Deck 13: Natural Monopolies: Deregulation

Question 1

Which of the following is a form of government intervention that is designed to correct market failures?

A) Antitrust laws.
B) Laissez faire.
C) Public goods.
D) Merit goods.

Answer 1

Antitrust laws.

Question 2

An industry in which one firm can achieve economies of scale over the entire range of market supply is a

A) Contestable market.
B) Kinked demand curve oligopoly.
C) Natural monopoly.
D) Perfectly competitive market.

Answer 2

Natural monopoly.

Question 3

A natural monopoly occurs because of

A) Legal restrictions preventing entry into the industry.
B) Low fixed costs.
C) The existence of economies of scale.
D) High marginal costs.

Answer 3

The existence of economies of scale.

Question 4

If a natural monopoly was broken into several smaller competing firms,

A) Consumers would lose because of less competition.
B) Producers would be better off because they would have greater market share.
C) Society would be worse off because the economies of scale would be destroyed.
D) Workers would be worse off because fewer jobs would be available.

Question 5

If a natural monopoly was forced to break up into several small competitive firms, the

A) Cost of production should fall as the smaller firms become more efficient.
B) Price charged by the competitive firms should decrease as the firms become more efficient.
C) Price charged by the competitive firms should increase because they no longer have economies of scale.
D) Total production for the industry should increase because of the efficiency generated by increased competition.

Question 6

All of the following are examples of natural monopolies except

A) Local telephone companies.
B) Electricity companies.
C) College bookstores.
D) Railroad companies.

Question 7

The goal of antitrust laws is to

A) Control the structure of an industry only.
B) Alter industry behavior only.
C) Prevent monopolies from forming.
D) Control the structure of an industry and alter industry behavior.

Question 8

All of the following are necessary conditions for pure laissez faire except

A) All producers must be perfectly competitive.
B) Both buyers and sellers must have full information about products and prices.
C) Firms do not have economies of scale.
D) Some firms have market power.

Question 9

A natural monopoly is a desirable market structure because

A) It allows the producer to earn greater profit than is possible under competition.
B) It allows the producer to deliver a higher-quality product to the market.
C) It allows the producer to deliver products to the market at the lowest possible cost.
D) The jobs it creates pay higher wages than those in a competitive industry.

Question 10

Antitrust enforcement focuses on market structure, while government regulation deals with all of the following except

A) Prices.
B) Output.
C) Perfect competition.
D) Profits.

Question 11

The best way to address a natural monopoly without dismantling the economies of scale is

A) Laissez faire.
B) Antitrust.
C) Deregulation.
D) Regulation.

Question 12

Market failure can result from all of the following except

A) Market power.
B) Regulation.
C) Restricted output.
D) Monopoly.

Question 13

Market failure

A) Occurs whenever the government intervenes in the market mechanism.
B) Occurs whenever the government pursues laissez-faire policies.
C) Occurs whenever an imperfection in the market mechanism prevents optimal outcomes.
D) Never occurs.

Question 14

Which of the following is used as an antitrust tool that focuses on the structure of industry?

A) Price regulation.
B) Profit regulation.
C) Forbidding business practices such as advertising.
D) Prohibiting mergers and acquisitions.

Question 15

The long-run average total cost curve of a natural monopolist

A) Is downward-sloping in the relevant range of production.
B) Is U-shaped.
C) Reflects diseconomies of scale.
D) Is below the long-run marginal cost curve in the relevant range of production.

Question 16

When firms have the ability to restrict output, raise prices, stifle competition, and inhibit innovation, the market failure involved is

A) Public goods.
B) Externalities.
C) Market power.
D) Inequities.

Question 17

When the market does not lead to an optimal allocation of resources, there must be

A) Too much regulation.
B) A market failure.
C) Proper antitrust laws in place.
D) A competitive market structure.

Question 18

Which of the following can the government use to alter both firm behavior and industry structure?

A) Deregulation.
B) Regulation.
C) Antitrust laws.
D) Tax policy.

Question 19

The major aim of government regulation is to

A) Control the structure of an industry.
B) Alter industry behavior.
C) Prevent monopolies from forming.
D) Restrict competition.

Question 20

Which of the following is a form of government intervention?

A) Natural monopoly.
B) Public goods.
C) Regulation.
D) Externalities.

Question 21

If a natural monopoly is forced to set a price consistent with price efficiency, it will

A) Set price above marginal cost.
B) Earn a profit on every unit of output produced.
C) Set price equal to the ATC of production.
D) Incur a loss on every unit of output produced.

