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)
Consolidation Worksheets (Chapter 16)
1
© Pearson Education Asia Limited 2014
Answers:
Effective price
ceiling
Effective price
floor
MB > / = / < MC
MB > / = / < MC
 /  / uncertain
 /  / uncertain
Yes / No
(underproduction /
overproduction)
Yes / No
(underproduction /
overproduction)
Change in Q
 /  / uncertain
 /  / uncertain
Change in P
 /  / uncertain
 /  / uncertain
Change in CS
 /  / uncertain
 /  / uncertain
Change in PS
 /  / uncertain
 /  / uncertain
Is MB greater than, equal
to or smaller than MC at
quantity transacted?
Change in TSS
Achieve efficiency in
resource allocation?
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).
NSS Exploring Economics 3 (Second Edition)
Consolidation Worksheets (Chapter 16)
2
© Pearson Education Asia Limited 2014
16.5 Summarise the effects of an effective quota in a perfectly competitive market
by choosing the correct answers in the table below.
Answers:
Is MB greater than, equal
to or smaller than MC at
quantity transacted?
MB > / = / < MC
Change in TSS
 /  / uncertain
Yes / No
(underproduction
Achieve efficiency in
resource allocation?
/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.
NSS Exploring Economics 3 (Second Edition)
Consolidation Worksheets (Chapter 16)
3
© Pearson Education Asia Limited 2014
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
Qe
NSS Exploring Economics 3 (Second Edition)
Consolidation Worksheets (Chapter 16)
Q
4
© Pearson Education Asia Limited 2014
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
b.

potential gains not being captured when MB > / = / < MC;

the loss in total social surplus when MB > / = / < MC.

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
4.
Qf
Qe
Q
Explain how price ceilings would lead to inefficient allocation of resources.
Illustrate your answer with a supply-demand diagram.
(5 marks)
NSS Exploring Economics 3 (Second Edition)
Consolidation Worksheets (Chapter 16)
5
© Pearson Education Asia Limited 2014
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
5.
Qc
Q
Qe
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
Qm
Qe
NSS Exploring Economics 3 (Second Edition)
Consolidation Worksheets (Chapter 16)
Q
6
© Pearson Education Asia Limited 2014
*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.
$
Quota
Gain from removal of quota =
Deadweight loss under quota
S = MC
D = MB
0
Qq
Qe
Quantity of Good X
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.
ii.
the market price
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.
NSS Exploring Economics 3 (Second Edition)
Consolidation Worksheets (Chapter 16)
7
© Pearson Education Asia Limited 2014
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
Tax
S = MC
S’ = MC–unit subsidy
Subsidy
Pt
Pe
Pe
Py
0
Qt
b.
Qe
D = MB
Q
0
Qe
D = MB
Q
Qy
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 + unit tax
S = MC
Tax
S = MC
S’ = MC–unit subsidy
Subsidy
Pt
Pe
Pe
Py
0
2.
Qt
Qe
D = MB
Q
0
Qe
Qy
D = MB
Q
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
NSS Exploring Economics 3 (Second Edition)
Consolidation Worksheets (Chapter 16)
8
© Pearson Education Asia Limited 2014
a.
What are the equilibrium price and output level?
(2 marks)
b. Is the output level in part (a) efficient? Explain your answer.
*c. Explain if there is any deadweight loss in the following cases:
i. The government sets a maximum price at $6,000 per unit;
ii. The government sets a maximum price at $10,000 per unit.
(2 marks)
(2 marks)
(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
overproduction of MP3 players? Explain.
(3 marks)
NSS Exploring Economics 3 (Second Edition)
Consolidation Worksheets (Chapter 16)
9
© Pearson Education Asia Limited 2014
c.
Is 2,000 units an efficient level of output? Is there underproduction or
overproduction of MP3 players? Explain.
(3 marks)
*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.


$
500
450
400
350
300
250
200
150
100
50
0
The quantity transacted is efficient / not efficient. There is
underproduction / overproduction.
This is because MB > MC at this output level.
Quota = 1000 units
S = MC
D = MB
1,000 2,000 3,000 4,000 5,000
NSS Exploring Economics 3 (Second Edition)
Consolidation Worksheets (Chapter 16)
10
Q
© Pearson Education Asia Limited 2014
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
ceiling
Effective price
floor
MB > MC
MB > MC


No
(underproduction)
No
(underproduction)
Change in Q


Change in P


Change in CS
uncertain

Change in PS

uncertain
Is MB greater than, equal
to or smaller than MC at
quantity transacted?
Change in TSS
Achieve efficiency in
resource allocation?
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
Is MB greater than, equal
to or smaller than MC at
quantity transacted?
Change in TSS
Achieve efficiency in
resource allocation?
Change in Q
MB > MC

No (underproduction)

Change in P

Change in CS

Change in PS
uncertain
NSS Exploring Economics 3 (Second Edition)
Consolidation Worksheets (Chapter 16)
11
© Pearson Education Asia Limited 2014
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.

 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.
2.
$
S = MC
Pe
MB = MC
D = MB
0
3.
a.
Qe
Q
Deadweight loss is

potential gains not being captured when MB > MC;

the loss in total social surplus when MB < MC.
NSS Exploring Economics 3 (Second Edition)
Consolidation Worksheets (Chapter 16)
12
© Pearson Education Asia Limited 2014


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
Pe
Price floor
X <
X
Y
Y
D = MB
0
4.
Q
Qe
Qf
Producer surplus

An effective price ceiling will lower the quantity supplied below the
efficient level.

Therefore, resource allocation is inefficient.
$
Deadweight loss
S = MC
Pc
Price ceiling
D = MB
0
Qc
Q
Qe
NSS Exploring Economics 3 (Second Edition)
Consolidation Worksheets (Chapter 16)
13
© Pearson Education Asia Limited 2014
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
Minimum wage
Wm
Deadweight loss
D = MB
0
6.
Qm
Q
Qe

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.
$
Quota
Gain from removal of quota =
Deadweight loss under quota
S = MC
D = MB
0
Qq
Qe
NSS Exploring Economics 3 (Second Edition)
Consolidation Worksheets (Chapter 16)
Quantity of Good X
14
© Pearson Education Asia Limited 2014
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 + unit tax
S = MC
Tax
S = MC
S’ = MC–unit subsidy
Subsidy
Pt
Pe
Pe
Py
0
Qt
b.
Qe
D = MB
Q
0
Qe
D = MB
Q
Qy
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 + unit tax
S = MC
Tax
S = MC
S’ = MC–unit subsidy
Subsidy
Pt
Pe
Pe
Py
0
2.
Qt
a.
b.
c.
Qe
D = MB
Q
0
Qe
Qy
D = MB
Q
Equilibrium price is $8,000.
Equilibrium output level is 3,500 units.
Yes. The output level is efficient.
This is because marginal benefit equals marginal cost (= $8,000) at that
output level.
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.
NSS Exploring Economics 3 (Second Edition)
Consolidation Worksheets (Chapter 16)
15
© Pearson Education Asia Limited 2014
ii.
3.
Since the maximum price is not effective, the output is still at the
efficient level.
Thus, there is no deadweight loss.
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.


$
500
450
400
350
300
250
200
150
100
50
0
The quantity transacted is not efficient. There is
underproduction.
This is because MB > MC at this output level.
Quota = 1000 units
S = MC
D = MB
1,000 2,000 3,000 4,000 5,000
NSS Exploring Economics 3 (Second Edition)
Consolidation Worksheets (Chapter 16)
16
Q
© Pearson Education Asia Limited 2014