NSS Exploring Economics 1 (3rd Edition)

Answers to Exercises

Chapter 7 Government intervention (II)

Questions
p.221
Test yourself 7.1
a. The following shows the supply and demand schedules for Good H. Suppose the
government imposes a unit tax of $4 on Good H. Find the new supply schedule after the
imposition of the tax.
Quantity supplied after tax
Price ($ / unit) Qd (units / period) QS (units / period)
(units / period)
10 50 30
12 45 35
14 40 40
16 35 45
18 30 50

b. Use the above information to complete the table below.

Before tax After tax Change
Price that consumers pay
(inclusive of tax)
Price that producers actually
receive (net of tax)

Quantity transacted

Consumers’ total
expenditure
Producers’ total revenue
(net of tax)

Test yourself 7.2

Suppose the same amount of unit tax is imposed on high-quality and low-quality Good X.
How will this affect the ratio of high-quality to low-quality Good X sold in the market?

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Answers to Exercises (Chapter 7)
P.227
Test yourself 7.3
Refer to the following supply and demand schedules for Good Z.
Unit price ($) 17 18 19 20 21 22 23
Quantity demanded 190 180 170 160 150 140 130
Quantity supplied 115 130 145 160 175 190 205
Suppose the government imposes a unit tax of $5.
a. Show the new supply schedule after the tax, and find the new equilibrium price and
quantity after tax.
b. Explain how the imposition of the unit tax affects sellers’ revenue net of tax.
c. Calculate the ratio of the sellers’ tax burden to the consumers’ tax burden. Based on this
ratio, explain whether the demand is more elastic than the supply.

Misconceptions 7.1
Suppose the government has recently imposed a unit tax on Good P. Determine whether the
following statements about the unit tax are true.
a. If Good P is a necessity, the consumers’ tax burden will be larger than the producers’
tax burden.
b. Producers’ total revenue net of tax will increase if the demand is inelastic.

p.229
Misconceptions 7.2
The following table shows the supply and demand schedules for private housing in Country
G. Suppose the government imposes a unit stamp duty of $1 million on private housing. Are
the following statements correct?
Unit Price QS Qd
($ million) (units / month) (units / month)
7 13 16
8 13 15
9 13 14
10 13 13
11 13 12
a. The price of private housing will increase by $1 million.
b. Revenue from the unit stamp duty will be $13 million.
c. Buyers will bear all the stamp duty.
d. Producers’ total revenue net of tax is $130 million.

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Answers to Exercises (Chapter 7)
NSS Exploring Economics 1(3rd Edition) 3 © Pearson Education Asia Limited 2019
Answers to Exercises (Chapter 7)
p.234
Test yourself 7.4
The following table shows the supply schedule of subdivided flats in City P. Suppose the
government in City P provides a unit rent subsidy of $4,000. Draw the new supply schedule
with the subsidy.
Rent per month $2,000 $4,000 $6,000 $8,000 $10,000 $12,000
Quantity of Before subsidy 2,000 2,200 2,400 2,600 2,800 3,000
subdivided
flats supplied After subsidy

Test yourself 7.5

The following shows the supply and demand schedules for Good K. Suppose the government
provides a unit subsidy of $2 for it. Find the supply schedule after the provision of a subsidy.
Then, complete the table below.
Price ($ / unit) Qd (units / period) QS (units / period)
10 500 300
11 450 350
12 400 400
13 350 450
14 300 500

Before subsidy After subsidy Change

Price that consumers pay
(excluding the subsidy)
Price that producers actually
receive (including the subsidy)

Quantity transacted

Consumers’ total expenditure

Producers’ total revenue

including the subsidy

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Answers to Exercises (Chapter 7)
p.237
Test yourself 7.6
Draw separate supply-demand diagrams to show how the subsidy benefit is shared between
consumers and producers if
a. demand is more elastic than supply;
b. demand is less elastic than supply.

p.239
Test yourself 7.7
The government of City L provides a per unit book subsidy to promote reading.
a. Under what condition would consumers enjoy a larger subsidy benefit than the publishing
companies? Show your answer on a supply-demand diagram.
b. Suppose both Book A and Book B have perfectly elastic supply, and the price of Book A
was higher than that of Book B. How would the unit subsidy affect the relative quantity
of Book A to Book B sold?

p.241
Misconceptions 7.3
The Hong Kong government provides subsidies to non-profit kindergartens.
‘As the demand for kindergartens is inelastic, parents benefit more from the subsidy.’
Is this statement correct?

