Deck 15: Economic Regulation and Antitrust Policy

Question 1

In a natural monopoly, throughout the range of market demand,

A)marginal cost exceeds average cost and therefore pulls average cost upward
B)average cost exceeds marginal cost and therefore pulls marginal cost upward
C)marginal cost is below average cost and therefore pulls average cost downward
D)average cost is equal to marginal cost
E)there are diseconomies of scale

Answer 1

C

Question 2

Economic regulation of business is justified if, by intervening, governmentcan

A)improve the allocation of resources in society
B)create economic rents for special interest groups
C)reduce output and increase prices for an industry
D)increase tax revenue from the regulated industry
E)force firms to increase their costs of production

Answer 2

A

Question 3

If a firm can double inputs and, thereby, more than double output over therange of output the market demands, it is said to be experiencing

A)decreasing minimum efficient scale
B)increasing returns to scale
C)constant returns to scale
D)decreasing returns to scale
E)increasing long run average cost

Answer 3

B

Question 4

A natural monopoly exists when, throughout the range of market demand,

A)average cost is increasing
B)there are diseconomies of scale
C)average cost is decreasing
D)average cost is constant
E)marginal cost exceeds average cost

Question 5

Which of the following is the best example of a natural monopoly?

A)gold mining in the Colorado Rocky Mountains
B)filmmaking in Hollywood
C)electrical service to homes in Seattle
D)production of film by Kodak
E)production of computers by IBM

Question 6

The average cost curve for a natural monopoly is downward sloping whereit intersects the market demand curve.

Question 7

Economies of scale throughout the range of market demand give naturalmonopolies

A)downward­sloping long­run average cost curves
B)upward­sloping long­run average total cost curves
C)upward­sloping long­run average cost curves
D)upward­sloping short­run average total cost curves
E)horizontal long­run average cost curves

Question 8

If a firm has a downward­sloping long­run average cost curve over theentire range of market demand, it is a

A)local monopoly
B)resource monopoly
C)monopsony
D)output monopoly
E)natural monopoly

Question 9

A natural monopoly, such as the local telephone company, is characterizedby

A)a lack of natural competitors
B)low fixed costs and diseconomies of scale
C)economies of scale
D)a lack of government regulation
E)constant costs of production

Question 10

Government regulation of the prices charged by monopolies is an exampleof

A)safety regulation
B)economic regulation
C)Herfindahl regulation
D)antitrust regulation
E)antimerger regulation

Question 11

Government regulation of the prices and entry conditions in an industry is anexample of

A)safety regulation
B)economic regulation
C)Herfindahl regulation
D)antitrust regulation
E)Social Security legislation

Question 12

A natural monopoly exists when, throughout the range of market demand,

A)average cost is increasing
B)there are diseconomies of scale
C)there are economies of scale
D)average cost is constant
E)marginal cost exceeds average cost

Question 13

Government attempts to prohibit monopolization of a market are known as

A)antitrust regulation
B)economic regulation
C)social regulation
D)anticompetitive regulation
E)Herfindahl regulation

Question 14

Public policy can help achieve more efficient use of an economy'sresources by eliminating all monopolies.

Question 15

Which of the following occurs if firms are able to restrict output and raiseprice?

A)resources are misallocated
B)wealth is shifted from consumers to government
C)wealth is shifted from producers to consumers
D)P = MC
E)P = minimum LRAC

Question 16

)Government controls of price, output, entry of new firms, and quality ofservice in industries where monopoly appears desirable are known as

A)antitrust regulation
B)economic regulation
C)social regulation
D)antimerger regulation
E)consumer advocacy regulation

Question 17

.Public utilities are either government­owned or government­regulated firms.

Question 18

Which of the following is not a criticism of monopolies?

A)They restrict output.
B)They set price above the perfectly competitive level.
C)They tend to be less innovative than firms in a competitive market.
D)They exert a disproportionate amount of political influence.
E)They reduce allocative efficiency through perfect price discrimination.

Question 19

Economic regulation is government policy designed to

A)improve health and safety in products and in working conditions
B)prevent firms from monopolizing or developing a cartel in existing competitive markets
C)eliminate existing monopolies by breaking them apart into many smaller firms
D)create monopolies by forcing competitive firms to merge
E)control price and output in industries where monopoly is desirable

Question 20

A monopoly is likely to charge a higher price than an otherwise similarcompetitive industry would be.

