Deck 16: Government Regulation of Business

Question 1

Natural monopoly arises when

A) there is only one firm in the area.
B) there are high barriers to entry.
C) costs are subadditive.
D) it is more cost efficient to have multiple firms.
E) none of the above

Answer 1

C

Question 2

In long-run perfectly competitive equilibrium, economic efficiency is achieved because

A) price equals long-run marginal cost for every firm in the industry.
B) price equals average fixed cost for every firm in the industry.
C) price equals minimum long-run average cost for every firm in the industry.
D) both a and c

Answer 2

both a and c

Question 3

Common property resources lead to market failure because

A) poorly defined property rights result in too little of the resource being used by society.
B) poorly defined property rights reduce production costs.
C) poorly defined property rights create a deadweight loss.
D) the resource is overexploited and under supplied.

Answer 3

D

Question 4

The Golden Gate bridge is not a pure public good because

A) the bridge is not a nondepletable good.
B) the bridge is nondepletable.
C) the free rider problem could be solved using toll accesses or booths.
D) the marginal cost of another car crossing the bridge is zero.

Question 5

An underallocation of resources in an industry means that for the last unit produced,

A) economic profit is still rising.
B) society places a higher value on the resources required to produce the last unit than the value society places on consuming the last unit.
C) the demand price for the last unit exceeds the marginal cost of producing the last unit.
D) the cost of producing the last unit exceeds its value to society.
E) long-run average cost is falling.

Question 6

"Market power"

A) is the ability to lower costs and earn monopoly profits.
B) is the ability to raise price without losing all sales.
C) becomes "monopoly power" when the degree of market power is sufficiently high.
D) both a and b
E) both b and c

Question 7

An underallocation of resources occurs when

A) marginal private benefit exceeds marginal social benefit.
B) a negative externality in production exists.
C) a positive externality in consumption exists.
D) All of these will lead to underallocation of resources.

Question 8

Private provision of public goods fails to achieve economic efficiency because

A) the free rider problem causes overproduction of the good.
B) the free rider problem prevents collection of sufficient revenue.
C) the price of the privately supplied public good must exceed zero in order to be allocatively efficient.
D) both a and c
E) both b and c

Question 9

The less information consumers have about product quality,

A) the greater will be the loss of social surplus due to productive inefficiency.
B) the smaller will be the loss of social surplus due to productive inefficiency.
C) the greater will be the loss of social surplus due to allocative inefficiency.
D) the smaller will be the loss of social surplus due to allocative inefficiency.

Question 10

As a policy option for regulating natural monopoly, marginal cost pricing is desirable because

A) consumers pay the lowest possible price that will generate sufficient revenue to cover the costs of the natural monopolist.
B) allocative efficiency is achieved.
C) price is set equal to the minimum value of long-run average cost.
D) all of the above.

Question 11

Market or monopoly power leads to market failure because

A) price exceeds marginal revenue, which causes the profit-maximizing firm to under-produce the good or service.
B) price exceeds marginal revenue, which causes the profit-maximizing firm to over-produce the good or service.
C) when MR = MC in profit-maximizing equilibrium, the value of the last unit produced is less than the marginal cost of producing the last unit.
D) firms with market power have no incentive to produce on their expansion paths.

Question 12

When social surplus is maximized in competitive equilibrium

A) marginal social benefit equals marginal social cost.
B) allocative and productive efficiency are achieved.
C) consumer surplus is maximized.
D) both a and b
E) all of the above

Question 13

Firms with market power

A) face downward sloping average cost curves.
B) face downward sloping marginal cost curves.
C) will produce where P = MR=MC.
D) will maximize profit but fail to maximize social surplus.

Question 14

The cost and demand conditions for residential water consumption are shown below. If there are 450,000 residential water customers, then develop an optimal two-part pricing scheme and answer Questions .


-The optimal usage fee to charge is _______ per gallon of water.

A) $0.12
B) $0.18
C) $0.24
D) $0.30
E) $0.36

Question 15

An overallocation of resources in an industry means that for the last unit produced,

A) economic profit is negative but rising.
B) society places a higher value on the resources required to produce the last unit than the value society places on consuming the last unit.
C) the demand price for the last unit exceeds the marginal cost of producing the last unit.
D) the marginal cost of production is falling.
E) the average cost is falling.

