Question 1

In Canada,the Competition Act specifies that in antitrust cases the ʺwatchdogʺ is the

Accepted Answer

A) Senate. 
B) Commissioner of the Competition Bureau. 
C) Supreme Court of Canada. 
D) minister responsible for Industry Canada. 
E) prime minister. 
A) Senate. 
B) Commissioner of the Competition Bureau. 
C) Supreme Court of Canada. 
D) minister responsible for Industry Canada. 
E) prime minister. B

Question 2

Consider a natural monopoly that has declining LRAC over the entire range of the market demand curve.If it is regulated and required to charge a price that is equal to MC,the resulting level of output is

Accepted Answer

A) allocatively efficient,and profit is earned. 
B) allocatively efficient,but the firm must be paid a subsidy or it will eventually go out of business. 
C) less than the allocatively efficient level,and profit is zero. 
D) less than the allocatively efficient level,but losses occur. 
E) greater than the allocatively efficient level,but losses occur. 
A) allocatively efficient,and profit is earned. 
B) allocatively efficient,but the firm must be paid a subsidy or it will eventually go out of business. 
C) less than the allocatively efficient level,and profit is zero. 
D) less than the allocatively efficient level,but losses occur. 
E) greater than the allocatively efficient level,but losses occur. B

Question 3

Allocative efficiency is a property of the behaviour of

Accepted Answer

A) individual firms. 
B) all firms in an industry. 
C) perfectly-competitive firms. 
D) monopolies. 
E) the overall economy. 
A) individual firms. 
B) all firms in an industry. 
C) perfectly-competitive firms. 
D) monopolies. 
E) the overall economy. E

Question 4

The diagram below shows the market demand curve and the cost curves for a single firm.
   FIGURE 12-6
-Refer to Figure 12-6.Suppose this firm is being regulated using a policy of average -cost pricing.In this case,

Accepted Answer

A) the result is allocatively efficient because economic profits are zero. 
B) the result is allocatively inefficient because price exceeds marginal cost. 
C) the level of output is too low,but the price is allocatively efficient. 
D) the result is as close to the competitive outcome as possible. 
E) the result is allocatively inefficient because the marginal cost curve is downward sloping. 
A) the result is allocatively efficient because economic profits are zero. 
B) the result is allocatively inefficient because price exceeds marginal cost. 
C) the level of output is too low,but the price is allocatively efficient. 
D) the result is as close to the competitive outcome as possible. 
E) the result is allocatively inefficient because the marginal cost curve is downward sloping.

Question 5

Consider the following information for a regional cable television service provider that is a natural monopoly and has a U-shaped long-run average cost curve.(Assume the service provided is basic cable and units are household connections.) - minimum LRAC = $9.00 per month
- minimum efficient scale = 2 million units
- current output = 2.3 million units
- LRAC at current output = $10.25 per month
Suppose the firm is currently being regulated and is required to follow a marginal-cost pricing policy.The price of the service will be per month.

Accepted Answer

A) lower than $9.00 
B) $9.00 
C) between $9.00 and $10.25 
D) $10.25 
E) higher than $10.25 
A) lower than $9.00 
B) $9.00 
C) between $9.00 and $10.25 
D) $10.25 
E) higher than $10.25

Question 6

If a perfectly competitive industry was suddenly monopolized without any change in cost conditions,

Accepted Answer

A) both price and quantity produced would increase. 
B) both price and quantity produced would decrease. 
C) price would increase and quantity produced would decrease. 
D) price would decrease and quantity produced would increase. 
E) there would be no change in either price or quantity produced. 
A) both price and quantity produced would increase. 
B) both price and quantity produced would decrease. 
C) price would increase and quantity produced would decrease. 
D) price would decrease and quantity produced would increase. 
E) there would be no change in either price or quantity produced.

