Question 1

A major drawback of providing subsidies to private companies that are natural monopolies is that

Accepted Answer

A) Taxpayers dislike this use of their tax dollars. 
B) Private companies are less efficient than public companies. 
C) The companies have no incentive to limit costs. 
D) The companies will allow product quality to decline. 
A) Taxpayers dislike this use of their tax dollars. 
B) Private companies are less efficient than public companies. 
C) The companies have no incentive to limit costs. 
D) The companies will allow product quality to decline. A

Question 2

If a natural monopoly was forced to break up into several small competitive firms,the

Accepted Answer

A) Cost of production should fall as the smaller firms become more efficient. 
B) Price charged by the competitive firms should decrease as the firms become more efficient. 
C) Price charged by the competitive firms should increase because they no longer have economies of scale. 
D) Total production for the industry should increase because of the efficiency generated by increased competition. 
A) Cost of production should fall as the smaller firms become more efficient. 
B) Price charged by the competitive firms should decrease as the firms become more efficient. 
C) Price charged by the competitive firms should increase because they no longer have economies of scale. 
D) Total production for the industry should increase because of the efficiency generated by increased competition. C

Question 3

When profits are regulated,monopolists are likely to increase their fixed costs.

Accepted Answer

A) True 
 B)False  True

Question 4

Which of the following is a form of government intervention?

Accepted Answer

A) Natural monopoly. 
B) Public goods. 
C) Regulation. 
D) Externalities. 
A) Natural monopoly. 
B) Public goods. 
C) Regulation. 
D) Externalities.

Question 5

If regulation of the natural monopolist called for marginal cost pricing in Figure 27.1,the regulatory agency should set the price at

Accepted Answer

A) P2. 
B) P0. 
C) P3. 
D) P4. 
A) P2. 
B) P0. 
C) P3. 
D) P4.

Question 6

If a natural monopoly is forced to set a price consistent with price efficiency,it will

Accepted Answer

A) Set price above marginal cost. 
B) Earn a profit on every unit of output produced. 
C) Set price equal to the ATC of production. 
D) Incur a loss on every unit of output produced. 
A) Set price above marginal cost. 
B) Earn a profit on every unit of output produced. 
C) Set price equal to the ATC of production. 
D) Incur a loss on every unit of output produced.

Question 7

Market failure

Accepted Answer

A) Occurs whenever the government intervenes in the market mechanism. 
B) Occurs whenever the government pursues laissez-faire policies. 
C) Occurs whenever an imperfection in the market mechanism prevents optimal outcomes. 
D) Never occurs. 
A) Occurs whenever the government intervenes in the market mechanism. 
B) Occurs whenever the government pursues laissez-faire policies. 
C) Occurs whenever an imperfection in the market mechanism prevents optimal outcomes. 
D) Never occurs.

Question 8

When the regulatory process itself becomes a drag on economic growth,society experiences

Accepted Answer

A) Compliance costs of regulation. 
B) Administrative costs of regulation. 
C) Budgetary costs of regulation. 
D) Efficiency costs of regulation. 
A) Compliance costs of regulation. 
B) Administrative costs of regulation. 
C) Budgetary costs of regulation. 
D) Efficiency costs of regulation.

Question 9

Market failure occurs in natural monopolies because

Accepted Answer

A) The monopolist fails to maximize profits. 
B) The monopolist charges a price lower than marginal cost. 
C) Consumers get inaccurate information about the opportunity cost of the product. 
D) Consumers are not willing to pay the price that the monopolist charges. 
A) The monopolist fails to maximize profits. 
B) The monopolist charges a price lower than marginal cost. 
C) Consumers get inaccurate information about the opportunity cost of the product. 
D) Consumers are not willing to pay the price that the monopolist charges.

Question 10

The costs associated with regulation are a source of government failure.

Accepted Answer

A) True 
 B)False

Question 11

State the advantage and the disadvantage of output regulation.

Accepted Answer

The advantage of output regula

Question 12

Profit regulation occurs when regulation requires the natural monopolist to set

Accepted Answer

A) Price equal to average total cost. 
B) Price equal to marginal cost. 
C) Marginal revenue equal to average total cost. 
D) Price equal to average variable cost. 
A) Price equal to average total cost. 
B) Price equal to marginal cost. 
C) Marginal revenue equal to average total cost. 
D) Price equal to average variable cost.