Question 16

When we say that market prices allocate goods to the highest-valued users, we mean that

A) only consumers with higher incomes will get any of the good, while lower income consumers get none of the good.
B) only consumers who value the good more than the market price of the good will choose to buy the good.
C) government allocation of the good is warranted because government can make sure that the good gets consumed by deserving individuals.
D) there is no shortage.

Question 17

When there is negative externality in production,

A) Marginal social benefit exceeds marginal private benefit.
B) Marginal private benefit exceeds marginal social benefit.
C) Marginal social cost exceeds marginal private cost.
D) Marginal private cost exceeds marginal social cost.

Question 18

Which of the follow is NOT a characteristic of natural monopoly?

A) Two or more firms experiencing economies of scale can produce the industry output at lower total cost than if a single firm produces the industry output.
B) One firm can produce the industry output at a lower total cost than two or more firms.
C) One firm is the technically efficient way to organize production.
D) Production of the industry output is characterized by cost subadditivity.

Question 19

Price is $50 and quantity demanded is 2,000 units at point A on a linear demand curve. The linear supply curve intersects the demand curve at point B, which is at a price of $30 and 3,000 units. Which of the following statements is true?

A) Moving from point A to point B causes consumer surplus to rise by $50,000.
B) Moving from point A to point B causes consumer surplus to rise by $10,000.
C) Moving from point B to point A causes consumer surplus to rise by $10,000.
D) Moving from point B to point A causes consumer surplus to rise by $50,000.

Question 20

When a competitively produced product is subject to negative externalities in production, the industry will

A) overproduce the good because marginal social cost will exceed marginal social benefit in competitive equilibrium.
B) overproduce the good because marginal private cost is less than marginal private benefit in competitive equilibrium.
C) underproduce the good because marginal social cost will exceed marginal social benefit in competitive equilibrium.
D) underproduce the good because marginal private social cost is less than marginal private benefit in competitive equilibrium in competitive equilibrium.

Question 21

Social economic efficiency means that the market is achieving

A) productive efficiency.
B) allocative efficiency.
C) maximum possible consumer surplus.
D) both a or b
E) all of the above

Question 22

For Questions refer to the following information:
A municipal water utility employs quasi-fixed capital inputs-are the water treatment plant and distribution lines to homes-to supply water to 20,000 households in the community it serves. The figure below shows the cost structure of this utility for various levels of water service. Quantity of water consumption is measured in 1,000-gallon units per month. AQFC is the average quasi-fixed cost curve, and LAC is long-run average cost. Long-run marginal cost, LMC, is constant and equal to $4 per 1,000-gallon unit. The inverse demand equation is $$P = 24 - 0.0004 Q _ { d }$$ .

-Second-best pricing does not achieve social economic efficiency because there is a dead weight loss of

A) $125,000.
B) $150,000.
C) $200,000.
D) $250,000
E) $300,000

Question 23

For Questions refer to the following information:
A municipal water utility employs quasi-fixed capital inputs-are the water treatment plant and distribution lines to homes-to supply water to 20,000 households in the community it serves. The figure below shows the cost structure of this utility for various levels of water service. Quantity of water consumption is measured in 1,000-gallon units per month. AQFC is the average quasi-fixed cost curve, and LAC is long-run average cost. Long-run marginal cost, LMC, is constant and equal to $4 per 1,000-gallon unit. The inverse demand equation is $$P = 24 - 0.0004 Q _ { d }$$ .

-If the Public Service Commission undertakes second-best pricing, the price and output of water are __________ and _________, respectively.

A) $2.00; 55,000
B) $9.00; 50,000
C) $2.50; 27,500
D) $9.50; 55,000
E) none of the above

Question 24

Use the figure below, which shows the linear demand and constant cost conditions facing a firm with a high barrier to entry, to answer Questions .

-The firm will earn economic profit of $______.

A) $500,000
B) $750,000
C) $1,000,000
D) $1,250,000

Question 25

The figure below shows the result of a price fixing scheme that raised price above competitive levels at point C to a price of $15 at point M. Answer Questions using this figure

-When antitrust enforcement agents break up this price-fixing cartel, producers will lose $__________ of producer surplus.