Question 21

If a regulator sets the price equal to the natural monopolist's marginal cost,

A)the monopoly will experience a loss
B)the monopoly will earn a profit
C)the monopoly will earn zero profit
D)consumers will be worse off than they would be if the firm's profit maximization activities were
Unregulated
E)the monopoly will be better off than it would be if its profit maximization activities were unregulated

Question 22

) If regulators set price equal to marginal cost for the natural monopoly inExhibit 15­3, then from the usual profit­maximizing position, price changesfrom

A)$24 to $18, and quantity increases from 5 to 8
B)$14 to $20, and quantity increases from 5 to 8
C)$24 to $18, and quantity remains unchanged
D)$24 to $18, and quantity increases from 5 to 8
E)$24 to $22, and quantity increases from 5 to 10

Question 23

Watt Power and Light, an electric company, will suffer an economic loss

A)even at its profit­maximizing output because marginal cost is always less than average cost
B)even at its profit­maximizing output because average cost is always less than marginal cost
C)if regulators insist that it produce where price equals marginal cost because marginal cost is less than
Average cost
D)if regulators insist that it produce where price equals marginal cost because average cost is always less than
Marginal cost
E)if regulators insist that it produce where price equals average cost because average cost is always less than
Marginal cost

Question 24

) The welfare loss associated with the unregulated natural monopoly inExhibit 15­4 is shown by the area

A)cef
B)abc
C)adf
D)dfeg
E)bcfd

Question 25

Compared to the profit­maximizing outcome, marginal cost pricing innatural monopoly leads to

A)reduced demand
B)higher price
C)reduced consumer surplus
D)more economic profit
E)greater output

Question 26

) If it is allowed to earn only a normal profit, the regulated natural monopolyin Exhibit 15­6 will set price equal to

A)a
B)b
C)c
D)f
E)e

Question 27

If regulators allow the natural monopolist in Exhibit 15­6 to earn only anormal profit, it will produce an output equal to

A)0
B)g
C)h
D)i
E)j

Question 28

Exhibit 15­5 If the natural monopoly in Exhibit 15­5 is regulated so that it earns a normalprofit, then

A)P = $24 and Q = 8
B)P = $22 and Q = 6
C)P = $24 and Q = 5
D)P = $20 and Q = 8
E)P = $18 and Q = 5

Question 29

The rail system in Metropolis is a natural monopoly.If the governmentregulates the system by setting the fare equal to marginal cost, which of thefollowing will be true?

A)Price and output will be higher than if the monopoly were unregulated.
B)Price and output will be lower than if the monopoly were unregulated.
C)Price will be lower and output higher than if the monopoly were unregulated.
D)Price will be higher and output lower than if the monopoly were unregulated.
E)Profit will be lower than if the monopoly were unregulated, but price and output could either increase
Or decrease.

Question 30

Exhibit 15­4 In Exhibit 15­4, the consumer surplus that results from an unregulatedmonopoly, is shown by area

A)abc
B)adf
C)cef
D)dfeg
E)bcfd

Question 31

) In Exhibit 15­4, the consumer surplus that results from a regulatedmonopoly that charges a price equal to MC, is shown by area

A)abc
B)adf
C)cef
D)dfeg
E)bcfd

Question 32

If government regulators force a natural monopoly to produce where priceequals marginal cost, the monopoly will earn

A)a "fair return"
B)positive economic profit
C)zero economic profit
D)negative economic profit
E)greater economic profit than if it were unregulated

Question 33

If regulators allow the natural monopolist in Exhibit 15­6 to earn only anormal profit, it will result in an increase in consumer surplus compared tothe profit maximizing result.

Question 34

The rail system in Metropolis is a natural monopoly.If the governmentregulates the system by setting the fare equal to marginal cost, which of thefollowing will be true?

A)The managers of the rail system will be allowed to adjust marginal cost so that they can get a normal rate
Of return on capital.
B)The managers of the rail system will be allowed to adjust marginal cost so that they can get a fair profit.
C)The rail system will earn economic profit at that fare.
D)If the government doesn't give the rail system a subsidy to supplement revenue from fares, the system
Will face continuous economic losses.
E)If the government doesn't give the rail system a subsidy to supplement revenue from fares, fare
Increases will push marginal cost upward.

