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Incidence of tax 04B9c

• A first registration tax is imposed on cars and the


tax is collected from car sellers. Suppose the total
tax burden of car sellers is greater than that of the
buyers.
1. State the condition that leads to this sharing of the
tax burden. Illustrate with the situation with a
diagram.
2. Using the same diagram, show car sellers’ total sales
revenue net of the tax. (8 marks)
When demand is more elastic than supply

P($) buyers' tax burden E s


S2 S1 
Consumers’ sellers' tax burden E d
tax burden
per-unit If E d  Es , then buyers' tax burden
tax
will be smaller than sellers'
P2
P1
Total
tax Net revenue
burden D
Producers’
tax burden

Q
0 Q2 Q1
Change in TR in disequilibrium condition
04B10a
• At the outbreak of SARS, airlines did not reduce
air fares or the number of flights. As a result,
there were a lot of empty seats on planes flying
to Hong Kong.
• With the aid of a diagram, explain the above
economic phenomenon, and explain how the
total revenue of these airlines was affected.
(8 marks)
Solution

P D1 S
D2

ES Decrease in TR
P1

Q2 Q1 Q
Change in market equilibrium 03B10b

• Suppose the price of paper falls drastically and


the number of school children increases.
1. Explain why the supply of and the demand for
textbooks would be affected by these changes.
2. With the aid of a diagram, explain under what
condition of the price of text books would
DECREASE. (8
marks)
Simultaneous Increase in Demand & Supply
P >
D2 S1 The demand
D1 increases (increase
in no. of
consumers) and the
S2 supply also
increases (decrease
in production cost).
P1 The price will
decrease if increase
P2 in supply is larger
than the increase in
demand.

Q1 Q2 Q
Deflation and TR from exports 03B9a

• Deflation has occurred in Hong Kong since


1998. A government official has said, “Deflation
in Hong Kong would stimulate its exports.” With
the aid of a diagram, explain under what
condition would deflation increase Hong Kong’s
total export value (in terms of the Hong Kong
dollar). (7 marks)
Determination of Price
• The World Cup of 1994 was held in the USA. People from all over
the world went to the US to watch the matches.
• The final match was held in Los Angeles. The rental
accommodation in that city was fixed in supply. Due to the high
demand, many disappointed football fans could not rent an
accommodation unit because the rental price was not high
enough.
• (1) Draw a well-labeled supply-demand diagram to show the
above situation. (2
marks)
• (2) If the rental price had been raised to a level where the demand
had met the fixed supply, how would the rental income of the
accommodation owners be different from that in (1) ? Explain with
the aid of a diagram. (5 marks)
Determination of Price

• Assuming initial equilibrium, what would happen to


the wages of garment workers in Hong Kong, if
a. some garment workers are attracted by the higher
wages of tertiary industries and they thus change
their occupations. (5 marks)
b. many garment firms have been moved to South
China, other things being constant. (5 marks)
Determination of Price
A. If there is a bad harvest of rice in China due to flooding,
what would the market of Chinese rice in Hong Kong be
affected? Explain with the aid of a diagram. (5 mark
s)

B. If more and more Hong Kong citizens are in favour of the


rice from Thailand, what would happen to the market of T
hai rice in Hong Kong? (5 marks)

C. If we find that the combined effect in (a) and (b) caused t


he price of Chinese rice in Hong Kong to remain unchang
ed, explain with the aid of a diagram. (7 marks)
Determination of Price

• 97A2
• Workers in the manufacturing sector in Hong
Kong have an unemployment problem. With the
aid of a supply-demand diagram, explain ONE
situation under which the number of unemployed
manufacturing workers may decrease. (6 marks)
Determination of Price
• 98B9c
• Mr Wong employs some imported workers in the rest
aurant
1. With the aid of a diagram, explain the effect of import
ation of workers on the equilibrium wage rate of resta
urant workers in Hong Kong. (4 marks)
2. Use the same diagram to illustrate the effect of impor
tation of workers on the employment level of local re
staurant workers. (3 marks)
Determination of Price

• 99B10a
• There is a serious unemployment in Hong
Kong.
1. Given a fixed wage rate, explain why a
decrease in the profits tax rate may reduce
unemployment. (3 marks)
2. Draw a supply-demand diagram for the labour
market in (i) above. Explain, step by step, how
the diagram is drawn. (6 marks)
Determination of Price

• 02A2
• Suppose the Organization of Petroleum Exporting
countries cuts its oil production. At the same time, the
demand for automobiles increases.
• With the aid of a diagram, explain under what
condition the price of GASOLINE would increase.
(7 marks)
Effects on Revenue

• 97B9b
• Suppose the government builds a railway in
northwest New Territories. With the aid of a
diagram, explain the effect of this new railway on
the total revenue of mini-buses operating on the
same route. (6 marks)
Change in Demand/Supply and Revenue

• 02B11 (b)
• There are student places not yet filled in Miss Wong’s
tutorial school. The school decides to launch an
advertising campaign to recruit more students and to
keep the tuition fee unchanged.
• With the aid of diagram, explain how a successful
advertising campaign would fill all the places and
increase the total revenue of the school. (7 marks)
Determination of Price and effect on Revenue

• Suppose the postage charge of a country is fixed.