Test yourself 7.8

The government of Country A provides huge subsidies to its apple farmers. Use separate
supply-demand diagrams to explain how this policy affects the total income that the
following parties actually receive.
a. Apple farmers
b. Orange farmers

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Answers to Exercises (Chapter 7)
Test yourself 7.9
Complete the following table to summarise the effects of different types of government
intervention learned in the previous chapter and this chapter.
Effective Effective Effective Unit
Unit tax
price ceiling price floor quota subsidy
Effect on supply
curve
Move along
demand curve?
Change in quantity
transacted
Change in price
that consumers pay
Change in price
that producers
actually receive
Does the change in
consumers’ TE
depend on Ed?
Change in TR that
producers actually
receive

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Answers to Exercises (Chapter 7)
Exercises
pp.244-248
Multiple Choice Questions

Choose the best answer.

1.
Suppose the price of petrol increases after an increase in the petrol tax. Which of the
following statements is false?
A. Since it becomes more costly to drive, the demand curve for private cars shifts leftwards,
leading to a decrease in their price.
B. The total amount of money spent by petrol users on buying petrol will certainly increase.
C. Public transport, which is a substitute for private cars, would be in greater demand.
D. The total revenue (excluding tax) that petrol sellers receive will certainly fall after the
increase in tax.

2.
Refer to the following supply-demand diagram about the comic book market.

Suppose the government imposes a unit tax on comic books. Then,

A. the price of comic books remains unchanged.
B. the quantity transacted of comic books remains unchanged.
C. consumers’ total expenditure must decrease.
D. producers’ total revenue net of tax must decrease.

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Answers to Exercises (Chapter 7)
3.
In City H, the following table shows the supply and demand schedules for cigarettes.
Price QS Qd
($ / unit) (units / period) (units / period)
100 2,800 3,400
110 3,000 3,300
120 3,200 3,200
130 3,400 3,100
140 3,600 3,000
150 3,800 2,900
160 4,000 2,800
Suppose the government imposes a unit tax of $30 on cigarettes. Which of the following
statements about the imposition is correct?
(1) The consumption of cigarettes decreases to 3,000 units.
(2) The total expenditure increases to $435,000.
(3) The total revenue actually received (net of tax) is $330,000.
(4) There is a surplus in the market.
A. (1) and (2) only
B. (1) and (3) only
C. (2) and (3) only
D. (2) and (4) only

4.
Suppose the government imposes a unit tax on Good X. The consumers’ tax burden will be
larger than the producers’ tax burden if the elasticity of demand for Good X is ______ its
elasticity of supply.
A. greater than
B. smaller than
C. equal to
D. All of the above can be correct.

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Answers to Exercises (Chapter 7)
5.*
Suppose the original price of pizza was $100 per unit in City P. To solve the problem of
obesity, the government has imposed a unit tax of $20 on pizzas. After imposition of the tax,
the price of pizza paid for by consumers changes by 10% while the quantity transacted of
pizza changes by 20%.
Based on the above information, we can conclude that:
(1) Both the demand for and supply of pizza are elastic.
(2) Consumers and producers bear the same tax burden.
(3) Consumers’ total expenditure decreases by 10%.
(4) The market price increases to $120.
A. (1) and (2) only
B. (1) and (3) only
C. (2) and (3) only
D. (2) and (4) only

6.
The following table shows the supply and demand schedules in the rental bike market in City
P. In order to lower the city’s carbon footprint, the government provides a unit subsidy of $15
to rent a bike.
Rent Qd QS
($ / unit) (units / period) (units / period)
10 1,600 1,000
15 1,500 1,200
20 1,400 1,400
25 1,300 1,600
30 1,200 1,800
Based on the above table, we can conclude that:
A. The market rental rate for bikes decreases by $15.
B. The quantity transacted increases by 400 units.
C. The total amount of the subsidy is $21,000.
D. The supply of rental bikes is more elastic than the demand for rental bikes.