Question 22

Natural monopolies fail to minimize

A) Marginal cost.
B) Marginal revenue.
C) Average variable cost.
D) Average total cost.

Question 23

An unregulated natural monopoly is most likely to

A) Earn an economic profit.
B) Produce where marginal cost equals price.
C) Charge a lower price than if the same product were produced in a competitive market because of the monopolist's greater technical efficiency.
D) Take advantage of the concept of marginal cost pricing.

Question 24

An unregulated natural monopoly can lead to

A) Higher prices for consumers.
B) An optimal mix of output.
C) Loss of economies of scale.
D) Marginal cost pricing.

Question 25

The long-run average total cost curve of a natural monopolist

A) Is U-shaped.
B) Reflects declining average fixed costs.
C) Falls continuously as more output is produced.
D) Reflects diminishing returns.

Question 26

For a natural monopoly, marginal cost

A) Intersects average total cost at zero profit.
B) Equals price at a profitable output level.
C) Equals marginal revenue above the demand curve.
D) Is always below average total cost in the relevant range of production.

Question 27

If the government regulated a natural monopolist to achieve price efficiency without subsidies or price discrimination, the monopolist would

A) Lose money and go out of business.
B) Earn only normal profits.
C) Earn economic profits.
D) Earn less profit than before, but still earn a profit.

Question 28

If a natural monopoly is forced to use marginal cost pricing, which of the following is not true?

A) Average total costs increase.
B) Output increases.
C) Allocative efficiency is achieved.
D) Economic profits are reduced.

Question 29

What is meant by price efficiency?

A) Price is greater than marginal cost.
B) Price is equal to marginal cost.
C) Price is equal to average total cost.
D) Price is greater than average total cost.

Question 30

Which of the following is not a regulatory option when the government is trying to prevent market failure in the case of a natural monopoly?

A) Cost regulation.
B) Profit regulation.
C) Output regulation.
D) Price regulation.

Question 31

A natural monopoly

A) Has low barriers to entry.
B) Has high marginal costs.
C) Charges a lower price than a competitive firm.
D) Will charge high prices if unregulated.

Question 32

If the government wants a natural monopolist to achieve allocative efficiency, the government should

A) Subsidize the firm and require marginal cost pricing.
B) Ensure that the firm produces at full capacity.
C) Regulate the firm so that it produces the output level at which economic profit is zero.
D) Use price ceilings so the firm will earn a normal profit.

Question 33

For a natural monopoly, price efficiency means

A) Price is set above marginal cost.
B) Price is set equal to average total cost.
C) Economics profits are earned.
D) Price is set equal to marginal cost.

Question 34

Economies of scale refer to the

A) Reduction in minimum average costs due to an increase in the number of workers hired.
B) Reduction in minimum average costs due to an increase in plant size.
C) Downward-sloping portion of the marginal cost curve.
D) Downward-sloping portion of the average total cost curve.

Question 35

If the government forces a natural monopoly to produce the output level at which P = MC, the firm will

A) Fail to produce efficiently.
B) Produce less than the profit-maximizing level of output.
C) Incur losses.
D) Produce where ATC is at a minimum.

Question 36

To maximize profit, a natural monopolist produces the level of output at which

A) Price equals marginal cost.
B) Price equals average total cost.
C) Marginal revenue equals marginal cost.
D) Marginal cost equals average total cost.

Question 37

When a firm experiences positive economic profits over the long run,

A) Technical efficiency cannot be achieved.
B) The firm must be a natural monopoly.
C) Allocative efficiency will always be achieved.
D) Equity may not be achieved.

Question 38

Market failure occurs in natural monopolies because

A) The monopolist fails to maximize profits.
B) The monopolist charges a price lower than marginal cost.
C) Consumers get inaccurate information about the opportunity cost of the product.
D) Consumers are not willing to pay the price that the monopolist charges.

Question 39

An unregulated natural monopoly can lead to all of the following except

A) A suboptimal mix of output.
B) Less output than society wants.
C) Unfair monopoly profits.
D) Low prices for consumers.

Question 40

Marginal cost pricing means that a firm charges

A) A price that is marginally lower than the average total cost of production.
B) A price that is marginally higher than the average total cost of production.
C) A price that is equal to the marginal cost of production.
D) Any price as long as average total cost is greater than marginal cost.