A) $5,000
B) $15,000
C) $20,000
D) $31,250

Question 26

For Questions refer to the following information:
A municipal water utility employs quasi-fixed capital inputs-are the water treatment plant and distribution lines to homes-to supply water to 20,000 households in the community it serves. The figure below shows the cost structure of this utility for various levels of water service. Quantity of water consumption is measured in 1,000-gallon units per month. AQFC is the average quasi-fixed cost curve, and LAC is long-run average cost. Long-run marginal cost, LMC, is constant and equal to $4 per 1,000-gallon unit. The inverse demand equation is $$P = 24 - 0.0004 Q _ { d }$$ .

-Quasi-fixed capital inputs cost per month is $____.

A) 150,000
B) 200,000
C) 250,000
D) 300,000
E) 350,000

Question 27

For Questions refer to the following information:
A municipal water utility employs quasi-fixed capital inputs-are the water treatment plant and distribution lines to homes-to supply water to 20,000 households in the community it serves. The figure below shows the cost structure of this utility for various levels of water service. Quantity of water consumption is measured in 1,000-gallon units per month. AQFC is the average quasi-fixed cost curve, and LAC is long-run average cost. Long-run marginal cost, LMC, is constant and equal to $4 per 1,000-gallon unit. The inverse demand equation is $$P = 24 - 0.0004 Q _ { d }$$ .

-Regulators at the Public Service Commission are unlikely to choose the price in the previous question because

A) the water utility company will lose money at that price.
B) the utility company will require a subsidy to continue operation in the long run.
C) government failure is a common problem at Public Service Commissions.
D) both a and b
E) all of the above

Question 28

The figure below shows the result of a price fixing scheme that raised price above competitive levels at point C to a price of $15 at point M. Answer Questions using this figure

-By forming this price-fixing cartel, producers gained $__________ of producer surplus, while consumers lost $__________ of consumer surplus.

A) $15,000; $10,000
B) $15,000; $20,000
C) $20,000; $10,000
D) $20,000; $5,000

Question 29

For Questions refer to the following information:
A municipal water utility employs quasi-fixed capital inputs-are the water treatment plant and distribution lines to homes-to supply water to 20,000 households in the community it serves. The figure below shows the cost structure of this utility for various levels of water service. Quantity of water consumption is measured in 1,000-gallon units per month. AQFC is the average quasi-fixed cost curve, and LAC is long-run average cost. Long-run marginal cost, LMC, is constant and equal to $4 per 1,000-gallon unit. The inverse demand equation is $$P = 24 - 0.0004 Q _ { d }$$ .

-The price and output of water that maximize social surplus are _____ and _____, respectively.

A) $9.00; 50,000
B) $4.00; 25,000
C) $4.00; 50,000
D) none of the above

Question 30

The figure below shows the result of a price fixing scheme that raised price above competitive levels at point C to a price of $15 at point M. Answer Questions using this figure

-The formation of this cartel caused a deadweight loss to society of $____________ of social surplus.

A) $5,000
B) $15,000
C) $20,000
D) $31,250

Question 31

For Questions refer to the following information:
A municipal water utility employs quasi-fixed capital inputs-are the water treatment plant and distribution lines to homes-to supply water to 20,000 households in the community it serves. The figure below shows the cost structure of this utility for various levels of water service. Quantity of water consumption is measured in 1,000-gallon units per month. AQFC is the average quasi-fixed cost curve, and LAC is long-run average cost. Long-run marginal cost, LMC, is constant and equal to $4 per 1,000-gallon unit. The inverse demand equation is $$P = 24 - 0.0004 Q _ { d }$$ .

-If the Public Service Commission implements an optimal two-part pricing plan, the usage fee is set at $_____ per 1,000-gallon units per month and the fixed monthly access charge must then be $_____ per household.