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Answers to Exercises (Chapter 7)
7.
Study the following supply-demand diagram of the canned cat food market in Cat City.

Suppose the government provides a unit subsidy of $10. Then,

(1) the price of canned cat food decreases by less than $10.
(2) the quantity transacted of canned cat food remains unchanged.
(3) the total revenue that producers actually receive must increase.
(4) the total expenditure that consumers pay must decrease.
A. (1) and (2) only
B. (1) and (3) only
C. (2) and (4) only
D. (3) and (4) only

8.
Suppose a government provides a unit subsidy to Good X. Consumers will fully enjoy the
benefit of the subsidy if
A. the supply of Good X is perfectly elastic.
B. the supply of Good X is perfectly inelastic.
C. the demand for Good X is unitarily elastic.
D. the demand for Good X is perfectly elastic.

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Answers to Exercises (Chapter 7)
Refer to the following supply and demand schedules for Good X and answer Questions 9
and 10.
Price Quantity demanded Quantity supplied
($ / unit) (units / period) (units / period)
28 100 55
30 90 60
32 80 65
34 70 70
36 60 75
38 50 80
40 40 85

9.
Which of the following would happen if the government grants a unit subsidy of $6 to
Good X?
A. The new equilibrium price would be $30.
B. The total subsidy granted would be $450.
C. Buyers’ share of the subsidy would be $160.
D. The ratio of the buyers’ share of the subsidy to the sellers’ share of the subsidy would
be 1:1.

10.
Which of the following would happen if the government sets a price ceiling at $38 instead?
A. The quantity transacted would be 50 units.
B. The total revenue would be $2,380.
C. Buyers’ total expenditure would be $1,900.
D. A surplus of 30 units would appear.

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Answers to Exercises (Chapter 7)
pp.248-250
Short questions
1.
The following table shows the supply-demand schedules for Good X.
Quantity supplied
Unit price Quantity demanded (units)
(units)
$6 180 60
$7 140 80
$8 100 100
$9 60 120
$10 20 140
a. What is the equilibrium price of Good X? (1 mark)
b. Find the new price if the government imposes a unit tax of $3 on Good X. (2 marks)
c. With reference to (b), find the ratio of the consumers’ tax burden to the producers’ tax
burden. (3 marks)

2.
Study the following supply and demand schedules of imported textiles in Country U.
Price ($) 300 310 320 330 340 350 360
Quantity
demanded 13,000 12,500 12,000 11,500 11,000 10,500 10,000
(units)
Quantity
supplied 10,000 11,000 12,000 13,000 14,000 15,000 16,000
(units)
To protect local production of textiles, the government imposes a unit tax of $30 on imported
textiles.
a. Construct the new supply schedule. (2 marks)
b. Find the new equilibrium quantity and price. (2 marks)
c. Calculate the total revenue actually received and the tax burden borne by importers.
(2 marks)
d. Explain whether the demand elasticity is greater than the supply elasticity. (2 marks)
e. Based on your answers above, briefly explain why the unit tax may help protect the local
textile industry. (2 marks)

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Answers to Exercises (Chapter 7)
3.
With the aid of TWO separate supply-demand diagrams, explain the effects of each of the
following two policies on the consumption of Good X.
a. The government imposes a unit tax on Good X. (4 marks)
b. The government subsidises substitutes for Good X. (4 marks)

4.
‘If the government introduces a unit tax of $10 on all goods and services sold in Hong Kong,
their prices must increase by $10.’ Do you agree with this statement? Explain your answer
with the aid of a supply-demand diagram. (6 marks)

5.
The following table shows the supply-demand schedules for Good Y.
Quantity demanded Quantity supplied
Price ($)
(units) (units)
4 100 80
5 90 90
6 80 100
7 70 110
8 60 120
a. What is the equilibrium price of Good Y? (1 mark)
b. Find the new price if the government provides a unit subsidy of $2 to producers of Good
Y. (3 marks)
c. With reference to (b), explain whether the price elasticity of supply is greater than, equal
to or smaller than the price elasticity of demand. (4 marks)