Question 41

Profit regulation occurs when regulation requires the natural monopolist to set

A) Price equal to average total cost.
B) Price equal to marginal cost.
C) Marginal revenue equal to average total cost.
D) Price equal to average variable cost.

Question 42

Hiring over 260,000 U.S.federal workers to oversee and operate regulatory agencies involves

A) Zero costs since the market outcomes will be improved.
B) Government failure in every case.
C) Forgoing output that could be produced if the workers were employed elsewhere.
D) Some opportunity costs only if market outcomes do not improve.

Question 43

A natural monopoly has an incentive to pad its cost of production under which type of regulation?

A) Price regulation.
B) Profit regulation.
C) Output regulation.
D) Social regulation.

Question 44

Output regulation is likely to result in

A) A surplus of the product.
B) A decline in the quality of the product.
C) An increase in the cost of subsidies.
D) Profit maximization for the monopolist.

Question 45

In the real world, the choice is between

A) Perfect markets and perfect government intervention.
B) Perfect markets and imperfect government intervention.
C) Imperfect markets and perfect government intervention.
D) Imperfect markets and imperfect government intervention.

Question 46

In the absence of a subsidy, production efficiency by a natural monopolist will

A) Be achieved if price is set equal to average total cost.
B) Be achieved if marginal revenue is set equal to marginal cost.
C) Be achieved if price is set equal to marginal cost.
D) Never be achieved.

Question 47

If government failure did not exist,

A) Laissez faire would apply to all markets.
B) Deregulation would be unnecessary.
C) The invisible hand would be the most efficient and equitable way to run the economy.
D) All markets would be regulated.

Question 48

Output regulation forces the natural monopolist to produce at an output

A) That perfectly competitive firms would choose.
B) Where MR = MC.
C) Greater than its profit-maximizing choice.
D) Where MR equals zero.

Question 49

Regulations that offer imperfect answers

A) Are options that should never be implemented.
B) Reflect the realistic choices that society must make between imperfect markets and imperfect government intervention.
C) Are not consistent with utility maximization in the real world.
D) Will always have costs greater than their benefits.

Question 50

Production efficiency under a natural monopoly is achieved

A) Where marginal cost equals demand.
B) Where marginal revenue equals marginal cost.
C) Where marginal cost is minimized.
D) At capacity production where ATC is at a minimum.

Question 51

Suppose the quality of service provided by a newly regulated firm begins to deteriorate soon after regulation is enforced.Which of the following types of regulation is most likely being used?

A) Price regulation.
B) Profit regulation.
C) Output regulation.
D) Social regulation.

Question 52

Profit regulation of a natural monopoly is achieved when

A) P = ATC.
B) P = MC.
C) MR = MC.
D) MR = minimum ATC.

Question 53

Compared with the profit-maximizing choice of a natural monopolist, output regulation will result in a

A) Higher level of output and a higher price.
B) Lower level of output and a higher price.
C) Higher level of output and a lower price.
D) Lower level of output and a lower price.

Question 54

If profit regulation is used to control a natural monopolist, the monopolist is likely to

A) Attempt to reduce the costs of production.
B) Inflate or pad the costs of production.
C) Increase the quality of its product in an effort to increase sales.
D) Reduce maintenance of plants and equipment.

Question 55

For a natural monopolist, if costs start to climb once it is subject to government regulation, then it is most likely facing

A) Cost regulation.
B) Profit regulation.
C) Output regulation.
D) Price regulation.

Question 56

A natural monopoly can purposely increase its cost of production by

A) Using its own unregulated subsidiary to inflate its cost.
B) Substituting cheaper inputs.
C) Keeping marginal costs low.
D) Using government subsidies to offset losses.

Question 57

When market outcomes improve after government regulation is enforced,

A) Technical efficiency is achieved.
B) The net effect of government intervention on society is definitely beneficial.
C) Government intervention still may not be justified if the economic costs are too high.
D) Allocative efficiency is achieved.

Question 58

A major drawback of providing subsidies to private companies that are natural monopolies is that

A) Taxpayers dislike this use of their tax dollars.
B) Private companies are less efficient than public companies.
C) The companies have no incentive to limit costs.
D) The companies will allow product quality to decline.

Question 59

Output regulation for a natural monopolist

A) May require large government subsidies.
B) Is consistent with marginal cost pricing.
C) Encourages bloated costs.
D) May jeopardize equity goals.

Question 60

Government failure occurs when

A) Dealing with a natural monopoly.
B) There is market power.
C) Government intervention fails to improve economic outcomes.
D) Public goods are present.

