Chapter 13 Efficiency, Equity and the Role of Government (I)

▍Consumer surplus and producer surplus

1. In which of the following situations will consumer surplus decrease?

(1) an increase in price
(2) an increase in demand
(3) a decrease in supply
A. (1) and (2) only
B. (1) and (3) only
C. (2) and (3) only
D. (1), (2) and (3)

2. Below is the cost schedule of a price-taking firm. There is a fixed cost of $10.

Quantity (units) Total variable cost ($)

1 25
2 55
3 90
4 130
5 175

Suppose the market price is $40. Which of the following statements about the firm is CORRECT?
(1) Its profit-maximising output level is 4 units.
(2) At the profit-maximising output level, its profit is $30.
(3) At the profit-maximising output level, its total producer surplus is $30.
A. (1) and (2) only
B. (1) and (3) only
C. (2) and (3) only
D. (1), (2) and (3)

3. Suppose people turn to buy gold to avoid risk in investing in shares. This leads to an increase in the
demand for gold. As a result,
A. consumer surplus will decrease.
B. benefit of society as a whole will decrease.
C. the price of gold will decrease.
D. producer surplus will increase.

©Aristo Educational Press Ltd. 99

HKDSE Economics in Life (2nd Edition) Exam Kit

4. Suppose the demand curve of good X is downward sloping and its supply curve is upward sloping.
An increase in its popularity will result in
(1) an increase in consumer surplus.
(2) an increase in producer surplus.
(3) an increase in the marginal benefit of consuming the last unit of good X.
A. (2) only
B. (1) and (2) only
C. (2) and (3) only
D. (1), (2) and (3)

▍Conditions for efficiency

5. At an output level where the marginal cost of producers is higher than the marginal benefit of
consumers,
A. it is lower than the efficient output level.
B. increasing output can reduce deadweight loss.
C. reducing output can increase total social surplus.
D. producer surplus is maximised but consumer surplus is not maximised.

6. Which of the following statements about economic efficiency is CORRECT?

A. When society achieves efficiency, either an increase or a decrease in output will lead to a
decrease in total social surplus.
B. When the marginal benefit is higher than the marginal cost, society is inefficient because there
is over-production.
C. When the marginal benefit is lower than the marginal cost, society is inefficient because there
is under-production.
D. All of the above are correct.

▍Functions of price

7. Which of the following cases illustrate the rationing function of price?

(1) A property developer releases a few luxury properties for auction, and the highest bidders win.
(2) A manufacturer shuts down its production line of traditional mobile phones because of low
demand.
(3) Great demand for live chickens during the Chinese New Year pushes up their prices.
A. (1) and (2) only
B. (1) and (3) only
C. (2) and (3) only
D. (1), (2) and (3)

100
 Chapter 13 Efficiency, Equity and the Role of Government (I)

▍Deviations from efficiency

8. Suppose good X and good Y are in joint demand. Imposing an effective price ceiling on good X will
lead to
A. a decrease in total social surplus in the market of good Y.
B. an increase in consumer surplus in the market of good Y.
C. a decrease in producer surplus in the market of good X.
D. an increase in consumer surplus in the market of good X.

9. The diagram below shows the demand-supply diagram of a good. The government set a price ceiling
on the good at P1.
Unit price

P1

D
0 Quantity

Which of the following will be the result of increasing the price ceiling on the good?
A. Producers’ total revenue may increase, decrease or remain unchanged.
B. Producer surplus will increase.
C. Deadweight loss will increase.
D. As the change in consumer surplus is uncertain, the effect on total social surplus is ambiguous.

10. The price of public clinics is set below the market equilibrium. Suppose the government raises the
price of public clinics and at the same time the price of private clinics decreases. In the market of
public medical services,
(1) the producer surplus will increase.
(2) the consumer surplus will decrease.
(3) the deadweight loss will decrease.
A. (1) and (2) only
B. (1) and (3) only
C. (2) and (3) only
D. (1), (2) and (3)

©Aristo Educational Press Ltd. 101

HKDSE Economics in Life (2nd Edition) Exam Kit

11. The government of a country sets an effective minimum price control on good X. This will lead to
(1) a decrease in the quantity transacted of good X.
(2) a decrease in total social surplus.
(3) a decrease in producer surplus.
A. (1) and (2) only
B. (1) and (3) only
C. (2) and (3) only
D. (1), (2) and (3)

12. The diagram below shows the demand-supply diagram of good X in a perfectly competitive market.
The government sets a price floor at P1.