6.
In City K, the government provided a subsidy of $20 for healthy food. Study the following
supply and demand schedules of healthy food with a subsidy.
Price ($) 30 40 50 60 70 80 90
Quantity demanded (units) 180 170 160 150 140 130 120
Quantity supplied (units) 100 110 120 130 140 150 160
Suppose the government cancels the subsidy for healthy food.
a. What is the new equilibrium price and the corresponding quantity supplied? (2 marks)
b. Calculate the change in the total revenue that producers actually receive. (3 marks)
c. Calculate how much the government saves by eliminating the subsidy. (2 marks)
d. Explain how the cancellation of the subsidy may change the relative quantity of junk food

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Answers to Exercises (Chapter 7)
 to healthy food. (2 marks)

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Answers to Exercises (Chapter 7)
7.
In Hong Kong, the government provides subsidies to private homes for the elderly. Assume
that the demand for private homes is perfectly inelastic. With the aid of a supply-demand
diagram, indicate how the benefit of the subsidy would be distributed between the private
home operators and the occupants. (6 marks)

p.250
Structured questions
1.
In Hong Kong, the government imposes a heavy tax on cigarettes.
a. Explain why the demand elasticity for cigarettes is likely to be inelastic. (2 marks)
b. Based on (a), draw a supply-demand diagram to indicate consumers’ tax burden and
producers’ tax burden due to the cigarette tax. Which group — consumers or producers
— is more likely to bear a greater tax burden? Explain your answer.
(6 marks)
c. Besides the heavy tax on cigarettes, the government has also passed laws to prohibit
smoking in many public areas. Use another supply-demand diagram to explain the
combined effects of the above TWO policies on the price and consumption of cigarettes
in Hong Kong. (8 marks)

2.
Suppose the government in Country A removes the unit tax on diesel fuel.
a. With the aid of a supply-demand diagram, explain how suppliers could enjoy more total
revenue (excluding government tax) from the removal of the tax. (7 marks)
*b. Explain under what situations (in terms of demand elasticity and supply elasticity) the
price of diesel would decrease by an amount equal to the tax removed. Use TWO supply-
demand diagrams to illustrate your answer. (8 marks)

3.
Suppose the government of Country Z provides a unit subsidy for cabbages. The demand for
cabbages is inelastic, and the supply curve of cabbage is upward sloping.
a. With the aid of a supply-demand diagram, explain how the subsidy affects the quantity
transacted, equilibrium price and consumers’ expenditure on cabbages. (10 marks)
b. Explain why cabbage farmers’ income necessarily increases. Besides the provision of a
subsidy, explain TWO policies that can raise cabbage farmers’ income. (5 marks)
*c. Suppose cabbage farmers can use their land to grow broccoli. How might the subsidy
affect the supply of broccoli? Explain. (3 marks)

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Answers to Exercises (Chapter 7)
Answer
p.221
Test yourself 7.1
a.
Quantity supplied after tax
Price ($ / unit) Qd (units / period) QS (units / period)
(units / period)
10 50 30 −

12 45 35 −

14 40 40 30
16 35 45 35
18 30 50 40

b.
Before tax After tax Change
Price that consumers pay
$14 $16 Increases
(inclusive of tax)
Price that producers
$14 $12 Decreases
actually receive (net of tax)
Quantity transacted 40 35 Decreases
Remains unchanged
Consumers’ total
$14 × 40 = $560 $16 × 35 = $560 (∵Ed = 1 in this
expenditure
example)
Producers’ total revenue
$14 × 40 = $560 $12 × 35 = $420 Decreases
(net of tax)

Test yourself 7.2

As the same amount of unit tax is imposed, the relative price of high-quality Good X (in
terms of low-quality Good X) decreases. According to the law of demand, a greater
proportion of high-quality Good X will be sold in the market. Therefore, the ratio will
increase.

