Deck 12: Economic Efficiency and Public Policy

Question 1

In Canada,alleged violations of the Competition Act are referred to the for adjudication.

A)minister responsible for Industry Canada
B)provincial Courts of Appeal
C)RCMP
D)Commissioner of the Competition Bureau
E)Competition Tribunal

Answer 1

E

Question 2

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.

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

Answer 2

E

Question 3

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,economic profits to the firm are represented by the area

A)0P3aQ1.
B)P1P2bc.
C)P2P3ad.
D)P2P3ab.
E)There are no economic profits.

Answer 3

E

Question 4

If average- cost pricing is imposed on a falling- cost natural monopoly,the result will be

A)losses and exit from the industry in the long run.
B)economic losses.
C)exit from the industry in the short run.
D)zero economic profit.
E)economic profits.

Question 5

When comparing a perfectly competitive firm and a (single- price)monopolist,a major difference is that

A)the monopolist produces where MR = MC,but the perfect competitor does not.
B)the perfect competitor produces where P = MC,but the monopolist does not.
C)the perfect competitor minimizes its costs,but the monopolist does not.
D)the monopolist achieves allocative efficiency but the perfect competitor does not.
E)the perfect competitor achieves productive efficiency,but the monopolist does not.

Question 6

Productive efficiency for an individual firm requires that

A)P = ATC for all goods.
B)all resources be fully used.
C)MC = P for all goods.
D)the firm be allocatively efficient.
E)the firm be on its LRAC curve.

Question 7

The diagram below shows the demand and supply curves in a perfectly competitive market.
FIGURE 12- 5
Refer to Figure 12- 5.If output in this market were Q3,the loss in total economic surplus relative to the competitive equilibrium would be illustrated by area

A)1.
B)2.
C)3.
D)4.
E)3 + 4.

Question 8

For an entire economy,allocative efficiency requires that

A)price is greater than marginal cost for all goods.
B)price equals average cost for all goods.
C)marginal cost equals price for all goods.
D)MRP is equated for all factors of production.
E)goods are allocated equitably across markets.

Question 9

In principle,a comparison of the long- run equilibrium of competitive and (single- price)monopoly industries leads to the following conclusion:

A)neither industry is capable of allocative efficiency.
B)both the competitive industry and the monopoly will allocate resources efficiently.
C)the competitive industry will achieve productive efficiency but the monopoly will not.
D)the competitive industry is consistent with allocative efficiency whereas the monopoly is not.
E)both the competitive industry and the monopoly will allocate resources inefficiently.

Question 10

There has been a trend toward less government regulation and ownership in oligopolistic industries in most industrialized countries since the 1980s.One reason for this is

A)policymakers came to understand that many oligopolistic firms were producing output levels that resulted in allocative efficiency.
B)domestic firms are now exposed to more international competition due to falling transportation and communication costs.
C)Canada's Competition Bureau,and similar agencies in other countries were so successful at promoting competition that such regulation is no longer required.
D)policymakers came to understand that many oligopolistic firms were operating at their minimum efficient scale,thereby producing an efficient outcome.
E)policymakers realized that they did not have effective tools for promoting efficiency.

Question 11

Consider a natural monopoly that is producing an output level such that it is experiencing decreasing returns to scale.If government policy requires the firm to set price equal to marginal cost,

A)the outcome will be allocatively inefficient and the firm will be incurring losses.
B)the outcome will be allocatively efficient and the firm will be earning zero profits.
C)the outcome will be allocatively efficient and the firm will be earning profits.
D)the outcome will be allocatively efficient and the firm will be incurring losses.
E)the outcome will be allocatively inefficient and the firm will be earning profits.

Question 12

Canadian governments (federal,provincial and municipal)employ public ownership or regulation of industries in an effort to

A)produce a more equitable distribution of income between consumers and producers with monopoly power.
B)ensure that the goal of profit maximization is being pursued because this ensures allocative efficiency.
C)transfer monopoly profits from private firm owners to the government.
D)protect consumers from the high prices and restricted output associated with monopoly power.
E)promote productive efficiency in all industries.

Question 13

FIGURE 12- 3 $$10$$

-Refer to Figure 12- 3.Comparing the perfectly competitive equilibrium to the monopoly equilibrium,the reduction in consumer surplus due to monopoly is outlined by

A)P2P3E.
B)q1CEq2.
C)BCE.
D)P2ECP3.
E)P2EP4.