Question 13

Describe how the government should set a monopolist's price to ensure allocative efficiency.What is the problem with setting the price at this level?

Accepted Answer

To ensure that allocative efficiency is

Question 14

To maximize profits,an unregulated natural monopolist would choose which combination of price and output in Figure 27.1?

Accepted Answer

A) P4,Q4. 
B) P2,Q2. 
C) P3,Q3. 
D) P1,Q1. 
A) P4,Q4. 
B) P2,Q2. 
C) P3,Q3. 
D) P1,Q1.

Question 15

Antitrust enforcement focuses on market structure,while government regulation deals with all of the following except

Accepted Answer

A) Prices. 
B) Output. 
C) Perfect competition. 
D) Profits. 
A) Prices. 
B) Output. 
C) Perfect competition. 
D) Profits.

Question 16

Regulations that offer imperfect answers

Accepted Answer

A) Are options that should never be implemented. 
B) Reflect the realistic choices that society must make between imperfect markets and imperfect government intervention. 
C) Are not consistent with utility maximization in the real world. 
D) Will always have costs greater than their benefits. 
A) Are options that should never be implemented. 
B) Reflect the realistic choices that society must make between imperfect markets and imperfect government intervention. 
C) Are not consistent with utility maximization in the real world. 
D) Will always have costs greater than their benefits.

Question 17

If regulation of the firm called for it to earn only a normal profit or rate of return in Figure 27.1,the regulatory agency should set the price at

Accepted Answer

A) P1. 
B) P2. 
C) P3. 
D) P0. 
A) P1. 
B) P2. 
C) P3. 
D) P0.

Question 18

Marginal cost pricing means that a firm charges

Accepted Answer

A) A price that is marginally lower than the average total cost of production. 
B) A price that is marginally higher than the average total cost of production. 
C) A price that is equal to the marginal cost of production. 
D) Any price as long as average total cost is greater than marginal cost. 
A) A price that is marginally lower than the average total cost of production. 
B) A price that is marginally higher than the average total cost of production. 
C) A price that is equal to the marginal cost of production. 
D) Any price as long as average total cost is greater than marginal cost.

Question 19

If profit regulation is used to control a natural monopolist,the monopolist is likely to

Accepted Answer

A) Attempt to reduce the costs of production. 
B) Inflate or pad the costs of production. 
C) Increase the quality of its product in an effort to increase sales. 
D) Reduce maintenance of plants and equipment. 
A) Attempt to reduce the costs of production. 
B) Inflate or pad the costs of production. 
C) Increase the quality of its product in an effort to increase sales. 
D) Reduce maintenance of plants and equipment.

Question 20

For a natural monopoly,marginal cost

Accepted Answer

A) Intersects average total cost at zero profit. 
B) Equals price at a profitable output level. 
C) Equals marginal revenue above the demand curve. 
D) Is always below average total cost in the relevant range of production. 
A) Intersects average total cost at zero profit. 
B) Equals price at a profitable output level. 
C) Equals marginal revenue above the demand curve. 
D) Is always below average total cost in the relevant range of production.

Exam 27: Natural Monopolies: Deregulation

A major drawback of providing subsidies to private companies that are natural monopolies is that

If a natural monopoly was forced to break up into several small competitive firms,the

When profits are regulated,monopolists are likely to increase their fixed costs.

Which of the following is a form of government intervention?

If regulation of the natural monopolist called for marginal cost pricing in Figure 27.1,the regulatory agency should set the price at

If a natural monopoly is forced to set a price consistent with price efficiency,it will

Market failure

When the regulatory process itself becomes a drag on economic growth,society experiences

Market failure occurs in natural monopolies because

The costs associated with regulation are a source of government failure.

State the advantage and the disadvantage of output regulation.

Profit regulation occurs when regulation requires the natural monopolist to set

Describe how the government should set a monopolist's price to ensure allocative efficiency.What is the problem with setting the price at this level?

To maximize profits,an unregulated natural monopolist would choose which combination of price and output in Figure 27.1?

Antitrust enforcement focuses on market structure,while government regulation deals with all of the following except

Regulations that offer imperfect answers

If regulation of the firm called for it to earn only a normal profit or rate of return in Figure 27.1,the regulatory agency should set the price at

Marginal cost pricing means that a firm charges

If profit regulation is used to control a natural monopolist,the monopolist is likely to

For a natural monopoly,marginal cost

Economics: the Core Issues

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Theory Versus Reality

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