Deck 11: Regulation and Antitrust: The Role of Government in the Economy

Question 1

One difference between the public interest theory and the economic theory of regulation is that the former

A) asserts that regulation is a response to market failure and the latter that it is a response to the existence of natural monopolies and externalities.
B) asserts that regulation is a response to market failure and the latter that it is a response to pressure group action designed to promote the interests of regulated firms.
C) is based on qualitative analysis and the latter is based on quantitative analysis.
D) argues that regulation is inappropriate while the latter proves that it is essential.

Answer 1

asserts that regulation is a response to market failure and the latter that it is a response to pressure group action designed to promote the interests of regulated firms.

Question 2

Which of the following is not a complication encountered by public utility regulatory commissions when they set rates?

A) It is difficult to determine the economic value of a public utility's fixed assets.
B) Public utilities typically engage in price discrimination, so many different rates must be determined.
C) The services provided by public utilities are typically jointly produced, so the allocation of costs among different services is difficult or impossible.
D) All of the above are problems that are encountered when regulatory commissions set rates.

Answer 2

All of the above are problems that are encountered when regulatory commissions set rates.

Question 3

The economic theory of regulation holds that regulation is a response by government to cases in which markets cannot efficiently allocate resources.

Answer 3

False

Question 4

Government regulation of an activity that produces an externality can be expected to yield a socially optimal result only if the private and social benefits and costs of the activity can be accurately determined.

Question 5

Political pressures on appointees to public utility regulatory commissions tend to result in rate changes that are larger than necessary to obtain the socially optimal results.

Question 6

Price collusion among firms is clearly and unequivocally prohibited by antitrust laws.

Question 7

Predatory pricing refers to the case in which a firm produces a level of output where marginal cost is equal to marginal revenue and charges a price such that demand exceeds supply.

Question 8

An import tariff and an import quota both have the effect of protecting domestic producers from foreign competition.

Question 9

The market supply and demand functions for a good traded on a perfectly competitive market are:
Qd = 40 - 2P and Qs = 15 + 3P
(i) What is the equilibrium price and quantity on this market?
(ii) If the production of each unit of this good gives rise to a social cost of $1, what is the socially optimal equilibrium quantity and price? Assume that producers pay a tax of $1 per unit.
(iii) If the production of each unit of this good gives rise to a social benefit of $5, what is the socially optimal equilibrium quantity and price? Assume that producers receive a subsidy of $5 per unit.

Question 10

The market supply and demand functions for a good traded on a perfectly competitive market are:
Qd = 50 - 0.5P and Qs = 10 + 1.5P
(i) What is the equilibrium price and quantity on this market?
(ii) If the production of each unit of this good gives rise to a social cost of $4, what is the socially optimal equilibrium quantity and price? Assume that producers pay a tax of $4 per unit.
(iii) If the production of each unit of this good gives rise to a social benefit of $8, what is the socially optimal equilibrium quantity and price? Assume that producers receive a subsidy of $8 per unit.

Question 11

The market supply and demand functions for a good traded on a perfectly competitive market are:
Qd = 75 - 1.5P and Qs = 21 + 0.5P
(i) What is the equilibrium price and quantity on this market?
(ii) If the consumption of each unit of this good gives rise to a social cost of $4, what is the socially optimal equilibrium quantity and price? Assume that consumers pay a tax of $4 per unit.
(iii) If the consumption of each unit of this good gives rise to a social benefit of $8, what is the socially optimal equilibrium quantity and price? Assume that consumers receive a subsidy of $8 per unit.

Question 12

The market supply and demand functions for a good traded on a perfectly competitive market are:
Qd = 70 - 2P and Qs = 20 + 3P
(i) What is the equilibrium price and quantity on this market?
(ii) If the consumption of each unit of this good gives rise to a social cost of $5, what is the socially optimal equilibrium quantity and price? Assume that consumers pay a tax of $5 per unit.
(iii) If the consumption of each unit of this good gives rise to a social benefit of $10, what is the socially optimal equilibrium quantity and price? Assume that consumers receive a subsidy of $10 per unit.

Question 13

The market demand for the output of a public utility is:
Qd = 500 - P
The firm's long-run average cost and long-run marginal cost functions are:
LAC = 400 - 0.60Q and LMC = 140 - 0.20Q
(i) What price and quantity combination would result if the firm was not regulated? How much profit would the firm earn?
(ii) What price and quantity combination would result if the firm was regulated at a price that resulted in an economic profit of zero?
(iii) What price and quantity combination would result if the firm was regulated at a price that resulted in the socially optimal level of output? How much profit would the firm earn?

Question 14

The domestic supply and demand functions for a good traded on a perfectly competitive market are:
Qd = 700 - 8P and Qs = 200 + 2P
(i) What is the equilibrium price and quantity on this market?
(ii) Assume that a foreign supplier exports a comparable good and is willing to sell all that domestic consumers want to purchase at a unit price of $35. What is the new equilibrium price and quantity on the market and how many units of the good will be imported?
(iii) Now suppose that a tariff of $10 per unit is imposed on the imports. What is the new equilibrium price and quantity, how many units will be imported, how much revenue will be generated by the tariff, and how much revenue will the foreign firms receive?
(iv) Now suppose that, instead of a tariff, the foreign firms agree to a voluntary export quota. Assume that the quota results in the same equilibrium quantity as the $10 tariff. How many units will be imported and how much revenue will the foreign firms receive?

Question 15

The domestic supply and demand functions for a good traded on a perfectly competitive market are:
Qd = 500 - P and Qs = 200 + 4P
(i) What is the equilibrium price and quantity on this market?
(ii) Assume that a foreign supplier exports a comparable good and is willing to sell all that domestic consumers want to purchase at a unit price of $40. What is the new equilibrium price and quantity on the market and how many units of the good will be imported?
(iii) Now suppose that a tariff of $10 per unit is imposed on the imports. What is the new equilibrium price and quantity, how many units will be imported, how much revenue will be generated by the tariff, and how much revenue will the foreign firms receive?
(iv) Now suppose that, instead of a tariff, the foreign firms agree to a voluntary export quota. Assume that the quota results in the same equilibrium quantity as the $10 tariff. How many units will be imported and how much revenue will the foreign firms receive?