient / Inefficient