Question 1

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

Accepted Answer

The answer of The diagram below shows the demand and...

Question 2

If a regulatory agency ordered a public utility (a natural monopoly) to price all of its output at marginal cost, then the firm

Accepted Answer

If the demand curve is above the ATC curve, then the firm can earn profits while pricing at marginal cost. If the demand curve is below the ATC curve, then the firm would incur losses. Hence, the position of the demand curve and the ATC curve determines whether the firm would incur profits or losses.

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 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

Accepted Answer

The answer of The diagram below shows the market demand...

Question 4

A natural monopoly

Accepted Answer

A natural monopoly occurs when one firm can produce the entire output demanded in a market at a lower cost than any combination of two or more smaller firms. In such a case, if the natural monopoly is left unregulated, it may lead to higher prices and reduced output, resulting in allocative inefficiency. Hence, regulation is needed to ensure that the natural monopoly does not abuse its market power, leading to more efficient production and pricing.

Question 5

The diagram below shows the market demand curve and the cost curves for a single firm.  FIGURE 12-6
-Refer to Figure 12-1. Suppose each of Firms A, B, and C are producing 500 kilos of potatoes. Is this industry productively efficient?

Accepted Answer

Productive efficiency requires that all firms in the industry produce at the minimum point on their respective average total cost curves. In this case, we can see that the marginal cost curves for each firm do not intersect at the minimum point of their respective average total cost curves, indicating that they are not producing at the minimum point of their cost curves. Therefore, the industry is not productively efficient. Option A is incorrect because knowledge of the market price is not necessary to determine productive efficiency. Option C is incorrect because equating output does not necessarily mean that all firms are producing at the minimum point of their average total cost curves. Option D is incorrect because the slopes of the marginal cost curves do not necessarily affect productive efficiency. Option E is incorrect because the fact that firms could easily produce more than their current level of output does not necessarily mean that they are not productively efficient.

Question 6

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

Accepted Answer

The firm depicted in the figure is a natural monopoly because the average total cost (ATC) curve is continually decreasing and intersects the market demand curve at a quantity lower than the minimum efficient scale. This means that a single firm can produce the entire output demanded in the market at a lower cost than multiple firms, making it a natural monopoly.

Question 7

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

Accepted Answer

The answer of If all firms are profit maximizers, then...

Question 8

An economy will be allocatively efficient if

Accepted Answer

Allocative efficiency occurs when the price of a good or service equals its marginal cost. This means that the resources used to produce the good are being allocated in the most efficient way possible, since the cost of producing an additional unit is equal to the benefit it provides to consumers. As a result, this maximizes social welfare as the benefits from the last unit produced would be greater than the costs incurred in its production. Therefore, choice C is the correct answer.

Question 9

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

Accepted Answer

The answer of If average-cost pricing is imposed on a...

Question 10

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,

Accepted Answer

Average-cost pricing sets the price equal to the average total cost of production. In this case, the level of output is where the average total cost curve intersects with the demand curve. However, this results in a price that exceeds the firm's marginal cost, leading to allocative inefficiency. Therefore, choice C is the correct answer.

Question 11

Consider a natural monopoly that has declining ATC over the entire range of the market demandcurve. If it is regulated and required to charge a price that is equal to MC, the resulting level ofoutput is

Accepted Answer

The answer of Consider a natural monopoly that has declining...

Question 12

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

Accepted Answer

Producer surplus is the area above the supply curve and below the market price. In the free-market equilibrium, producer surplus is shown by the area P1P2E, which is above the supply curve but below the equilibrium price. Therefore, the correct answer is A.

Question 13

An important defence of oligopoly as a market structure is that

Accepted Answer

Oligopoly is often found in markets with high barriers to entry and minimum efficient scale (MES) is large. Oligopolies can achieve economies of scale and reduce production costs when producing on this large scale. Therefore, oligopoly is the most efficient available alternative when MES is large.

Question 14

The economic efficiency of a natural monopoly can be improved with the use of two-part tariffs because it allows the monopoly to

Accepted Answer

The answer of The economic efficiency of a natural monopoly...

Question 15

Allocative efficiency occurs when

Accepted Answer

Allocative efficiency occurs when the sum of consumer and producer surplus is maximized, meaning that resources are allocated to their most valuable use, resulting in the greatest total benefit to society. This is achieved when the price of the good or service equals its marginal cost of production, leading to an optimal level of production where the marginal benefit and marginal cost are equal. Maximizing producer or consumer surplus alone does not necessarily result in allocative efficiency.

Question 16

If a perfectly competitive industry was suddenly monopolized without any change in cost conditions,

Accepted Answer

When a perfectly competitive industry is monopolized, the single firm now has control over the market price. In order to maximize their profits, the monopolist will reduce the quantity produced in order to increase the price. This is because monopolists face a downward-sloping demand curve, meaning that as they increase the price, the quantity demanded will decrease. Therefore, the monopolist will want to produce less in order to increase the price and maximize profits. As a result, both price and quantity produced will change, but they will move in opposite directions. The price will increase, while the quantity produced will decrease. This is different from the outcome in a perfectly competitive market, where price is determined by the market and firms cannot individually affect it.

Quiz 12: Economic Efficiency and Public Policy