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Answers to Exercises (Chapter 7)
p.227
Test yourself 7.3
Unit price ($) 17 18 19 20 21 22 23
Quantity demanded 190 180 170 160 150 140 130
Quantity supplied 115 130 145 160 175 190 205
QS after tax – – – – – 115 130
a. The new equilibrium price and quantity are $23 and 130 units, respectively.
b. Before the imposition of the tax, the sellers’ revenue was $3,200 (= $20 × 160). After the
imposition of the tax, the sellers’ revenue (net of tax) decreases to $2,340 (= $18 × 130).
c. Before the imposition of the tax, the equilibrium price was $20. After the imposition of
the tax, the price that consumers pay is $23 while the price sellers actually receive is $18.
Thus, the ratio of the sellers’ tax burden to the consumers’ tax burden is equal to 2:3.
As the consumers’ tax burden is greater than the sellers’ tax burden, the demand for Good
Z is less elastic than the supply of Good Z.

Misconceptions 7.1
a. False. When Good P is a necessity, the demand for it tends to be inelastic. However, the
tax incidence is determined by comparing the supply elasticity with the demand elasticity.
If the supply is more inelastic than the demand, then consumers will still bear less of a tax
burden.
b. False. Producers’ total revenue (net of tax) will increase if the demand is inelastic.

p.229
Misconceptions 7.2
a. Incorrect. The supply is perfectly inelastic; the unit stamp duty does not lead to any
change in price.
b. Correct. The quantity transacted remains at 13 units. Hence, revenue = $1 million × 13 =
$13 million.
c. Incorrect. As the supply is perfectly inelastic, producers cannot shift any of the tax burden
to consumers. Producers will bear all of the stamp duty.
d. Incorrect. The price that producers actually receive = $10 million − $1 million = $9
million. Total revenue net of tax = $9 million × 13 = $117 million.

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Answers to Exercises (Chapter 7)
p.234
Test yourself 7.4
Rent per month $2,000 $4,000 $6,000 $8,000 $10,000 $12,000
Quantity of Before subsidy 2,000 2,200 2,400 2,600 2,800 3,000
subdivided
flats supplied After subsidy 2,400 2,600 2,800 3,000 – –

Test yourself 7.5

QS after subsidy
Price ($ / unit) Qd (units / period) QS (units / period)
(units / period)
10 500 300 400
11 450 350 450
12 400 400 500
13 350 450 –

14 300 500 –

Before subsidy After subsidy Change

Price that consumers pay
$12 $11 Decreases
(excluding the subsidy)
Price that producers
actually receive $12 $13 Increases
(including the subsidy)
Quantity transacted 400 450 Increases
Consumers’ total Increases (∵ Ed > 1
$12 × 400 = $4,800 $11 × 450 = $4,950
expenditure in this example)
Producers’ total revenue
$12 × 400 = $4,800 $13 × 450 = $5,850 Increases
including the subsidy

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Answers to Exercises (Chapter 7)
p.237
Test yourself 7.6
a. If demand is more elastic than supply, the consumers’ share is smaller than the producers’
share.

b. If demand is less elastic than supply, the consumers’ share is greater than the producers’
share.

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Answers to Exercises (Chapter 7)
p.237
Test yourself 7.7
a. When the demand is less elastic than the supply, consumers will enjoy a larger subsidy
benefit.

b. The unit subsidy would lower the money prices of Book A and Book B by the same
amount. As a result, the relative price of Book A to Book B would decrease and so the
relative quantity of Book A to Book B sold would increase.

p.241
Misconceptions 7.3
Incorrect. It depends on the elasticity of demand and the elasticity of supply. Even if the
demand for kindergartens is inelastic, the supply may still be less elastic than the demand.
Then, kindergartens may benefit more

Test yourself 7.8

a. After the provision of subsidies, apple farmers will increase their supply from S0 to S1.
The price of apples decreases from P0 to P1 while the quantity of apples increases from Q0
to Q1. Total income of the apple farmers, including the subsidy, is P2 × Q1, which is larger
than P0 × Q0 before the provision of subsidies.

