NSS Exploring Economics 1 (3rd Edition)

Chapter 6 Government intervention (I)

Exercises pp.209-211
Multiple Choice Questions

1. The following diagram shows the price ceiling that the government has imposed on Good
X:

If the government raises the price ceiling to a higher level, there will be
A. a greater excess supply of Good X.
B. no change in the quantity transacted of Good X.
C. an increase in the quantity transacted of Good X.
D. an increase in the price of Good X.

2.* Which of the following descriptions is correct if the government imposes an effective
price ceiling in the petrol market?
A. A black market where illegal transactions of petrol will necessarily emerge.
B. Drivers’ cost of obtaining petrol may increase after the imposition of the ceiling.
C. The demand for private petrol cars will increase due to the decrease in the petrol price.
D. All of the above

3. In Country X, an effective price ceiling on bus fares is removed. Which of the following
statements about the effects is INCORRECT?
A. The bus fares increase.
B. The quantity transacted of bus service increases.
C. The demand for bus drivers increases.
D. The total revenue of bus companies may decrease if the demand is elastic.

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4. Based on supply-demand analysis, the introduction of an effective minimum wage will
cause
(1) a decrease in the quantity demanded for labour.
(2) an increase in the total wages earned by workers.
(3) an increase in the number of unemployed workers.
A. (1) and (2) only
B. (1) and (3) only
C. (2) and (3) only
D. (1), (2) and (3)

5. A famous singer schedules a concert in Hong Kong. However, there are unsold tickets.
This implies that
A. consumers have to engage in non-price competition for the tickets.
B. the government has imposed a minimum price control on the tickets.
C. the concert ticket revenue would decrease if the tickets were sold at a lower price.
D. the concert ticket price is set above the equilibrium level.

6. Refer to the following demand and supply schedules of Good X for which the government
controls and fixes the price at $17.
Unit price Quantity demanded Quantity supplied
($) (units/day) (units/day)
19 30 65
17 40 55
15 50 50
13 60 45
11 70 40
9 80 35
Suppose the government lowers the controlled price of Good X to $13, the total expenditure
for Good X will
A. increase by $70.
B. increase by $100.
C. decrease by $95.
D. increase or decrease depending on elasticity of demand.

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7. The following table shows the supply and demand schedules of a good.
Price ($) 40 45 50 55 60
Qd (units) 200 180 160 140 120
QS (units) 80 100 120 140 160
If the government imposes a quota of 120 units on the good, total expenditure on the good
will
A. decrease by $1,700.
B. decrease by $500.
C. increase by $300.
D. increase by $1,900.

8. After the government increases the quota on a good, the quota becomes ineffective. Which
of the following will happen?
A. The quota is not used up.
B. Excess demand will disappear.
C. Total expenditure will fall if the demand is elastic.
D. All of the above

9. If the Hong Kong government reduces the effective daily quota on fresh chickens imported
from the mainland, then
A. the average quality of fresh chickens imported from the mainland will rise.
B. Hong Kong’s demand for fresh chickens imported from the mainland will decrease.
C. the local supply of fresh chickens in Hong Kong will increase.
D. the price of chilled chickens in Hong Kong will decrease.

10. Under which of the following would the total revenue of farmers of agricultural products
necessarily increase?
A. The government raises the effective maximum price for agricultural products to a level
above the equilibrium price.
B. The government raises the effective minimum price for agricultural products.
C. The government removes the effective quota imposed on agricultural products.
D. None of the above

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11. Refer to the following supply and demand for Good Z.

Which of the following statements is/are correct?

(1) If a minimum price is set at P1, the total revenue is equal to P1 × Q1.
(2) If a quota is imposed at Q1, the total revenue is equal to P3 × Q1.
(3) If a maximum price is set at P1, the total revenue is equal to P2 × Q2.
A. (1) only
B. (1) and (2) only
C. (1) and (3) only
D. (2) and (3) only

12. The following table shows the demand and supply schedules for Good Y.
Unit price Quantity demanded Quantity supplied
($) (units) (units)
11 18 14
12 16 16
13 14 18
14 12 20
The government can restrict the quantity transacted to 14 units by imposing
(1) a price ceiling at $13.
(2) a price ceiling at $11.
(3) a price floor at $13.
(4) a price floor at $11.
A. (1) and (3) only
B. (1) and (4) only
C. (2) and (3) only
D. (2) and (4) only

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pp.211-212
Short Questions
1.
‘After the imposition of an effective price ceiling on Good X, the full cost of buying Good X
must fall.’ Do you agree? Explain. (5 marks)

2.
The Hong Kong government has restricted imports of fresh chickens from the mainland when
there are outbreaks of avian flu. With the aid of a supply-demand diagram, explain how the
price and the quantity transacted of the imported fresh chickens from the mainland will
change if
● the effective daily import quota was reduced; and
● the price of chilled chickens sharply increased. (10 marks)

3.
Given the following information about the market for LCD TV sets:
Price Quantity demanded Quantity demanded
($ / unit) (units / period) (units / period)
12,000 2,500 6,500
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 is the equilibrium price of LCD TV sets? (1 mark)
b. What are the effects on quantity sold and producers‘ total revenue if the government
imposes
i. a minimum price of $10,000? (3 marks)
ii. a minimum price of $6,000? (3 marks)
iii. maximum quantity control of 2,500 units? (3 marks)

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4.
To protect domestic car manufacturers, the government of Country Y imposes an effective
quota for imported cars.
a. Without using any diagram, explain how the imposition of a quota for imported cars can
help increase the income of domestic car manufacturers. (4 marks)
b. Suppose there is a prolonged labour strike in the car manufacturing industry in Country
Y. With the aid of a diagram, explain how consumers’ expenditure on imported cars will
be affected. (8 marks)

pp.212-213
Structured questions
1.
The following figure shows the market supply and demand curves for construction workers.
Suppose the government imposes a minimum wage at the equilibrium wage W1.

With the aid of TWO separate diagrams, explain whether the total earnings of construction
workers will necessarily decrease under the following situations:
a. Some developers have suspended a few property development projects due to insufficient
funding. (7 marks)
b. A significant proportion of construction workers have retired. (9 marks)

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2.
In Country B, an effective price ceiling has been imposed on the electricity market.
a. What is the effect on the total expenditure for electricity if the government lowers the
price ceiling? Draw a supply-demand diagram to illustrate your answer. (5 marks)
b. Suppose that the price ceiling remains unchanged. With the aid of TWO separate
diagrams, explain the effects of the following independent events on the quantity of
electricity sold and total sales revenue.
i. Electric cars become increasingly popular in Country B. (5 marks)
ii. An increase in the price of natural gas, which is a major input for electricity
generation. (6 marks)

3.
The government aims to discourage people from smoking.
a. With the aid of THREE separate diagrams, explain how the consumption of cigarettes
can be reduced by the following measures:
i. Imposing an effective quota on the market for cigarettes (4 marks)
ii. Banning smoking in all public places (4 marks)
iii. Setting an effective minimum price for cigarettes (4 marks)
b. Which of the measures mentioned in part (a) will most likely lead to a decrease in the
total sales revenue of cigarettes? Briefly explain your answer. (3 marks)