Question 14

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

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

Question 15

Which of the following is an example of an industry that succeeds in restricting entry,thereby maintaining prices above competitive levels?

A)window washing
B)dentistry
C)book publishing
D)transport trucking
E)beef cattle ranching

Question 16

Allocative efficiency occurs when

A)consumer surplus is maximized.
B)deadweight loss is achieved.
C)producer surplus is maximized.
D)the economy achieves the frontier of the production possibilities boundary.
E)the sum of consumer and producer surplus is maximized.

Question 17

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.

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

Question 18

Which of the following is the result of a monopolist's pricing and output behaviour,as compared to a perfectly competitive outcome?

A)an increase in both consumer and producer surplus
B)a reduction in producer surplus and increase in consumer surplus
C)an increase in the sum of consumer and producer surplus
D)a reduction in both consumer and producer surplus
E)a reduction in the sum of consumer and producer surplus

Question 19

An allowable defence for a merger according to Canada's Competition Bureau is that

A)merged and therefore bigger firms are better placed to compete globally.
B)larger firms are easier to regulate.
C)the gains in efficiency resulting from the merger more than offset any reductions in competition.
D)merging firms find it easier to decide how they will share the market.
E)merging firms are more profitable because they no longer have to compete with one another.

Question 20

FIGURE 12- 3
Refer to Figure 12- 3.If the diagram is depicting a perfectly competitive industry,the equilibrium price and quantity is

A)P2 and q1.
B)P2 and q2.
C)P1 and q1.
D)P1 and q2.
E)P3 and q1.

Question 21

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

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

Question 22

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

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

Question 23

The diagram below shows the demand and supply curves in a perfectly competitive market.
FIGURE 12- 5
Refer to Figure 12- 5.At the free- market equilibrium,consumer surplus is represented by the area

A)P2P3E.
B)P1P2E.
C)P1P3E.
D)1 +2.
E)1 + 2 + 3 + 4.

Question 24

The diagram below shows the demand and supply curves in a perfectly competitive market.
FIGURE 12- 5
In Canada,a significant challenge for the Competition Bureau when reviewing a possible merger between firms in a concentrated industry is to

A)impose effective entry barriers to the industry.
B)determine whether monopoly no longer poses a threat to the Canadian economy.
C)determine whether criminal charges are required due to unlawful collusion.
D)allow those mergers that lead to larger firms that are easier to regulate.
E)determine whether efficiency gains make the merger desirable.

Question 25

FIGURE 12- 2 The production possibilities boundary shows possible combinations of guns and butter that can be produced by a country.The lower diagram shows demand and supply for butter.

Refer to Figure 12- 2.Suppose this economy is allocatively efficient at Q1 units of butter.Now suppose there is an increase in demand for butter from D to D1.After this shift in demand,

A)the marginal value to consumers of butter is less than the marginal cost to producers; the price of butter (relative to the price of guns)rises; the economy moves to output Q2 of butter and point (c)on the PPB.
B)the price of guns (relative to the price of butter)rises and the economy moves to point (a)on the PPB.
C)the marginal value to consumers of butter is greater than the marginal cost to producers; the price of butter (relative to the price of guns)rises; the economy moves to output Q2 of butter and point (c)on the PPB.
D)the increase in the price of butter (relative to the price of guns)will cause the demand curve to shift back down to D and allocative efficiency will be maintained.
E)the supply curve will shift up to S1 and allocative efficiency will be maintained.

Question 26

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

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

Question 27

Suppose we compare two monopolists with identical cost and demand conditions.Monopolist A charges a single price.Monopolist B engages in price discrimination,charging a different price for different units of the product.Which one of the following statements is correct?

A)A will produce less than B,resulting in smaller deadweight loss.
B)A and B will both produce the same amount.
C)B will generally produce more than A,resulting in less deadweight loss.
D)A will produce more than B,resulting in larger deadweight loss.
E)B will produce less than A,resulting in a larger deadweight loss.

Question 28

In the long run,the imposition of average- cost pricing in natural monopolies,such as Manitoba Hydro and New Brunswick Power,would generally lead to

A)productive efficiency.
B)distorted investment decisions.
C)allocative efficiency.
D)a reduction in the output by these firms.
E)both allocative efficiency and productive efficiency.

Question 29

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
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.

