Question 1

The U.S.airline industry,prior to deregulation,was characterized by _____.
A)excessive profits
B)a high level of efficiency
C)excess demand
D)nonprice competition

Accepted Answer

Prior to deregulation, the U.S. airline industry was characterized by nonprice competition, in which airlines competed on factors other than price, such as differentiated services, amenities, and marketing strategies. There were also regulatory barriers to entry, which limited competition and allowed established airlines to maintain their market power.

Question 2

One of the reasons for the low profitability of U.S.airlines during the era of regulation by the Civil Aeronautics Board (CAB)was _____.
A)the absence of organized labor unions
B)low airline safety
C)the scheduling of airline flights to sparsely populated areas
D)the price ceiling imposed by the CAB

Accepted Answer

The answer of One of the reasons for the low...

Question 3

The Civil Aeronautics Board (CAB)allowed airlines to charge prices above the equilibrium price.Even then the airlines were not profitable because:
A)their economic profits were zero.
B)nonprice competition between the airlines raised costs and eroded profits.
C)the demand was too low to make profit.
D)they were subject to heavy taxes by the government which drove down profits.

Accepted Answer

Nonprice competition between airlines raised costs and eroded profits, nullifying the benefits of charging prices above the equilibrium price. Therefore, although the airlines were allowed to charge higher prices, they were still not profitable.

Question 4

Although U.S.airline fares fell significantly after deregulation,profits did not fall.This was because:
A)the airline industry is a decreasing cost industry.
B)the airlines reduced costs by lowering wages to workers.
C)the demand for air travel did not increase by a significant percentage.
D)the airlines received subsidies from the federal government.

Accepted Answer

The answer of Although U.S.airline fares fell significantly after deregulation,profits...

Question 5

Deregulation of the airline industry has resulted in:
A)a reduction in the number of airline passengers.
B)a reduction in the wages and salaries in the airline industry.
C)an increase in airfares.
D)a rapid expansion of airport capacity.

Accepted Answer

Deregulation has led to increased competition among airlines, which in turn has put downward pressure on wages and salaries in the industry as companies look to cut costs.

Question 6

A contestable market is one in which:
A)a small number of firms operate,keeping price above marginal cost.
B)the market price is independent of the number of firms.
C)the price in the market depends upon the number of firms because entry is free.
D)the lack of barriers to entry causes price to remain low.

Accepted Answer

The answer of A contestable market is one in which:
A)a...

Question 7

Suppose the government limits the number of cabs that can operate in the city by issuing a limited number of medallions.Later,if the government decides to regulate fares instead and sets them below current levels:
A)surpluses will result in the taxicab market.
B)the resale value of the medallion will fall.
C)the demand for taxicabs will decline.
D)congestion during peak traffic hours will decrease.

Accepted Answer

If the government regulates fares and sets them below current levels, the demand for medallions may decrease as the profitability of owning a taxi cab may decrease. This would lead to a fall in the resale value of the medallion.

Question 8

A rent control has been imposed on the market for rental housing in a country.If the long run supply curve in this competitive market is more price elastic than the short run supply curve,it implies that:
A)the deadweight loss of the rent control is higher in the long run compared to the short run.
B)the deadweight loss of the rent control is higher in the short run compared to the long run.
C)the deadweight loss of the rent control is zero in the long run.
D)the deadweight loss of the rent control is zero in the short run.

Accepted Answer

If the long run supply curve is more price elastic than the short run supply curve, it means that in the long run, producers have more time to adjust their production levels and potentially find alternative uses for their resources. This means that in the long run, the quantity supplied will be more responsive to changes in price compared to the short run. Therefore, when rent control is imposed, the long run supply curve will shift more than the short run supply curve, causing a larger deadweight loss in the long run compared to the short run.

Question 9

If a commodity has a(n)_____,a greater share of the burden of an excise tax levied on the commodity would be borne by the producers.
A)relatively elastic supply curve and a perfectly inelastic demand curve
B)perfectly elastic supply curve
C)relatively inelastic demand curve and a relatively elastic supply curve
D)perfectly elastic demand curve

Accepted Answer

The answer of If a commodity has a(n)_____,a greater share...

Question 10

Issuing a fixed number of licenses to operate a taxicab in a city would mean that the number of:
A)cabs and fares are both above the efficient level.
B)cabs is less than the efficient quantity and fares are above free-market levels.
C)cabs is above the efficient level and fares are depressed below the free-market level.
D)cabs and fares are both below the efficient level.

