Efficiency Equity and the Role of Government: practice questions

6 questions · 11 marks · free, no account · Read the notes first

1. Question 1Multiple choice · 1 mark

   Ann is willing to pay up to $50 for a concert ticket. She buys one for $35. Her consumer surplus is

   A

   $15

   B

   $35

   C

   $50

   D

   $85

2. Question 2Multiple choice · 1 mark

   Which of the following is a public good?

   A

   A seat on a bus

   B

   A fireworks display over Victoria Harbour

   C

   A public housing flat

   D

   A free meal at a charity kitchen

3. Question 3Multiple choice · 1 mark

   A factory pollutes a river while producing paper. Without government intervention, the market for paper will

   A

   produce less than the efficient quantity.

   B

   produce the efficient quantity.

   C

   produce more than the efficient quantity.

   D

   have no deadweight loss.

4. Question 4Multiple choice · 1 mark

   Hong Kong's Gini coefficient rises from 0.53 to 0.54. This shows that

   A

   average income has risen.

   B

   the number of poor households has fallen.

   C

   resource allocation has become more efficient.

   D

   income distribution has become more unequal.

5. Question 53 marks

   Four buyers each want one unit of a good. The maximum amounts they are willing to pay are $50, $40, $30 and $20. The market price is $25.

   (a) How many units are bought?

   (b) Find the total consumer surplus.

   Show worked solution

   (a) Only buyers willing to pay at least $25 buy, so 3 units are bought. (1)

   (b) Consumer surplus = (50 − 25) + (40 − 25) + (30 − 25) (1)

   = 25 + 15 + 5 = $45 (1)

6. Question 64 marks

   A university puts its lecture videos online for anyone to watch free of charge. Explain whether the videos are a public good, and explain why such goods may be under-provided by the market.

   Show worked solution

   Yes. (1) One person watching a video does not reduce the amount available for others to watch: the videos are non-rivalrous in consumption. (1)

   If people who do not pay cannot easily be excluded, they can free ride on others' payments. (1) Producers then cannot collect enough revenue to cover the cost, so the market supplies less than the efficient quantity. (1)