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

Question 30

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 marginal- cost pricing.To maintain the resulting level of output

A)the demand curve would have to the left.
B)the average total cost curve would have to shift up.
C)the government would have to accept the allocative inefficiency associated with this level of output.
D)the government would have to subsidize the firm or it will eventually shut down.
E)the regulator would have to allow the firm to keep the monopoly profits at this level of output.

Question 31

Allocative efficiency is actively sought

A)by profit- maximizing firms in all market structures.
B)by none of the firms in any market.
C)only by perfectly- competitive firms.
D)only by profit- maximizing imperfectly- competitive firms.
E)by all firms in all markets.

Question 32

The diagram below shows supply,demand,and quantity exchanged of Monday matinee movie tickets.Assume it is a perfectly competitive market.
FIGURE 12- 4
Refer to Figure 12- 4.What is the total revenue received by the sellers of this product at the allocatively efficient level of output?

A)$500
B)$125
C)$375
D)$5
E)$250

Question 33

If all firms are profit maximizers,then the following is assured:

A)each firm is productively efficient.
B)that the economy reaches the production possibilities boundary.
C)allocative and productive efficiency.
D)allocative efficiency.
E)that firms attain the lowest possible average costs.

Question 34

Consider the efficiency of various market structures and complete the following sentence.The larger the minimum efficient scale of firms,ceteris paribus,the

A)more likely we are to have a concentrated market and allocative inefficiency.
B)lower the advantages of large- scale production.
C)less the tendency toward monopoly inefficiency.
D)more likely firms will display productive efficiency.
E)greater the number of firms comprising an industry.

Question 35

The diagram below shows supply,demand,and quantity exchanged of Monday matinee movie tickets.Assume it is a perfectly competitive market.
FIGURE 12- 4
Refer to Figure 12- 4.Suppose a disequilibrium price of $7.50 per movie ticket is imposed on this market.The total economic surplus is now _ ,which is than the total economic surplus generated at the allocatively efficient level of output.

A)$187.50; $62.50 less
B)$125; $250 less
C)$187.50; $187.50 less
D)$125; $125 less
E)$62.50; $125 less

Question 36

The diagram below shows the demand and supply curves in a perfectly competitive market.
FIGURE 12- 5
Refer to Figure 12- 5.In the free- market equilibrium,producer surplus is shown by the area

A)P3P2E.
B)P1P2E.
C)P1P3E.
D)1 +2.
E)1 + 2 + 3 + 4.

Question 37

The diagram below shows the demand and supply curves in a perfectly competitive market.
FIGURE 12- 5
Refer to Figure 12- 5.If output in this market were Q1,and the price were still equal to its free- market level,the loss in producer surplus relative to the competitive equilibrium would be illustrated by area

A)P1P3E.
B)2.
C)1.
D)1 + 2.
E)P3P2E.

Question 38

In general,which of the following statements guides policymakers with respect to a natural monopoly? The firm

A)is the best way to produce a given product and should be left alone.
B)will not achieve productive efficiency without regulation.
C)should be taken over by government and run as a crown corporation.
D)should be broken up into a large number of competitive firms.
E)generally needs to be regulated in order to reduce allocative inefficiency.

Question 39

FIGURE 12- 1 Consider three firms,A,B and C,all producing kilos of potatoes (per year)in a perfectly competitive market.The diagrams below show marginal cost curves for each of the three firms.

Refer to Figure 12- 1.Suppose each of Firms A,B,and C are producing 500 kilos of potatoes.Is this industry productively efficient?

A)It is not possible to say whether this industry is productively efficient because we do not know the market price of the product.
B)No,because marginal costs are not equated for all firms.
C)No,because each firm could easily produce more than 500 kilos.
D)Yes,because output is equated for all firms.
E)No,because the marginal cost curve for each firm has a different slope.

Question 40

The diagram below shows the demand and supply curves in a perfectly competitive market.
FIGURE 12- 5
Refer to Figure 12- 5.Allocative efficiency occurs

A)at price P1 and output Q3.
B)at output level Q3.
C)at output level Q1.
D)at price P2 and output Q2.
E)where the areas 1,2,3,and 4 are maximized.

Question 41

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

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

Question 42

The diagram below shows the market demand curve and the cost curves for a single firm.
FIGURE 12- 6
Refer to Figure 12- 6.The firm depicted in the figure is

A)a perfectly competitive firm.
B)a cartel.
C)a monopolistically competitive firm.
D)an oligopoly.
E)a natural monopoly.