Question 7

The diagram below shows cost and revenue curves for a natural monopoly producing electricity.Price is dollars per kilowatt hour and quantity is kilowatt hours per day.
   FIGURE 12-7
-Refer to Figure 12-7.Suppose this firm is being regulated using a pricing policy of average-cost pricing.In this case,economic profits are equal to

Accepted Answer

A) $10 000. 
B) $6000. 
C) $126 000. 
D) $28 000. 
E) $0. 
A) $10 000. 
B) $6000. 
C) $126 000. 
D) $28 000. 
E) $0.

Question 8

According to economist George Stigler,the process of regulating firms with market power becomes suspect over time because

Accepted Answer

A) regulators impose additional costs on regulated firms because they are expected to accomplish other social goals. 
B) regulators shift from protecting the consumer to protecting the regulated firm from competition. 
C) regulated firms are allowed to expand into other markets and drive out competing firms. 
D) regulated firms devise methods to circumvent the regulations. 
E) regulation leads to corruption of political parties. 
A) regulators impose additional costs on regulated firms because they are expected to accomplish other social goals. 
B) regulators shift from protecting the consumer to protecting the regulated firm from competition. 
C) regulated firms are allowed to expand into other markets and drive out competing firms. 
D) regulated firms devise methods to circumvent the regulations. 
E) regulation leads to corruption of political parties.

Question 9

Productive efficiency (at the level of the firm)is a goal that is sought

Accepted Answer

A) by profit-maximizing firms in all market structures. 
B) only by perfectly competitive firms. 
C) only by profit-maximizing imperfectly competitive firms. 
D) by no firms in any market. 
E) only by profit-maximizing firms in an oligopolistic market structure. 
A) by profit-maximizing firms in all market structures. 
B) only by perfectly competitive firms. 
C) only by profit-maximizing imperfectly competitive firms. 
D) by no firms in any market. 
E) only by profit-maximizing firms in an oligopolistic market structure.

Question 10

Consider the case of a natural monopoly with falling long -run average costs.If regulation sets the price equal to marginal cost,then

Accepted Answer

A) the firm would operate at a loss and eventually go out of business. 
B) shortages would result. 
C) the demand curve would shift to the left. 
D) the firm would earn economic profits. 
E) the outcome would be allocatively inefficient. 
A) the firm would operate at a loss and eventually go out of business. 
B) shortages would result. 
C) the demand curve would shift to the left. 
D) the firm would earn economic profits. 
E) the outcome would be allocatively inefficient.

Question 11

Consider an industry with three profit-maximizing firms producing identical soccer jerseys.At their current levels of output,Firm A has a MC of $22,Firm B has a MC of $26,and Firm C has a MC of $27.Each firm is minimizing its costs for its given level of output.Which of the following statements is definitely true?

Accepted Answer

A) Each firm and the industry are productively efficient. 
B) Each firm is productively efficient but the industry is not. 
C) The industry is productively efficient but each firm is not. 
D) Each firm is allocatively efficient but the industry is not. 
E) Each firm and the industry are allocatively efficient. 
A) Each firm and the industry are productively efficient. 
B) Each firm is productively efficient but the industry is not. 
C) The industry is productively efficient but each firm is not. 
D) Each firm is allocatively efficient but the industry is not. 
E) Each firm and the industry are allocatively efficient.

Question 12

The diagram below shows cost and revenue curves for a natural monopoly producing electricity.Price is dollars per kilowatt hour and quantity is kilowatt hours per day.
   FIGURE 12-7
-Refer to Figure 12-7.If this firm were unregulated and profit maximizing,its profit would be per day.

Accepted Answer

A) $0 
B) $10 000 
C) $60 000 
D) $110 000 
E) $120 000 
A) $0 
B) $10 000 
C) $60 000 
D) $110 000 
E) $120 000

Question 13

Consider the following information for a regional cable television service provider that is a natural monopoly and has a U-shaped long-run average cost curve.(Assume the service provided is basic cable and units are household connections.) - minimum LRAC = $9.00 per month
- minimum efficient scale = 2 million units
- current output = 1.7 million units
- current LRAC = $10.25 per month
If this firm is currently being regulated and is following an average -cost pricing policy,the price of service is
Per month.