Accepted Answer

Issuing a fixed number of licenses limits the supply of taxicabs, which would likely result in fewer cabs than the efficient market quantity and higher fares than in a free-market scenario due to reduced competition and limited supply.

Question 11

Restrictions on entry in the taxicab market tends to benefit _____ the most.
A)the government
B)original recipients of medallions
C)current taxicab drivers
D)taxicab passengers

Accepted Answer

Restrictions on entry in the taxicab market often come in the form of medallions or licenses, which are granted by the government and act as a barrier to entry for new drivers or companies. The original recipients of these medallions, usually existing taxicab drivers or companies, benefit the most as they are able to control the supply of taxicabs and charge higher prices due to limited competition.

Question 12

Which of the following is true of deregulation and airline safety in the U.S.?
A)Airline safety has deteriorated since the deregulation of the airline industry because safety standards are determined by the airlines themselves.
B)Airline safety has deteriorated since airline deregulation because increased competition does not give airlines any incentive to reduce the number of accidents.
C)Since airline safety standards are set by a government agency,deregulation of routes and fares is not directly linked to airline safety.
D)Airline safety has increased post-deregulation because airlines are now not required to insure their aircrafts against accidents.

Accepted Answer

Since airline safety standards are set by a government agency, deregulation of routes and fares is not directly linked to airline safety. The Federal Aviation Administration (FAA) regulates safety standards and enforces safety regulations in the airline industry. However, it is worth noting that there have been some critics who argue that deregulation has led to cost-cutting measures by airlines, which could indirectly affect safety.

Question 13

When the U.S.airline industry was regulated by the Civil Aeronautics Board (CAB),airline workers' unions:
A)did not benefit since the airlines were unprofitable and could not pay high wages.
B)negotiated higher-than-competitive fares from the airlines.
C)received lesser pay than what they received after deregulation.
D)were not organized and so did not have any bargaining power.

Accepted Answer

When the U.S. airline industry was regulated by the Civil Aeronautics Board (CAB), airline workers' unions were able to negotiate higher-than-competitive fares from the airlines. This was because the CAB's regulation of fares allowed airlines to maintain higher prices, which in turn provided the airlines with the financial capacity to meet union demands for higher wages and benefits.

Question 14

Rent controls in the rental housing market:
A)will lead to the deterioration of the quality of rental housing.
B)will not significantly affect supply in the long run.
C)does not have any adverse effects in the short run.
D)benefits tenants but not landlords.

Accepted Answer

Rent controls typically result in landlords being unable to charge market rates for their properties, and often lead to a lack of money for upkeep and improvements. As a result, the quality of rental housing can deteriorate over time. While it may benefit tenants in the short run, it can have long-term negative effects for both landlords and tenants.

Question 15

If a commodity has a(n)_____,a greater share of the burden of an excise tax levied on the commodity would be borne by the consumers.
A)perfectly elastic demand curve and an elastic supply curve
B)perfectly elastic demand curve and perfectly inelastic supply curve
C)relatively inelastic supply curve
D)perfectly inelastic demand curve

Accepted Answer

When demand is perfectly inelastic, consumers are willing to buy the same quantity regardless of the price. Therefore, if an excise tax is levied, consumers will bear the full burden of the tax since their demand does not decrease with an increase in price.

Question 16

An excise tax imposed on junk food reduces consumer surplus by $50,producer surplus by $80,and results in tax revenue of $40 for the government.What is the welfare effect of this tax?
A)A net loss of $10
B)A net gain of $40
C)A net loss of $90
D)A net loss of $130

Accepted Answer

The welfare effect of the tax can be calculated by adding the change in consumer surplus and producer surplus and subtracting the tax revenue generated for the government. 
Change in welfare = - ($50 + $80) + $40 = -$90 
This indicates a net loss of $90 in social welfare.

Question 17

Which of the following strengthens the possibility that the airline market is a contestable market?
A)Since other airlines can enter the market at no cost and charge lower fares,the fare charged by a single airline is always equal to the marginal cost.
B)The barriers to entry in the airline market lead to nonprice competition between the airlines operating in the market.
C)The fares that are charged for routes with more than one airline are significantly higher than the fares charged for a route with only one airline.
D)Airlines regularly charge fares that are above the competitive levels irrespective of the number of airlines plying a particular route.