Question 43

The diagram below shows the demand and supply curves in a perfectly competitive market.
FIGURE 12- 5
Refer to Figure 12- 5.If output in this market were Q3,and the price was still equal to its free- market level,the loss in producer surplus relative to the competitive equilibrium would be illustrated by area

A)1.
B)2.
C)3.
D)4.
E)3 + 4.

Question 44

If an economy is productively inefficient,it could improve its situation by

A)acquiring more resources.
B)trading some of its resources.
C)moving along its production possibilities boundary.
D)moving onto its production possibilities boundary.
E)moving beyond its production possibilities boundary.

Question 45

The diagram below shows the demand and supply curves in a perfectly competitive market.
FIGURE 12- 5
When comparing a monopoly equilibrium to a competitive market equilibrium,the consumer suffers two types of losses.They are

A)the deadweight loss due to the output that is produced beyond the competitive level,and the transfer of consumer surplus to the monopolist
B)the deadweight loss due to the output that is produced and the reduced incentive for innovation by the monopolist.
C)the loss of both consumer surplus and producer surplus.
D)a loss of consumer surplus due to the output that is not produced,and the transfer of consumer surplus to the monopolist.
E)the deadweight loss due to the output that is not produced and the transfer of producer surplus to the monopolist.

Question 46

In general,the sum of consumer and producer surplus is maximized under the conditions of

A)any market structure.
B)monopolistic competition.
C)perfect competition.
D)oligopoly.
E)monopoly.

Question 47

Suppose there are only two firms (Firms A and

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

Question 48

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
If this firm is currently being regulated and is following an average- cost pricing policy,the price of the service is per month.

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

Question 49

Which of the following is the definition of producer surplus?

A)the revenue received for a good,minus the cost of producing it
B)the price of a good minus the cost of producing it
C)quantity produced in excess of the allocatively efficient amount
D)the total revenue received by the producer for a good minus the total cost of producing that good
E)the price of a good minus the marginal cost of producing it,summed over the quantity produced

Question 50

The diagram below shows the demand and supply curves in a perfectly competitive market.
FIGURE 12- 5
Refer to Figure 12- 5.In the free- market equilibrium,producer plus consumer surplus is maximized and is illustrated by the area

A)P3P2E.
B)P1P2E.
C)P1P3E.
D)1 + 2.
E)1 + 2 + 3 + 4.

Question 51

The diagram below shows the demand and supply curves in a perfectly competitive market.
FIGURE 12- 5
Refer to Figure 12- 5.If output in this market were Q1,but the price was still at its free- market level,the loss in consumer surplus relative to the competitive equilibrium would be illustrated by area

A)P1P3E.
B)2.
C)P3P2E.
D)1 + 2.
E)1.

Question 52

The diagram below shows supply,demand,and quantity exchanged of Monday matinee movie tickets.Assume it is a perfectly competitive market.
FIGURE 12- 4
Monopoly is allocatively inefficient because

A)the firm has no incentive to maximize profits.
B)the opportunity cost exceeds the marginal cost of the last unit produced.
C)the marginal cost exceeds the average cost for the last unit produced.
D)the price exceeds the marginal cost of the last unit produced.
E)lower costs could be achieved.

Question 53

FIGURE 12- 3
We can safely say that each point on a country's production possibilities boundary (PPB)is

A)allocatively efficient.
B)Pareto optimal.
C)one at which P = MC for all goods.
D)not productively efficient.
E)productively efficient.

Question 54

Choose the statement that best describes the dilemma facing the regulator of a natural monopoly.

A)Marginal- cost pricing will result in allocative inefficiency; average- cost pricing leads to profits or losses.
B)Marginal- cost pricing will result in productive and allocative inefficiency; average- cost pricing will not.
C)Marginal- cost pricing leads to profit or losses; average- cost pricing results in allocative inefficiency.
D)Both kinds of regulation have the same implications for allocative efficiency.
E)There is no dilemma.

Question 55

FIGURE 12- 2 The production possibilities boundary shows possible combinations of guns and butter that can be produced by a country.The lower diagram shows demand and supply for butter.

Refer to Figure 12- 2.Suppose demand and supply for butter are shown by D and S,respectively.And suppose the economy is at point (a)on the production possibilities boundary.Is this output of guns and butter allocatively efficient?