Accepted Answer

A) lower than $9.00 
B) $9.00 
C) between $9.00 and $10.25 
D) $10.25 
E) higher than $10.25 
A) lower than $9.00 
B) $9.00 
C) between $9.00 and $10.25 
D) $10.25 
E) higher than $10.25

Question 14

The objective of government regulation and competition policy can be described as a means to

Accepted Answer

A) promote economic efficiency. 
B) make at least one person better off at the expense of others. 
C) reduce inequality in the economy. 
D) increase fairness in economic activities. 
E) make all industries perfectly competitive. 
A) promote economic efficiency. 
B) make at least one person better off at the expense of others. 
C) reduce inequality in the economy. 
D) increase fairness in economic activities. 
E) make all industries perfectly competitive.

Question 15

In which of the following situations would a natural monopoly exist?

Accepted Answer

A) a firm has a government charter to be the sole producer of some good 
B) a firm is able to operate at the minimum point of its long-run average total cost curve 
C) a firm produces a product essential to national security 
D) only one firm is supplying a natural resource 
E) one firm can most efficiently supply the entire market demand 
A) a firm has a government charter to be the sole producer of some good 
B) a firm is able to operate at the minimum point of its long-run average total cost curve 
C) a firm produces a product essential to national security 
D) only one firm is supplying a natural resource 
E) one firm can most efficiently supply the entire market demand

Question 16

Suppose there are only two firms (Firms A and B) in Canada that produce good X, and the two firms propose a merger to create a single firm (Firm AB). Is there any circumstance under which the authorities enforcing Canadian competition policy might approve of such a merger?

Accepted Answer

A) 	According to the Competition Act, as long as the revenues of the merged firm are less than $100 million per year. 
B) 	According to the Competition Act, if the merged firm enhances the status of a Canadian cultural industry. 
C) 	If the market is defined as being within Canadaʹs borders, and the merger allows Firm AB to exploit economies of scale. 
D) 	If international trade in good X is such that Firm AB faces a fully competitive environment, both within and outside of Canadaʹs borders. 
A) 	According to the Competition Act, as long as the revenues of the merged firm are less than $100 million per year. 
B) 	According to the Competition Act, if the merged firm enhances the status of a Canadian cultural industry. 
C) 	If the market is defined as being within Canadaʹs borders, and the merger allows Firm AB to exploit economies of scale. 
D) 	If international trade in good X is such that Firm AB faces a fully competitive environment, both within and outside of Canadaʹs borders.

Question 17

Consider two firms,A and B,that are producing the same product but with different average costs.Economists say this situation reflects a problem of

Accepted Answer

A) unemployed resources. 
B) economic inefficiency. 
C) productive inefficiency. 
D) allocative inefficiency. 
E) Not necessarily any of the above. 
A) unemployed resources. 
B) economic inefficiency. 
C) productive inefficiency. 
D) allocative inefficiency. 
E) Not necessarily any of the above.

Question 18

At the level of the industry,the condition for productive efficiency is that

Accepted Answer

A) goods are allocated equitably. 
B) there are no idle resources in the industry. 
C) MC = P for all goods. 
D) MRP = P for all inputs. 
E) MC is equal for all firms in the industry. 
A) goods are allocated equitably. 
B) there are no idle resources in the industry. 
C) MC = P for all goods. 
D) MRP = P for all inputs. 
E) MC is equal for all firms in the industry.

Question 19

Consider a monopolistically competitive industry in long-run equilibrium.Will this industry be productively efficient?