When e-commerce and e-mail becomes popular,
the revenue of the country’s Post Office from
postage charge falls sharply.
1. Indicate in a diagram the decrease in the postage
charge revenue of the Post Office.
2. In order to compensate for the decrease in
revenue, the Post Office increases its postage
charge. Indicate in the diagram in (1) the change
in revenue of the Post Office due to the increase
in postage charge. (5 marks)
Elasticity and Revenue

• 98B11b
• Suppose Japanese Yen depreciates against the
Hong Kong dollar, and that Hong Kong people’s
demand for Japanese car is elastic.
• With the aid of a diagram, explain how these
factors would affect the sales revenue (in HK$)
of Japanese car in Hong Kong. (8 marks)
Substitutes and effect on Revenue

• The Japanese Yen depreciated sharply against the


Hong Kong dollar. Other things being equal, what
would be the effect on the sales revenue of French
cars in Hong Kong? Explain your answer with the
aid of a supply-demand diagram. (9 marks)
Substitutes and Effect on Revenue

• 00B9b
• Some petroleum companies complained that
their business was affected because some
drivers bought gasoline from smugglers who
evaded import duties.
• With the aid of a diagram, explain how the
smuggling of gasoline would affect the sales
revenue of petroleum companies. (7 marks)
Determination of Price and effect on Revenue

• With the aid of a diagram, explain the condition


under which a large emigration of Country A’s
workers to Country B would lead to a decrease
in the total income of all workers (including those
immigrants) in Country B. (8 marks)
Elasticity and Revenue

• 02B12
• Mr Wong runs a bookstore in Hong Kong. He sells books
imported from Britain. Suppose the exchange rate betwe
en the US dollar and the British pound changes as follow
s: April : US$1 = ₤ 0.75 ; May : US$1 = ₤0.70
• Suppose the price of books imported from Britain remain
s unchanged in British pound and the demand for these
books is inelastic. With the aid of a diagram, explain how
Mr Wong’s sales revenue of these books in HK dollars w
ould change. (7 marks)
Elasticity and Total Revenue

• 01B9b
• Suppose the importing economy reduces the
effective quota on the quantity of garments
imported. With the aid of a diagram, explain
under what condition the total expenditure of this
economy on imported garments would decrease.
(9 marks)
Effect of Tariff

• 93’2(c)
• If the U.S.A. imposes a very high tariff on
garments imported from China, explain whether
1. the garment producers in South Korea, and
2. the banks in Hong Kong
• will gain or lose. (5
marks)
Effect of Per Unit Tax

• Suppose a per unit tax is imposed on the TV


sets sold in Hong Kong. This tax is collected
from the sellers. Indicate on a supply-demand
diagram the respective tax burdens of the
consumers and the sellers. (5
marks)
Effect of Price Floor
• If the government imposes a ‘price-ceiling’ at P1,
what will be the market price and quantity
transacted? Explain your answer. (4 marks)
P1

P0

Q1 Q0 Q2
Government Intervention

• Suppose the government abolishes the subsidy on


cattle slaughtering services. The total expenditure on
cattle slaughtering services decreases as a result.

a. Based on the information above, explain the elasticity


of demand for slaughtering services with the aid of a
diagram. (6 marks)

b. Use another diagram to explain how the abolition of the


subsidy affects the price of beef. (4 marks)
Government Intervention

• Read the following about Price ($) Qd (bottle/t) Qs (bottle/t)


imported red wine in Hong
100 20 1
Kong.
• The government has imposed 110 18 2
a $40 per unit tax on red
wine. Suppose the 120 16 4
government abolishes this 130 14 6
tax.
a. Calculate the change in the 140 12 8
net revenue of the importers. 150 10 10
b. Find the loss of revenue for
the government. 160 8 12

170 6 14
Price ($) Qd (bottle/t) Qs (bottle/t) New price
Original Pe = $150
100 20 1 60 Original Qe = 10

110 18 2 70
New Pe = !30
120 16 4 80
New Qe =14
130 14 6 90 Therefore,

140 12 8 change in net revenu


100
e = [130 x 14 -(150 -4
150 10 10 110 0) x10 ]= $720
Loss in government r
160 8 12 120
evenue = 40 x 10 = $
170 6 14 130 400

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