Question 61

Prior to the deregulation of the railroad industry, there was little incentive to invest in new technology or equipment.This is an example of

A) The failure of deregulation.
B) The inefficiencies of regulation
C) Market failure.
D) The failure of laissez faire.

Question 62

Which regulatory cost is borne by the firms that are regulated?

A) Efficiency costs.
B) Subsidy costs.
C) Compliance costs.
D) Administrative costs.

Question 63

When the regulatory process itself becomes a drag on economic growth, society experiences

A) Compliance costs of regulation.
B) Administrative costs of regulation.
C) Budgetary costs of regulation.
D) Efficiency costs of regulation.

Question 64

Which of the following is an example of government failure?

A) Too much regulation resulting in wasted resources.
B) Public goods.
C) Externalities.
D) Merit goods.

Question 65

The over 260,000 people employed in regulatory agencies of the federal government represent

A) A compliance cost.
B) An efficiency cost.
C) An administrative cost.
D) An information cost.

Question 66

Regulation is appropriate if

A) Government failure exists.
B) Market failure exists and the benefits of regulation exceed the costs.
C) It improves market outcomes regardless of costs.
D) An economic profit is being earned.

Question 67

In cost-benefit analysis, regulatory intervention can be justified if the

A) Marginal benefit of regulation exceeds its marginal cost.
B) Economic cost of regulation exceeds the value of the improvements in government intervention.
C) Value of government failure exceeds the value of market failure.
D) Intervention improves market outcomes, regardless of costs.

Question 68

The Braden brothers considered starting a new skydiving company.Once they read the government regulations they would have to comply with, they changed their minds.This is an example of

A) An administrative cost of regulation.
B) An efficiency cost of regulation.
C) A compliance cost of regulation.
D) An equity cost of regulation.

Question 69

The collapse of AT&T's natural monopoly in long-distance telephone service was caused by

A) Satellite technology that made it easier and less expensive for new companies to provide long-distance service.
B) The takeover of the telephone industry by the U.S. government.
C) Government regulation because of illegal collusion between ATamp;T and foreign competitors.
D) Inadequate profits.

Question 70

Which of the following markets has not been subject to substantial deregulation?

A) Airlines.
B) Computers.
C) Telecommunications.
D) Cable TV.

Question 71

Before deregulation of the telephone industry,

A) Telephone service prices were lower than after deregulation.
B) Cutthroat competition eliminated profits.
C) The volume of communication was lower than after deregulation.
D) There were greater variety and quality of service than after deregulation.

Question 72

If Synergy Energy Corp.hires attorneys to keep it informed about new regulations, their salaries represent

A) Administrative costs.
B) Compliance costs.
C) Capital costs.
D) Efficiency costs.

Question 73

When the FCC hires a new lawyer to help enforce government regulation, her salary is an example of

A) An administrative cost of regulation.
B) An efficiency cost of regulation.
C) A compliance cost of regulation.
D) Bloated costs.

Question 74

When there is market failure

A) Government intervention is always beneficial.
B) A laissez-faire approach is the best policy.
C) Government intervention is beneficial only in the case of natural monopolies.
D) Government intervention is beneficial only when the marginal benefit of intervention exceeds the marginal cost.

Question 75

Before the deregulation in telecommunications, AT&T charged higher rates on long-distance service in order to make local service rates lower.Such a practice is an example of

A) Price discrimination because different prices were charged for the same service.
B) The pricing of public goods.
C) Cross-subsidization of local phone service.
D) Predatory price cutting to eliminate local telephone companies.

Question 76

Which of the following industries was substantially deregulated over the last several decades?

A) Autos.
B) Cinemas.
C) Textiles.
D) Airlines.

Question 77

The first major regulatory target in the United States was

A) Airlines.
B) Railroads.
C) Trucking firms.
D) Telephone companies.

Question 78

The case for deregulation rests on the argument that

A) Government imperfections are worse than the market imperfections they were designed to cure.
B) Public goods are best provided by laissez faire.
C) Economies of scale are better achieved with the invisible hand.
D) Regulation is desirable and efficient, but a laissez-faire approach is more equitable.

Question 79

When regulation results in an inferior mix of output, there are

A) Administrative costs.
B) Compliance costs.
C) Efficiency costs.
D) Equity costs.

Question 80

Deregulation of the railroad industry led to

A) Lower profits.
B) Decreased competition.
C) Increased operating costs.
D) Reconfigured routes and services.