A) $4.00; $12.00
B) $4.00; $12.50
C) $5.00; $12.00
D) $5.00; $12.50

Question 32

For Questions refer to the following information:
A municipal water utility employs quasi-fixed capital inputs-are the water treatment plant and distribution lines to homes-to supply water to 20,000 households in the community it serves. The figure below shows the cost structure of this utility for various levels of water service. Quantity of water consumption is measured in 1,000-gallon units per month. AQFC is the average quasi-fixed cost curve, and LAC is long-run average cost. Long-run marginal cost, LMC, is constant and equal to $4 per 1,000-gallon unit. The inverse demand equation is $$P = 24 - 0.0004 Q _ { d }$$ .

-The value in blank c in the figure is ____.

A) $4.65
B) $4.75
C) $4.80
D) $5.50
E) none of the above

Question 33

For Questions refer to the following information:
A municipal water utility employs quasi-fixed capital inputs-are the water treatment plant and distribution lines to homes-to supply water to 20,000 households in the community it serves. The figure below shows the cost structure of this utility for various levels of water service. Quantity of water consumption is measured in 1,000-gallon units per month. AQFC is the average quasi-fixed cost curve, and LAC is long-run average cost. Long-run marginal cost, LMC, is constant and equal to $4 per 1,000-gallon unit. The inverse demand equation is $$P = 24 - 0.0004 Q _ { d }$$ .

-Two-part pricing is a desirable method of pricing water because

A) it is more profitable for the utility company than average-cost-pricing (i.e., second-best pricing).
B) deadweight loss is zero.
C) the deadweight loss is paid for by the users of water.
D) it easy to implement in practice.
E) both a and d

Question 34

___________ is/are example(s) of market failure that could justify government intervention in the market.

A) Imperfect information
B) Public goods
C) A perfectly competitive bagel market
D) A dominant firm that undertakes pricing strategies aimed at maintaining high entry barriers
E) only a, b, and d

Question 35

The cost and demand conditions for residential water consumption are shown below. If there are 450,000 residential water customers, then develop an optimal two-part pricing scheme and answer Questions .


-At the optimal user fee in the previous question, the water utility company will lose _______ per month.

A) $0
B) $1,440,000
C) $1,680,000
D) $2,400,000
E) $3,242,500

Question 36

The cost and demand conditions for residential water consumption are shown below. If there are 450,000 residential water customers, then develop an optimal two-part pricing scheme and answer Questions .


-The optimal monthly access charge per household is _______ per residence (per month).

A) $0.12
B) $0.18
C) $12
D) $24
E) $32

Question 37

For Questions refer to the following information:
A municipal water utility employs quasi-fixed capital inputs-are the water treatment plant and distribution lines to homes-to supply water to 20,000 households in the community it serves. The figure below shows the cost structure of this utility for various levels of water service. Quantity of water consumption is measured in 1,000-gallon units per month. AQFC is the average quasi-fixed cost curve, and LAC is long-run average cost. Long-run marginal cost, LMC, is constant and equal to $4 per 1,000-gallon unit. The inverse demand equation is $$P = 24 - 0.0004 Q _ { d }$$ .

-The value in blank b in the figure is ____.

A) 22,500
B) 25,000
C) 27,500
D) 30,000
E) none of the above

Question 38

For Questions refer to the following information:
A municipal water utility employs quasi-fixed capital inputs-are the water treatment plant and distribution lines to homes-to supply water to 20,000 households in the community it serves. The figure below shows the cost structure of this utility for various levels of water service. Quantity of water consumption is measured in 1,000-gallon units per month. AQFC is the average quasi-fixed cost curve, and LAC is long-run average cost. Long-run marginal cost, LMC, is constant and equal to $4 per 1,000-gallon unit. The inverse demand equation is $$P = 24 - 0.0004 Q _ { d }$$ .

-The value in blank d in the figure is ____.

A) 6.50
B) 7.50
C) 8.00
D) 9.50
E) none of the above

Question 39

For Questions refer to the following information:
A municipal water utility employs quasi-fixed capital inputs-are the water treatment plant and distribution lines to homes-to supply water to 20,000 households in the community it serves. The figure below shows the cost structure of this utility for various levels of water service. Quantity of water consumption is measured in 1,000-gallon units per month. AQFC is the average quasi-fixed cost curve, and LAC is long-run average cost. Long-run marginal cost, LMC, is constant and equal to $4 per 1,000-gallon unit. The inverse demand equation is $$P = 24 - 0.0004 Q _ { d }$$ .