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Answers to Exercises (Chapter 7)
b. Subsidies provided by the government to apple farmers will reduce the price of apples. As
apples and oranges are substitutes, this will lead to a decrease in the demand for oranges
from D1 to D2. The price and quantity of oranges will fall from P1 to P2 and Q1 to Q2,
respectively. As a result, the total income for orange farmers will fall from P1 × Q1 to
P2 × Q2.

Test yourself 7.9

Effective Effective Effective Unit
Unit tax
price ceiling price floor quota subsidy
Effect on supply
No effects No effects Kinked S↓ S↑
curve
Move along
No Yes Yes Yes Yes
demand curve?
Change in quantity
Decrease Decrease Decrease Decrease Increase
transacted
Change in price
Decrease Increase Increase Increase Decrease
that consumers pay
Change in price Decrease Increase Increase Decrease Increase

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Answers to Exercises (Chapter 7)
 that producers
actually receive
Does the change in
consumers’ TE No Yes Yes Yes Yes
depend on Ed?
Change in TR that
producers actually Decrease Uncertain Uncertain Decrease Increase
receive

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Answers to Exercises (Chapter 7)
Exercises
pp.244-248
Multiple Choice Questions
1. B
Option B is a false statement because whether petrol users spend more money on buying
petrol depends on the elasticity of demand between the original equilibrium price and the
new equilibrium price. Only when the demand is inelastic will petrol users spend more
money on petrol.
2. D
Although the price that producers actually receive remains unchanged, the decrease in
quantity transacted will lead to a decrease in producers’ total revenue net of tax.
3. B
After tax, P = $140, Q = 3,000, TE = $420,000
TR (net of tax) = ($140 – $30) × 3,000 = $330,000
Both the consumption and quantity supplied of cigarettes decrease to 3,000 units. There is
no surplus or shortage in the market.
4. B
5. A
Option (2) is correct. The price that consumers pay increases by $10 while the price that
producers actually receive decreases by $10. Thus, both consumers and producers bear
the same tax burden (= $10 × Q1).
Option (1) is correct. The demand elasticity is equal to 2. As Option (2) is correct, the
supply elasticity is equal to the demand elasticity.
Option (3) is incorrect. Consumers’ total expenditure decreases by 12% [= (1 + 10%)(1 −
20%) − 1].
Option (4) is incorrect. The market price increases to $110.

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Answers to Exercises (Chapter 7)
6. D
The market rental rate decreases to $10.
The quantity transacted increases by 200 (= 1,600 – 1,400) units.
The total amount of the subsidy is $24,000 (= $15 × 1,600).
The ratio of the consumers’ share of the subsidy to bike rental companies’ share of the
subsidy is 2:1 (= $10/$5).
Since the consumers’ share is greater, the supply elasticity is greater than the demand
elasticity.
7. C
8. A
9. C
Quantity demanded Quantity supplied
Price ($ / unit) QS after subsidy
(units / period) (units / period)
28 100 55 70
30 90 60 75
32 80 65 80
34 70 70 85
36 60 75 –
38 50 80 –
40 40 85 –
After subsidy, P = $32, Q = 80 units
Total subsidy granted = $6 × 80 = $480
Buyers’ share of the subsidy = ($34 − $32) × 80 = $160
Sellers’ share of the subsidy = $480 – $160 = $320
The ratio of the buyers’ share of the subsidy to the sellers’ share of the subsidy is 1:2.
10. B
The price ceiling is ineffective and sellers’ total revenue (or buyers’ total expenditure)
would remain unchanged at $2,380 (= $34 × 70).