Accepted Answer

A) Yes.Since the firms are in long-run equilibrium,they will all be producing at the minimum of their LRAC curves. 
B) Yes.Since the firms are in long-run equilibrium,they will all be operating on their LRAC curves. 
C) Yes.In long-run equilibrium,each firm is producing at an output level where price is equal to marginal cost. 
D) No.Firms are selling their output at a level where price exceeds marginal cost and thus,by definition,cannot be productively efficient. 
E) No.Since firms are selling differentiated products and there is no industry -wide price,we cannot conclude that marginal cost will be equated across all firms. 
A) Yes.Since the firms are in long-run equilibrium,they will all be producing at the minimum of their LRAC curves. 
B) Yes.Since the firms are in long-run equilibrium,they will all be operating on their LRAC curves. 
C) Yes.In long-run equilibrium,each firm is producing at an output level where price is equal to marginal cost. 
D) No.Firms are selling their output at a level where price exceeds marginal cost and thus,by definition,cannot be productively efficient. 
E) No.Since firms are selling differentiated products and there is no industry -wide price,we cannot conclude that marginal cost will be equated across all firms.

Question 20

The diagram below shows the market demand curve and the cost curves for a single firm.
   FIGURE 12-6
-Refer to Figure 12-6.Suppose this firm is a government-owned natural monopoly and imposes a price so as to achieve allocative efficiency in this market.The amount of tax revenue that the government must raise elsewhere in the economy to offset the losses of this firm is represented by the area

Accepted Answer

A) P1P3ae. 
B) P1P2bc. 
C) edbc. 
D) Q1dbQ2. 
E) 0P2bQ2. 
A) P1P3ae. 
B) P1P2bc. 
C) edbc. 
D) Q1dbQ2. 
E) 0P2bQ2.

Exam 12: Economic Efficiency and Public Policy

In Canada,the Competition Act specifies that in antitrust cases the ʺwatchdogʺ is the

Consider a natural monopoly that has declining LRAC over the entire range of the market demand curve.If it is regulated and required to charge a price that is equal to MC,the resulting level of output is

Allocative efficiency is a property of the behaviour of

The diagram below shows the market demand curve and the cost curves for a single firm. FIGURE 12-6 -Refer to Figure 12-6.Suppose this firm is being regulated using a policy of average -cost pricing.In this case,

If a perfectly competitive industry was suddenly monopolized without any change in cost conditions,

According to economist George Stigler,the process of regulating firms with market power becomes suspect over time because

Productive efficiency (at the level of the firm)is a goal that is sought

Consider the case of a natural monopoly with falling long -run average costs.If regulation sets the price equal to marginal cost,then

The diagram below shows cost and revenue curves for a natural monopoly producing electricity.Price is dollars per kilowatt hour and quantity is kilowatt hours per day. FIGURE 12-7 -Refer to Figure 12-7.If this firm were unregulated and profit maximizing,its profit would be per day.

The objective of government regulation and competition policy can be described as a means to

In which of the following situations would a natural monopoly exist?

Suppose there are only two firms (Firms A and B) in Canada that produce good X, and the two firms propose a merger to create a single firm (Firm AB). Is there any circumstance under which the authorities enforcing Canadian competition policy might approve of such a merger?

Consider two firms,A and B,that are producing the same product but with different average costs.Economists say this situation reflects a problem of

At the level of the industry,the condition for productive efficiency is that

Consider a monopolistically competitive industry in long-run equilibrium.Will this industry be productively efficient?

Economic Issues and Concepts

Economic Theories, data, and Graphs

Demand, supply, and Price

Elasticity

Price Controls and Market Efficiency

Consumer Behaviour

Producers in the Short Run

Producers in the Long Run

Competitive Markets

Monopoly, cartels, and Price Discrimination

Imperfect Competition and Strategic Behaviour

How Factor Markets Work

Labour Markets and Income Inequality

Market Failures and Government Intervention

The Economics of Environmental Protection

Taxation and Public Expenditure

What Macroeconomics Is All About

The Measurement of National Income

The Simplest Short-Run Macro Model

Adding Government and Trade to the Simple Macro Model

Output and Prices in the Short Run

From the Short Run to the Long Run: the Adjustment of Factor Prices

Long-Run Economic Growth

Money and Banking

Money, interest Rates, and Economic Activity

Monetary Policy in Canada

Inflation and Disinflation

Unemployment Fluctuations and the Nairu

Government Debt and Deficits

The Gains From International Trade

Exchange Rates and the Balance of Payments

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