A)No,because the marginal cost to producers of the butter produced is more than the marginal value to consumers.
B)Yes,because the marginal cost of producing the butter equals the marginal value of consuming the butter.
C)No,because the marginal costs for guns and butter are not equated.
D)No,because the marginal value to consumers of the butter produced is greater than the marginal cost to producers.
E)Yes,because all points on the production possibilities boundary are allocatively efficient.

Question 56

FIGURE 12- 3
A major aim of Canadian competition policy is to

A)achieve a perfectly competitive market structure in all markets in the Canadian economy.
B)protect Canadian companies from unfair foreign competition.
C)monitor the pricing practices of crown corporations.
D)prevent further concentration of industries where such concentration would lessen competition.
E)eliminate oligopolies and the allocative inefficiency that they entail.

Question 57

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

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

Question 58

The diagram below shows supply,demand,and quantity exchanged of Monday matinee movie tickets.Assume it is a perfectly competitive market.
FIGURE 12- 4
Refer to Figure 12- 4.What is the value of the consumer surplus generated in this market at the allocatively efficient level of output?

A)$10
B)$0
C)$125
D)$250
E)$5

Question 59

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,

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

Question 60

FIGURE 12- 3
Refer to Figure 12- 3.The area representing producer surplus at the monopoly equilibrium is outlined by

A)P0P2BA.
B)P0AP1.
C)0P0Aq1.
D)P0P3CA.
E)0P3Cq1.

Question 61

FIGURE 12- 1 Consider three firms,A,B and C,all producing kilos of potatoes (per year)in a perfectly competitive market.The diagrams below show marginal cost curves for each of the three firms.

Refer to Figure 12- 1.Suppose each of Firms A,B,and C are producing 500 kilos of potatoes.Is this industry allocatively efficient?

A)It is not possible to say whether this industry is allocatively efficient because we do not know the average costs for each firm.
B)No,because the marginal cost curve for each firm has a different slope.
C)Yes,because output is equated for all firms.
D)It is not possible to say whether this industry is allocatively efficient because we do not know the market price for kilos of potatoes.
E)No,since marginal costs are not equated for all firms,the industry is not productively efficient,and thus cannot be allocatively efficient.

Question 62

FIGURE 12- 3
Refer to Figure 12- 3.The area representing consumer surplus in a perfectly competitive equilibrium is outlined by

A)P3P4C.
B)0P4Eq2.
C)ACE.
D)ABE.
E)P2P4E.

Question 63

FIGURE 12- 1 Consider three firms,A,B and C,all producing kilos of potatoes (per year)in a perfectly competitive market.The diagrams below show marginal cost curves for each of the three firms.

Consider a public utility that is a natural monopoly with falling long- run average costs.If a regulatory agency ordered this firm to price all of its output at marginal cost,then the firm

A)would earn profits since the demand curve is perfectly inelastic.
B)could incur profits or losses depending on the position of the demand curve and the LRAC curve.
C)would lose money unless it is subsidized.
D)would have to shut down.
E)would incur losses since the demand curve is perfectly elastic.

Question 64

If a regulatory agency imposes a lump- sum tax on a monopolist (i.e.,a tax that is independent of the level of output)it will reduce the firm's profits because the tax increases

A)both the LRAC and the MC,leaving price and output unchanged.
B)all costs as it shifts the demand curve to the right.
C)all costs as it shifts the demand curve to the left.
D)price whereas quantity demanded falls.
E)the LRAC but not the MC,leaving price and output unchanged.

Question 65

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 marginal- cost pricing.In this case,

A)the result is allocatively inefficient because the firm is suffering losses.
B)allocative efficiency is achieved because price equals marginal cost.
C)the result is allocatively inefficient because the marginal cost curve lies below the ATC curve.
D)allocative efficiency is achieved because profits are maximized.
E)the result is allocatively inefficient because the firm is earning profits.

Question 66

The diagram below shows the demand and supply curves in a perfectly competitive market.
FIGURE 12- 5
Refer to Figure 12- 5.If output in this market were Q3,and the price were still P2,the loss in consumer surplus relative to the competitive equilibrium would be illustrated by area

A)1.
B)2.
C)3.
D)4.
E)3 + 4.

Question 67

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 the policy of marginal- cost pricing.The resulting price and output would be

A)P1 and Q1.
B)P2 and Q2.
C)P1 and Q2.
D)P3 and Q2.
E)P3 and Q1.

Question 68

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 marginal- cost pricing.In this case,the firm would experience represented by the area .