-The value in blank a in the figure is ____.

A) 40,000
B) 45,000
C) 50,000
D) 55,000
E) none of the above

Question 40

The figure below shows the result of a price fixing scheme that raised price above competitive levels at point C to a price of $15 at point M. Answer Questions using this figure

-When antitrust enforcement agents break up this price-fixing cartel, consumers will gain $__________ of consumer surplus.

A) $5,000
B) $15,000
C) $20,000
D) $31,250

Question 41

The figure below shows the marginal damage and marginal abatement cost curves for sulfur dioxide emissions in North Zulch. EPA officials have imposed an emissions tax of $100 per ton of sulfur dioxide.
With the $100 per ton emission tax enforced in North Zulch, firms will pay total abatement costs of $____________.

A) $2,000
B) $2,500
C) $3,000
D) $5,500
E) $6,000

Question 42

The figure below shows the marginal damage and marginal abatement cost curves for sulfur dioxide emissions in North Zulch. EPA officials have imposed an emissions tax of $100 per ton of sulfur dioxide.
With the $100 per ton emission tax enforced in North Zulch, firms will abate _______ tons and pay total emission taxes of $_________.

A) 30; $8,000
B) 40; $5,000
C) 50; $4,500
D) 50; $5,000
E) 90; $4,500

Question 43

The figure below shows the marginal damage and marginal abatement cost curves for sulfur dioxide emissions in North Zulch. EPA officials have imposed an emissions tax of $100 per ton of sulfur dioxide.
With the $100 per ton emission tax enforced in North Zulch, residents of North Zulch incur total damages from sulfur dioxide emissions of $____________.

A) $2,000
B) $2,500
C) $3,000
D) $5,500
E) $6,000

Question 44

When we say that market prices allocate goods to the highest-valued users, we mean that

A) Only consumers with higher incomes will get any of the good, while lower income consumers get none of the good.
B) Only consumers who value the good more than the market price of the good will choose to buy the good.
C) Government allocation of the good is warranted because government can make sure that the good gets consumed by deserving individuals.
D) Consumer surplus is maximized.
E) both a and d

Question 45

An underallocation of resources in an industry means that for the last unit produced,

A) economic profit is still rising.
B) society places a higher value on the resources required to produce the last unit than the value society places on consuming the last unit.
C) the demand price for the last unit exceeds the marginal cost of producing the last unit.
D) the cost of producing the last unit exceeds its value to society.
E) long-run average cost is falling.

Question 46

Use the figure below, which shows the linear demand and constant cost conditions facing a firm with a high barrier to entry, to answer Questions .

-$_________ the deadweight loss is caused by the market power created by the high entry barrier

A) $625,000
B) $1,000,000
C) $1,500,000
D) $2,000,000

Question 47

Private provision of public goods fails to achieve economic efficiency because

A) the free rider problem causes overproduction of the good.
B) the free rider problem prevents collection of sufficient revenue.
C) the price of the privately supplied public good must exceed zero.
D) both a and c
E) both b and c

Question 48

Use the figure below, which shows the linear demand and constant cost conditions facing a firm with a high barrier to entry, to answer Questions .

-If the entry barrier is removed consumers will be better off because

A) consumers will enjoy greater consumer surplus.
B) productive efficiency will be restored.
C) competition will eliminate the shortage caused by the entry barrier.
D) all of the above

Question 49

The figure below shows the marginal damage and marginal abatement cost curves for sulfur dioxide emissions in North Zulch. EPA officials have imposed an emissions tax of $100 per ton of sulfur dioxide.
The optimal level of sulfur dioxide emission is not zero because it would cost $_______ to avoid or abate the last ton of pollution, while the benefit of abating the last ton is $_______.

A) $300; $100
B) $300; $0
C) $13,500; 6,750
D) $13,500; $0

Question 50

The less accurate consumer information is about product quality,

A) the greater will be the loss of social surplus due to productive inefficiency.
B) the smaller will be the loss of social surplus due to productive inefficiency.
C) the greater will be the loss of social surplus due to allocative inefficiency.
D) the smaller will be the loss of social surplus due to allocative inefficiency.