Question 35

If the government wants a natural monopoly to earn a "fair return" or zeroeconomic profit, it will set

A)price equal to marginal cost
B)price equal to average total cost
C)price equal to average revenue
D)marginal cost equal to marginal revenue
E)marginal cost equal to average total cost

Question 36

) In Exhibit 15­4, the increase in consumer surplus that occurs when price isset equal to marginal cost rather than at the profit­maximizing level, as itwould be in an unregulated monopoly, is shown by area

A)abc
B)adf
C)cef
D)dfeg
E)bcfd

Question 37

If the electric company is allowed by regulators to earn only a normalprofit, it will produce at the point where

A)MR = MC
B)P = MC
C)MC = quantity demanded
D)P = AC
E)MR = AC

Question 38

In order to ensure allocative efficiency on the part of a natural monopoly,regulators would set price equal to marginal cost.

Question 39

Most local phone companies

A)face a horizontal demand curve
B)are regulated
C)are called public utilities
D)have tremendous economies of scale
E)are natural monopolies

Question 40

Which of the following is true when regulators require a natural monopolistto set price equal to marginal cost?

A)This policy results in a less than socially optimal allocation of resources.
B)The marginal cost of producing the last unit sold exceeds the consumers' marginal value for that last
Unit.
C)The monopolist will face recurring losses unless a subsidy is provided.
D)The monopolist will earn a normal profit.
E)The monopolist will earn more than a fair return.

Question 41

When government regulations force a natural monopoly to produce whereprice equals average total cost, social welfare is

A)maximized
B)less than it would be without regulation
C)greater than it would be without regulation, but it is not maximized
D)exactly the same as it would be without regulation
E)minimized

Question 42

Compared to the profit­maximizing outcome, average cost pricing in naturalmonopoly leads to

A)all of the following
B)a higher price
C)decreased consumer surplus
D)the elimination of economic profit
E)less output

Question 43

If the government wishes to provide a natural monopolist with a "fair" rateof return, it will force the firm to set

A)P = MC
B)P = AC
C)P = MR
D)P = AVC
E)MR = MC

Question 44

Which of the following is likely to result from the regulation of taxicabs inMexico City?

A)The price of taxi rides will decrease.
B)The price of taxi rides will increase.
C)The income of taxi owners will increase.
D)Taxi owners will have greater monopoly power.
E)The supply of taxis will decrease.

Question 45

A physicians' professional association supports legislation seeking higherquality medical care.According to the special interest theory of regulation,who likely will benefit most from this legislation?

A)Government, through decreased regulation of physician quality.
B)Patients, through reduced prices for medical care.
C)Physicians, through increased prices for medical care.
D)Hospitals, through decreased for physicians' services.
E)Government, since higher quality health care is clearly in the public interest.

Question 46

A regulated natural monopoly that must set price equal to average cost will

A)suffer an economic loss
B)earn a net economic profit
C)earn a normal profit
D)earn so little that it will close in the long run
E)earn no profits of any kind

Question 47

Producers play a disproportionately large role in influencing publicregulation because they have a strong interest in matters that affect theirspecialized source of income.

Question 48

Which of the following groups benefits from regulation, according to thespecial interest theory of regulation?

A)all consumers
B)all producers
C)only certain consumers
D)only certain producers
E)society as a whole

Question 49

If producers support proposed regulation of their industry, then

A)it is likely that consumers will benefit from the regulation
B)it is likely that producers are looking out for the interests of the consumers
C)it is likely that both producers and consumers will be adversely affected by the legislation
D)it is possible that consumers will be adversely affected by the legislation
E)it is likely that prices will fall

Question 50

To allow a public utility (which is a natural monopoly) to earn only a normalprofit, the government should

A)do all of the following
B)set price equal to average cost
C)equate marginal cost and average cost
D)set marginal cost equal to marginal revenue
E)set price equal to marginal cost

Question 51

The capture theory of regulation, espoused by George Stigler, asserts that

A)consumers "capture" regulatory agencies so that regulation favors consumers
B)producers "capture" regulatory agencies so that regulation favors producers
C)regulators "capture" producers and limit their market power
D)consumers "capture" some consumer surplus lost to monopoly
E)consumers and producers work together to "capture" regulatory agencies in order to achieve more
Desirable regulation

Question 52

The government often enacts regulation that benefits producers because

A)the government seeks to regulate in the best interest of the public
B)consumers have less information than producers and therefore seek government protection
C)consumers have a strong interest in matters that affect their standard of living
D)producers have a strong interest in matters that affect their specialized source of income
E)producers seek to act in the best interest of the public