A)losses; edbc
B)profits; edbc
C)profits; P2P3ad
D)losses; 0P2bQ2
E)losses; P1P2bc

Question 69

Allocative efficiency concerns

A)producing outputs at lowest possible cost.
B)the allocation of resources such that total economic surplus is maximized.
C)encouraging monopoly if it generates innovation.
D)the equitable distribution of resources.
E)discouraging all monopoly firms.

Question 70

The diagram below shows the market demand curve and the cost curves for a single firm.
FIGURE 12- 6
Which of the following is the definition of consumer surplus?

A)the value that consumers place on the last unit consumed of a good
B)the marginal value that consumers place on the last unit consumed of a good
C)the quantity consumed in excess of the allocatively efficient amount
D)the total value that consumers place on the quantity consumed of some good
E)the difference between the value that consumers place on a good and the payment they make to buy the good,summed over the quantity consumed

Question 71

FIGURE 12- 1 Consider three firms,A,B and C,all producing kilos of potatoes (per year)in a perfectly competitive market.The diagrams below show marginal cost curves for each of the three firms.

Refer to Figure 12- 1.Suppose each of Firms A,B,and C are producing 500 kilos of potatoes.Which of the following statements correctly describes the productive efficiency of this industry?

A)The total output of 1500 kilos is the productively efficient output for this industry,so no reallocation is necessary.
B)It is not possible to say whether this industry is productively efficient because we do not know the average costs for each firm.
C)Productive efficiency would be achieved if Firm B produced all the output,since it has the lowest MC for the production of 500 kilos.
D)It is possible to reduce the total cost of the given output by reallocating production among the three firms.
E)It is not possible to say whether this industry is productively efficient because we do not know the market price of the product.

Question 72

An economy in which there are no market failures and all industries are in a competitive long- run equilibrium is one where 1.allocative efficiency is achieved;
2.the economy is on the production possibilities boundary;
3.there is no incentive for firms to enter or leave industries.

A)1 and 2
B)1,2,and 3
C)2 only
D)1 and 3
E)2 and 3

Question 73

An economy will be allocatively efficient if

A)marginal cost equals price for all goods.
B)the economy's resources are fully employed.
C)imperfectly competitive markets are regulated.
D)the marginal costs of all firms in an industry are equal.
E)least- cost production techniques are employed by all firms.

Question 74

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 policy of marginal- cost pricing.In this case,economic profits are equal to

A)- $28 000.
B)- $50 000.
C)$90 000.
D)- $15 000.
E)$0.

Question 75

The diagram below shows supply,demand,and quantity exchanged of Monday matinee movie tickets.Assume it is a perfectly competitive market.
FIGURE 12- 4
Refer to Figure 12- 4.What is the value of the producer surplus generated in this market at the free- market equilibrium?

A)$125
B)$250
C)$5
D)$10
E)$0

Question 76

The diagram below shows supply,demand,and quantity exchanged of Monday matinee movie tickets.Assume it is a perfectly competitive market.
FIGURE 12- 4
Consider the efficiency of various market structures.In the absence of other market failures,allocative efficiency is achieved only under perfect competition because only this market structure results in

A)P = MC.
B)zero long- run profits.
C)maximization of profits through competition.
D)complete freedom of entry and exit.
E)productive efficiency.

Question 77

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

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

Question 78

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

A)regulators shift from protecting the consumer to protecting the regulated firm from competition.
B)regulators impose additional costs on regulated firms because they are expected to accomplish other social goals.
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 79

FIGURE 12- 1 Consider three firms,A,B and C,all producing kilos of potatoes (per year)in a perfectly competitive market.The diagrams below show marginal cost curves for each of the three firms.

One method of regulating a natural monopoly is known as average- cost pricing.Using this method,the regulator requires that the price be set equal to

A)internal cost.
B)average fixed cost.
C)average variable cost.
D)marginal cost.
E)long- run average cost.

Question 80

FIGURE 12- 2 The production possibilities boundary shows possible combinations of guns and butter that can be produced by a country.The lower diagram shows demand and supply for butter.

Refer to Figure 12- 2.Suppose demand and supply for butter are shown by D and S,respectively.And suppose the economy is at point (a)on the production possibilities boundary.How can this economy move toward allocative efficiency?

A)increase the supply of guns
B)expand the production possibilities boundary outward
C)produce less butter,more guns
D)produce more butter,less guns
E)increase the demand for butter