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Answers to Exercises (Chapter 7)
pp.248-250
Short questions
1.
a. $8 (1 mark)
b. Supply schedule under tax: (1 mark)
Unit price Quantity supplied under tax (units)
$9 60
$10 80
New price under tax = $9 (1 mark)
c. Consumers’ tax burden per unit
= New price under tax – Original price
= $9 – $8 = $1 (1 mark)
Producers’ tax burden per unit
= Tax per unit – Consumers’ tax burden per unit
= $3 – $1 = $2 (1 mark)
Thus, the ratio is 1:2. (1 mark)

2.
a.
Price ($) 330 340 350 360
New quantity supplied (units) 10,000 11,000 12,000 13,000
(2 marks)
b. The new equilibrium quantity and price are 11,000 units and $340, respectively.
(2 marks)
c. Total revenue actually received by importers = ($340 – $30) × 11,000 = $3,410,000
(2 marks)
The tax burden borne by importers = ($320 – $310) × 11,000 = $110,000 (2 marks)
d. No. As the ratio of the consumers’ tax burden to the producers’ tax burden is 2:1, the
demand elasticity is smaller than the supply elasticity. (2 marks)
e. The unit tax raises the price of imported textiles. As imported textiles and local textiles
are close substitutes, the demand for local textiles will increase. (2 marks)

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Answers to Exercises (Chapter 7)
3.
a. Imposing a unit tax on Good X will reduce the supply of Good X from S1 to S2. (1 mark)
Consumption of Good X will decrease from Q1 to Q2. (1 mark)
Indicate on the diagram:
● Parallel upward shift in supply curve (1 mark)
● Decrease in quantity transacted (1 mark)

b. Subsidising substitutes for Good X will reduce the prices of the substitutes. Therefore,
demand for Good X decreases from D1 to D2. (1 mark)
Consumption of Good X will decrease from Q1 to Q2. (1 mark)
Indicate on the diagram:
● Leftward shift in demand curve for Good X (1 mark)
● Decrease in quantity transacted for Good X (1 mark)

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Answers to Exercises (Chapter 7)
4.
No. (1 mark)
Given a downward sloping demand curve and an upward sloping supply curve, the price of a
good will increase by less than $10 after imposing a unit tax of $10. (2 marks)
This is because producers are able to shift only part of the tax burden to consumers. (1 mark)
Indicate on the diagram:
● Parallel upward shift in supply curve (1 mark)
● Amount of unit tax > Increase in price (1 mark)

5.
a. $5 (1 mark)
b. Supply schedule under the subsidy: (2 marks)
Quantity supplied under
Price ($)
the subsidy (units)
4 100
5 110
6 120
New price under the subsidy = $4 (1 mark)
c. After a unit subsidy of $2, the price that consumers pay decreases by $1 (= $5 – $4),
which is equal to the consumers’ benefit from the subsidy for each unit bought. (2 marks)
Producers also receive a unit subsidy of $1 [= ($4 + $2) – $5]. (1 mark)
As the consumers’ share is equal to the producers’ share, the price elasticity of supply is
equal to the price elasticity of demand. (1 mark)

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Answers to Exercises (Chapter 7)
6.
a. The new equilibrium price and the corresponding quantity supplied are $80 and 130 units,
respectively. (2 marks)
b. Before the cancellation of the subsidy, the equilibrium price was $70 and the quantity
transacted was 140. The total revenue the producers actually receive was $12,600 (= $90
× 140). (1 mark)
The new total revenue that producers actually receive is $10,400 (= $80 × 130). (1 mark)
Thus, the total revenue that producers actually receive decreases by $2,200. (1 mark)
c. $20 × 140 = $2,800 (2 marks)
d. After the cancellation of the subsidy on healthy food, the relative price of junk food to
healthy food decreases. According to the law of demand, the relative quantity of junk
food to healthy food increases. (2 marks)

7.
Given that the demand is perfectly inelastic, the demand curve is vertical. (1 mark)
With the provision of subsidies, the supply curve shifts downwards from S1 to S2. (1 mark)
Since the equilibrium price decreases from P1 to P2 by the amount of the unit subsidy,
occupants enjoy all of the subsidy. (1 mark)
Indicate on the diagram:
● Parallel downward shift in supply curve (1 mark)
● Vertical demand curve (1 mark)
● Consumers’ share of the subsidy (1 mark)