Accepted Answer

In a contestable market, the threat of new entry is enough to discipline the behavior of existing firms, even if there are high barriers to entry. This means that other airlines can enter the market at no cost and charge lower fares, leading a single airline to charge fares equal to the marginal cost. This strengthens the possibility that the airline market is a contestable market.

Question 18

Suppose a city limits the number of cabs that can provide taxi service by issuing medallions. If the medallions can be bought and sold and they command a positive price,you can conclude that:
A)fares are above the competitive levels.
B)no illegal cabs will operate in the city.
C)the demand for cabs is lesser than the supply of cabs.
D)the supply curve for taxicabs is horizontal.

Accepted Answer

The fact that medallions can be bought and sold and command a positive price suggests that there is a limited supply of cabs relative to the demand for them. This means that fares are likely above the competitive levels, as people are willing to pay a premium to secure a cab. This also means that there may be illegal cabs operating in the city, since the limited supply of medallions creates a potential profit opportunity for those willing to operate without them. The supply curve for taxicabs would not be horizontal, as the limited supply of medallions would create a vertical barrier to entry.

Question 19

For an excise tax which causes output in a market to fall to zero:
A)the tax revenue and deadweight loss are both zero.
B)the tax revenue is positive but there is no deadweight loss.
C)the deadweight loss is equal to the total surplus before the tax.
D)the deadweight loss is equal to the producer's surplus.

Accepted Answer

If an excise tax causes output in a market to fall to zero, then the tax revenue collected is also zero. However, there is a deadweight loss incurred, which is equal to the total surplus before the tax. This is because the tax eliminates all trading in the market, resulting in the loss of all gains from trade that would have occurred without the tax. Therefore, choice (C) is the correct answer.

Question 20

How do price ceilings in the rental housing market affect tenants?
A)Since price ceilings keep rents from rising above a certain level,the net gain to tenants is positive.
B)Tenants are worse off from price ceilings since the supply of rental housing falls in the long run.
C)Tenants benefit from price ceilings since landlords have incentives to improve the quality of existing rental housing
D)Since the supply of rental housing is inelastic in the short run,tenants are not affected by a price ceiling.

Accepted Answer

Price ceilings in the rental housing market create a situation where landlords can no longer charge market prices to tenants. This has the effect of reducing the quantity of rental housing supplied in the market as landlords are not able to make a profit at the artificially low rental rates. In the long run, this means that tenants have fewer options for available rentals and may face longer wait times or higher competition for the limited units that do exist. Overall, tenants are worse off with price ceilings in the rental housing market.

Quiz 10: Using the Competitive Model

The U.S.airline industry,prior to deregulation,was characterized by _____.

One of the reasons for the low profitability of U.S.airlines during the era of regulation by the Civil Aeronautics Board (CAB) was _____.

The Civil Aeronautics Board (CAB) allowed airlines to charge prices above the equilibrium price.Even then the airlines were not profitable because:

Although U.S.airline fares fell significantly after deregulation,profits did not fall.This was because:

Deregulation of the airline industry has resulted in:

A contestable market is one in which:

Suppose the government limits the number of cabs that can operate in the city by issuing a limited number of medallions.Later,if the government decides to regulate fares instead and sets them below current levels:

A rent control has been imposed on the market for rental housing in a country.If the long run supply curve in this competitive market is more price elastic than the short run supply curve,it implies that:

If a commodity has a(n) _____,a greater share of the burden of an excise tax levied on the commodity would be borne by the producers.

Issuing a fixed number of licenses to operate a taxicab in a city would mean that the number of:

Restrictions on entry in the taxicab market tends to benefit _____ the most.

Which of the following is true of deregulation and airline safety in the U.S.?

When the U.S.airline industry was regulated by the Civil Aeronautics Board (CAB) ,airline workers' unions:

Rent controls in the rental housing market:

If a commodity has a(n) _____,a greater share of the burden of an excise tax levied on the commodity would be borne by the consumers.

An excise tax imposed on junk food reduces consumer surplus by $50,producer surplus by $80,and results in tax revenue of $40 for the government.What is the welfare effect of this tax?

Which of the following strengthens the possibility that the airline market is a contestable market?

Suppose a city limits the number of cabs that can provide taxi service by issuing medallions. If the medallions can be bought and sold and they command a positive price,you can conclude that:

For an excise tax which causes output in a market to fall to zero:

How do price ceilings in the rental housing market affect tenants?