Deck 27: Natural Monopolies: Deregulation

Question 1

Market failure can result from all of the following except

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

Answer 1

Regulation.

Question 2

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.

Answer 2

The existence of economies of scale.

Question 3

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.

Answer 3

Natural monopoly.

Question 4

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.

Question 5

The major aim of government regulation is to

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

Question 6

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.

Question 7

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

A)Deregulation.
B)Regulation.
C)Antitrust laws.

Question 8

Which of the following is a form of government intervention?

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

Question 9

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.

Question 10

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.

Question 11

An unregulated natural monopoly can lead to

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

Question 12

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.

Question 13

All of the following are examples of natural monopolies except

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

Question 14

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.

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.

Question 16

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.

Question 17

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.

Question 18

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

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

Question 19

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.

Question 20

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.

Question 21

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.

Question 22

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.

Question 23

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.

Question 24

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.

Question 25

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.

Question 26

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.

Question 27

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.

Question 28

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.

Question 29

Profit regulation of a natural monopoly is achieved when

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

Question 30

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.

Question 31

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.

Question 32

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.

Question 33

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.

Question 34

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.

Question 35

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.

Question 36

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.

Question 37

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.

Question 38

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.

Question 39

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.

Question 40

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.

Question 41

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.

Question 42

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.

Question 43

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.

Question 44

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.

Question 45

The first major regulatory target in the United States was

A)Airlines.
B)Railroads.
C)Trucking firms.

Question 46

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.

Question 47

Government failure occurs when

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

Question 48

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

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

Question 49

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.

Question 50

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.

Question 51

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.

Question 52

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.

Question 53

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.

Question 54

Which of the following is an example of government failure?

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

Question 55

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.

Question 56

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.

Question 57

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.

Question 58

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.

Question 59

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

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

Question 60

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

A)Airlines.
B)Computers.
C)Telecommunications.

Question 61

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 AT&T and foreign competitors.

Question 62

In Figure 27.2,regulation designed to achieve allocative efficient pricing for the natural monopoly will result in a price of

A)P_A.
B)P_B.
C)P_C.

Question 63

Adherence to marginal cost pricing in Figure 27.1 will necessitate

A)Taxing away the economic profits that will be realized.
B)Giving the firm a subsidy.
C)Regulation of the firm's profits.

Question 64

In which of the following markets did deregulation contribute to increased industry concentration?

A)Airlines.
B)Cable TV.
C)Trucking.

Question 65

The socially optimal price and output combination in Figure 27.1 is

A)P₄,Q₄.
B)P₀,Q₁.
C)P₃,Q₃.

Question 66

The electric utility industry became a target for deregulation when

A)The cost of constructing nuclear power plants declined.
B)Technological advances destroyed the basis for natural monopolies in power production.
C)Local utility companies began behaving like monopolies.

Question 67

Proponents of electric utility industry deregulation argue that

A)Profit regulation resulted in increased costs and higher prices.
B)Profit regulation resulted in too much investment in highly efficient energy production.
C)Profit regulation resulted in industry output that was too great.

Question 68

If entry barriers into a monopolized market are kept low,

A)Market power increases.
B)A market is contestable.
C)Government failure exists.

Question 69

Deregulation of the cable TV market by the Telecommunications Turns Act of 1996 resulted in

A)Lower prices and better service.
B)Little change in either prices or service.
C)Significantly higher prices.

Question 70

One In the News article is titled "Bell Monopolies Push to Disconnect Competition." If rivals are required to pay an access fee to the local phone monopoly in order to enter a market and the fee is high enough,the fee

A)Is a barrier to entry.
B)Causes cross-subsidization.
C)Creates an oligopoly.

Question 71

When the CAB allowed airlines to charge high prices on longer,more efficient routes as long as they maintained service on shorter,unprofitable routes,it was allowing

A)Profit sharing.
B)Cross-subsidization.
C)Substitute pricing.

Question 72

Cross-subsidization occurs when

A)Profits on one product are used to subsidize low prices on another product.
B)The government subsidizes production of a product.
C)Profitable firms in an industry are forced to share their profits with the unprofitable firms.

Question 73

Which of the following would be most likely to give the American public more air travel at a lower cost?

A)Reregulate the airline market by reestablishing the CAB.
B)Allow foreign airlines to enter the U.S.market.
C)Limit entry of new firms to allow the current firms to gain greater financial strength.

Question 74

The industry that is the most recent target of deregulation is the

A)Trucking industry.
B)Electric utility industry.
C)Airline industry.

Question 75

The use of marginal cost pricing in Figure 27.1 will result in

A)Economic profits.
B)Economic losses.
C)A fair rate of return on invested capital.

Question 76

If regulation of the firm called for it to earn only a normal profit or rate of return in Figure 27.1,the regulatory agency should set the price at

A)P₁.
B)P₂.
C)P₃.

Question 77

Which of the following is true about this firm?

A)It is a natural monopoly.
B)Society can benefit from government regulation using marginal cost pricing without a subsidy.
C)Marginal cost pricing will assure technical efficiency.

Question 78

What development turned the cable TV market into a contestable one?

A)Economies of scale.
B)Satellite and broadband technology.
C)Cable TV firms raised prices.

Question 79

To maximize profits,an unregulated natural monopolist would choose which combination of price and output in Figure 27.1?

A)P₄,Q_4.
B)P₂,Q_2.
C)P₃,Q_3.

Question 80

The unregulated monopoly in Figure 27.2 will experience

A)Profits equal to P_CP_DDC.
B)Losses equal to P_A0q_AA.
C)Profits equal to P_D0q_CD.