NSS Exploring Economics 1(3rd Edition) 28 © Pearson Education Asia Limited 2019
Answers to Exercises (Chapter 7)
p.250
Structured questions
1.
a. The demand for cigarettes tends to be inelastic since it takes time for consumers to quit
smoking. (2 marks)
(Accept any other reasonable answers.)
b. As the demand is likely to be inelastic and the supply is unlikely to be inelastic, the
demand elasticity is likely to be smaller than the supply elasticity. Thus, consumers may
bear a larger tax burden. (2 marks)
Indicate on the diagram:
● Parallel upward shift of supply curve (1 mark)
● Price increases and quantity drops (1 mark)
● Correct positions of consumers’ burden and producers’ burden (1 mark)
● Consumers’ burden > Producers’ burden (1 mark)

c. A heavy tax imposed on cigarettes will shift the supply curve of cigarettes upwards from
S1 to S2. (1 mark)
Laws prohibiting smoking in public areas will reduce the demand for cigarettes from D 1
to D2. (1 mark)
The consumption of cigarettes will decrease from Q1 to Q2. (1 mark)
The equilibrium price of cigarettes may increase, decrease or remain unchanged,
depending on whether the decrease in supply is greater than, smaller than or equal to the
decrease in demand. (2 marks)
Indicate on the diagram:
● Upward shift in supply curve (1 mark)
● Leftward shift in demand curve (1 mark)
● Decrease in quantity transacted (1 mark)

NSS Exploring Economics 1(3rd Edition) 29 © Pearson Education Asia Limited 2019
Answers to Exercises (Chapter 7)
2.
a. Before the removal of the diesel tax, the supply curve of diesel fuel was S1. The total
revenue (excluding tax) was P0 × Q1. (1 mark)
After the removal of the diesel tax, the supply curve shifts downwards to S2. The
equilibrium price and quantity are P2 and Q2, respectively. (2 marks)
Thus, the total revenue (excluding tax) for diesel suppliers would increase from P0 × Q1 to
P2 × Q2. (1 mark)
Indicate on the diagram:
● Parallel downward shift in supply curve (1 mark)
● Increase in quantity transacted (1 mark)
● Increase in the price that producers actually receive (1 mark)

NSS Exploring Economics 1(3rd Edition) 30 © Pearson Education Asia Limited 2019
Answers to Exercises (Chapter 7)
b. If the demand is perfectly inelastic (Fig. 1), or the supply is perfectly elastic (Fig. 2), then
the price of diesel fuel would be reduced by an amount equal to the tax removed.
(2 marks)
Indicate on the diagrams:
Fig. 1:
● Vertical demand curve (1 mark)
● Downward shift in supply curve (1 mark)
● Decrease in price = Amount of unit tax (1 mark)

Fig. 2:
● Horizontal supply curve (1 mark)
● Downward shift in supply curve (1 mark)
● Decrease in price = Amount of unit tax (1 mark)

NSS Exploring Economics 1(3rd Edition) 31 © Pearson Education Asia Limited 2019
Answers to Exercises (Chapter 7)
3.
a. When the government provides a unit subsidy for cabbages, the production cost of
cabbages decreases. As a result, the supply curve of cabbages shifts downwards.
(2 marks)
The equilibrium price decreases from P1 to P2 while the quantity transacted increases from
Q1 to Q2. (2 marks)
Since the demand for cabbages is inelastic, the percentage increase in quantity demanded
is smaller than the percentage decrease in the price. As a result, consumers’ expenditure
on cabbages decreases. (2 marks)
Indicate on the diagram:
● Parallel downward shift in supply curve (1 mark)
● Equilibrium price decreases while quantity transacted increases (1 mark)
● Decrease in consumers’ expenditure > Increase in consumers’ expenditure. (2 marks)

b. Since both the price that cabbage farmers actually receive and the quantity transacted
increase, cabbage farmers’ income must increase. (2 marks)
The government can raise cabbage farmers’ income by setting an effective price floor or
effective quota. Both would lead to an increase in the price of cabbages. Since the
demand for cabbages is inelastic, cabbage farmers’ income would increase. (Accept other
reasonable answers, 3 marks)
c. Cabbages and broccoli are in competitive supply. When the price that cabbage farmers
actually receive increases, some broccoli farmers may shift to growing cabbages. Thus,
the supply of broccoli decreases. (3 marks)

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Answers to Exercises (Chapter 7)