Unit price

S
P1

D
0 Quantity

Suppose the government lowers the price floor. Which of the following statements are CORRECT?
(1) Excess demand for good X decreases.
(2) Total social surplus in the market of good X increases.
(3) Producer surplus in the market of good X’s substitute decreases.
A. (1) and (2) only
B. (1) and (3) only
C. (2) and (3) only
D. (1), (2) and (3)

13. Which of the following is the result of the government raising an effective price floor on a good?
A. Total social surplus increases.
B. Producer surplus increases.
C. Consumer surplus decreases.
D. Total expenditure on the good increases.

102
 Chapter 13 Efficiency, Equity and the Role of Government (I)

14. The diagram below shows the demand-supply diagram of a good. The government sets a quota on the
good at Q1.
Unit price
Sq
S
A

B E

C
D
Quantity
0 Q1

Suppose the government decides to abolish the quota. Which of the following areas is the benefit of
abolishing the quota to society?
A. area A
B. area B
C. area C
D. area E

15. After the government of a country sets an effective quota on good X,

(1) the quality of good X may improve.
(2) producer surplus will increase.
(3) consumer surplus will decrease.
A. (3) only
B. (1) and (2) only
C. (1) and (3) only
D. (2) and (3) only

16. A government plans to impose a per-unit tax on the producers of good X. Which of the following
statements about the situation after the imposition of the tax is CORRECT?
A. Total social surplus will be equal to the sum of consumer surplus and producer surplus.
B. The marginal benefit curve will shift downwards.
C. Some potential gain cannot be captured.
D. The price paid by consumers will decrease.

©Aristo Educational Press Ltd. 103

HKDSE Economics in Life (2nd Edition) Exam Kit

17. The following diagram shows the demand and supply curves of a good.

Unit price
S2
A
t S1
B
P2
P1 C E
G
F

H D
0 Quantity
Q2 Q1
Suppose a per-unit tax of t is imposed. As a result,
A. the total social surplus is equal to area AEH.
B. the consumer surplus is equal to area ABP2.
C. the deadweight loss is equal to area BEC.
D. the producer surplus is equal to area P2BFH.

18. If the amount of per-unit tax on a good is lowered,

A. government tax revenue must decrease.
B. total expenditure on the good will decrease.
C. consumer surplus will increase.
D. efficiency will be worsened.

19. Suppose the supply curves of electric cars and petrol cars are upward sloping. If the government
provides a per-unit subsidy on the production of electric cars, total social surplus in the market of
electric cars will ________________ while total social surplus in the market of petrol cars will
________________.
A. increase … increase
B. decrease … decrease
C. increase … decrease
D. decrease … increase

20. Suppose the government provides a per-unit subsidy to the firms producing good X. Which of the
following is the result of the increase in the amount of subsidy?
A. Producer surplus and consumer surplus increase, leading to an improvement in efficiency.
B. There will be a greater deadweight loss.
C. The amount of subsidy provided equals the sum of producer surplus and consumer surplus.
D. The market equilibrium output level is closer to the efficient output level.

104
 Chapter 13 Efficiency, Equity and the Role of Government (I)

▍Divergence between private and social costs (benefits)

21. Which of the following is an example of divergence between private and social costs (benefits)?
A. A tutor receives payment to provide tutorial service in a community centre, but the tutorial
service is free of charge.
B. An artist performed in a fund-raising activity and received the rewards he deserved.
C. Someone using drones has caused privacy issues, but no compensation is given to the affected
parties.
D. A concert overrun by an hour and the organiser was fined.

22. When there is a divergence between private and social benefits,

(1) there is under-production.
(2) the marginal social benefit is higher than the marginal social cost.
(3) the government must intervene to eliminate the divergence.
A. (1) and (2) only
B. (1) and (3) only
C. (2) and (3) only
D. (1), (2) and (3)

23.
Using electronic cigarettes (e-cigarettes) is becoming more popular in Hong Kong.
E-cigarettes contain toxic chemical substances that are harmful to health and may cause
cancer and lead to death. The government has submitted proposals to the Legislative
Council seeking to completely ban e-cigarettes.

Refer to the above information. Which of the following statements are CORRECT?
(1) There is a divergence between private and social costs.
(2) Banning e-cigarettes is a government solution to reduce the external effects.
(3) E-cigarettes are over-produced.
A. (1) and (2) only
B. (1) and (3) only
C. (2) and (3) only
D. (1), (2) and (3)

©Aristo Educational Press Ltd. 105

HKDSE Economics in Life (2nd Edition) Exam Kit

1. The table below shows the information of total benefit and total cost of good X.

Quantity (units) Total benefit ($) Total cost ($)

1 80 50
2 150 100
3 210 160
4 260 230
5 300 310

(a) Suppose there is a fixed cost of $10. What are the equilibrium price and quantity? Explain
your answer. (3 marks)
(b) At the equilibrium quantity, what is the total consumer surplus? (2 marks)

2. Because of the fear of H7N9 bird flu, people eat less chicken. With the aid of a diagram, explain how
this will affect the market price and the quantity transacted of chicken, the producer surplus and the
consumer surplus. (9 marks)

3. State and explain the function of price illustrated in each of the following cases.
(a) As the demand for seafood drops, a supermarket purchases less seafood. (2 marks)
(b) The price of electric vehicles increases, so more firms produce electric vehicles instead of
petrol vehicles. (2 marks)
(c) Someone paid twice the price for a limited edition T-shirt from a tout. (2 marks)

4. Read the following information.

The rent for private rental housing in Hong Kong has always
been high, putting a heavy financial burden on low-income
households. Some people suggest the government re-introduce
rent control to put a cap on the absolute level of rent.

Suppose the rent control is effective. Explain how the rent control may lead to economic inefficiency
with the aid of a diagram. (4 marks)

5. A government hopes to improve the economic efficiency of the market for good X. Someone
suggests the government raise the effective price floor of good X. If you were the government, would
you adopt this suggestion? Explain your answer with the aid of a diagram. (4 marks)

106
 Chapter 13 Efficiency, Equity and the Role of Government (I)

6. The following diagram shows the supply and demand curves of alcoholic beverages.

Alcoholic beverages
Unit price

D
Quantity
0

To discourage the consumption of alcoholic beverages, a government proposes to impose a per-unit

tax on the production of alcoholic beverages.
(a) With the aid of the above diagram, explain how the imposition of the tax may result in
economic inefficiency. (4 marks)
(b) Using the same diagram, indicate the producer surplus and consumer surplus after the
imposition of the tax. (2 marks)

7. The table below shows the information of margianl benefit and marginal cost of a good.

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

1 32 8
2 28 12
3 24 16
4 20 20
5 16 24
6 12 28

(a) According to the above information, what are the equilibrium price and quantity transacted?
(2 marks)
(b) Suppose the government imposes a per-unit sales tax of $8 on the good.
(i) Construct the new marginal cost schedule of the good. (3 marks)
(ii) What are the new equilibrium price and quantity transacted? (2 marks)
(iii) How will the producer surplus change? Show your steps. (3 marks)

©Aristo Educational Press Ltd. 107

HKDSE Economics in Life (2nd Edition) Exam Kit

8. Refer to the following conversation of two students.

Student A: Providing a per-unit subsidy increases both producer

surplus and consumer surplus.
Student B: Yes, so providing a per-unit subsidy can improve
economic efficiency.

(a) Do you agree with student A? Illustrate your answer with a demand-supply diagram.
(4 marks)
(b) Do you agree with student B? Explain your answer with the aid of the diagram in (a).
(4 marks)

9. After the opening of the Hong Kong-Zhuhai-Macao Bridge, districts like Tung Chung, Tsing Yi and
Discovery Bay have been overcrowded with Mainland tourists. Although this benefits retailers in
these districts, the huge influx of tourists affects the everyday life of Hong Kong citizens by causing
problems such as traffic jams. Explain how the opening of the Hong Kong-Zhuhai-Macao Bridge
may involve externality. (3 marks)

10. In Hong Kong, speeding is one of the major causes of traffic accidents.
(a) Does speeding lead to a divergence between private and social costs? Explain. (2 marks)
(b) It is suggested that the government should increase the penalty for speeding. Explain why this
would help discourage speeding. (2 marks)

11. A region of Country A is an industrial area where there are factories everywhere. In recent years,
harmful gas emissions from these factories have seriously polluted the air. The pollutants even spread
to other regions, causing smoky haze. This seriously affects the health of people.
(a) Explain whether there is a divergence between private and social costs in the above case.
(3 marks)
(b) Suppose the government of the region decides to impose an environmental tax on the
production activities of the factories. Explain how imposing the tax can help eliminate the
divergence between private and social costs. (3 marks)
(c) ‘After the imposition of the tax, the equilibrium quantity and the socially optimal quantity of
production of the factories must be the same.’ Do you agree with this statement? Explain.
(3 marks)

108