Question 1

Public bureaucrats who operate monopolies typically have lower incentives to lower costs.

Accepted Answer

Public bureaucrats who operate monopolies don't have to face the same level of competition as private firms, so they may not have the same pressure to reduce costs in order to remain competitive. Additionally, since they are not subject to market forces, there may be less incentive for them to operate efficiently and cost-effectively.

Question 2

Private ownership of a monopoly cannot benefit society.

Accepted Answer

Private ownership of a monopoly can benefit society if the monopoly is efficiently regulated to prevent abuse of power, ensure fair pricing, and encourage innovation, thereby providing essential services or goods that might be difficult to supply in a competitive market due to high initial costs or technical complexities.

Question 3

An important benefit of private ownership of a monopoly is that a private monopoly has more incentive to:

Accepted Answer

Private monopolies have a profit motive, which provides them with an incentive to reduce their costs in order to maximize their profits. In contrast, public monopolies may not face the same pressure to cut costs as they may have other objectives, such as improving public welfare or providing employment. Thus, private ownership of a monopoly is more likely to result in cost efficiencies and lower prices for consumers. Choices A, B, and D are incorrect because bargaining for lower wages, charging a benevolent social planner's price, and pricing at the intersection of marginal cost and average revenue may not necessarily lead to lower costs and higher efficiency, and may potentially harm workers and consumers.

Question 4

Average cost pricing always guarantees that the monopolist earns zero economic profits but does not ensure a socially optimal market solution.

Accepted Answer

Average cost pricing means pricing at a level that covers both the variable and fixed costs of production, resulting in zero economic profits. However, this pricing strategy does not take into account the demand for the product or the value it provides to consumers, so it may not lead to a socially optimal market solution.

Question 5

To move the allocation of resources closer to the social optimum, policymakers should typically try to induce firms in an oligopoly to cooperate rather than compete with each other.

Accepted Answer

Encouraging firms in an oligopoly to cooperate rather than compete can lead to collusion, resulting in higher prices and less benefit to consumers, moving away from the social optimum. Competition policy aims to prevent such cooperation to ensure markets remain competitive and efficient.

Question 6

Reduced competition through merging of companies:

Accepted Answer

The merging of companies can lead to a reduction in competition, which can give rise to increased market power. Increased market power can lead to higher prices for consumers and fewer choices. However, if the merging companies can achieve synergies, such as improving efficiency and lowering costs, then the benefits to society may outweigh the costs of decreased competition. Therefore, it is possible for reduced competition through merging of companies to raise social welfare if the benefit from the synergies exceeds the social cost of increased market power.

Question 7

Privatisation of a government-owned asset could reduce future earnings to the country.

Accepted Answer

Privatisation involves selling off a government-owned asset to private investors. In some cases, the asset may have the potential to earn significant revenue for the government in the future. If the asset is sold, the government will no longer receive this revenue and it may reduce their future earnings.

Question 8

Resale price maintenance may not be anti-competitive if:

Accepted Answer

Resale price maintenance may not be anti-competitive if market power is exerted through wholesale price rather than retail price. This is because exerting market power through wholesale price does not directly affect retail competition and is less likely to harm consumer welfare.

Question 9

Regulated natural monopolies typically have rising average costs.

Accepted Answer

Regulated natural monopolies typically have decreasing average costs due to economies of scale, which is why they are allowed to exist under regulation.

Question 10

The key issue in determining the efficiency of public versus private ownership of a monopoly is:

Accepted Answer

The key issue in determining the efficiency of public versus private ownership of a monopoly is how ownership of the firm affects the cost of production. Private monopolies may have a profit motive that leads to higher prices and lower output, while public ownership may result in political interference and inefficiencies. Ultimately, the most efficient ownership structure will depend on the specific circumstances and regulatory framework.

Question 11

Economists argue that there are no practical problems with marginal-cost pricing as a regulatory system.

Accepted Answer

Economists recognize several practical problems with marginal-cost pricing, including difficulties in accurately determining marginal costs, potential financial losses for firms if average costs exceed marginal costs, and the challenge of applying this approach in industries with significant fixed costs.

Question 12

The main rationale for making tying illegal is that:

Accepted Answer

Tying is considered illegal primarily because it allows firms to leverage their dominance in one market to expand their market power into other markets, potentially stifling competition and harming consumers.

Question 13

In 1998 the US Government charged Microsoft with the anti-competitive practice of tying. This was motivated by Microsoft bundling its internet browser into the Windows operating system.

Accepted Answer

The US Government did charge Microsoft with the anti-competitive practice of tying in 1998, and this was due to Microsoft bundling its internet browser into the Windows operating system.

Question 14

One problem with regulating a monopolist on the basis of cost is that:

Accepted Answer

Regulating a monopolist based on cost can lead to a situation where the monopolist lacks the incentive to minimize costs, as they can pass these costs onto consumers through higher prices, knowing that their regulated prices will cover these costs. This can result in inefficiency and higher costs than necessary.

Question 15

The information obtained from a retail outlet can be considered a:

Accepted Answer

The information obtained from a retail outlet can be considered a public good because it is non-excludable and non-rivalrous. This means that once the information is made available, it cannot easily be restricted to certain individuals, and one person's use of the information does not diminish its availability to others.

Question 16

Suppose the government regulates a natural monopoly by making the firm charge marginal cost. In order for the firm to make zero economic profits the government must pay a subsidy to the firm. What amount should this subsidy be?

Accepted Answer

The subsidy should be the difference between Average Total Cost and marginal cost per unit. This is because, at marginal cost pricing, the firm's revenue per unit is less than its average total cost per unit, leading to losses. The subsidy covers this gap, allowing the firm to break even.

Question 17

As the number of sellers in an oligopoly grows, an oligopolistic market looks more and more like a competitive market.

Accepted Answer

In a competitive market, the presence of a large number of sellers leads to price competition and homogeneous products, which are also characteristics of an oligopoly as the number of firms in the market increases. Therefore, as the number of sellers in an oligopoly grows, the market becomes more competitive.

Question 18

Suppose Apple Computers has entered into an enforceable resale price maintenance agreement with Computer Super Stores Inc. (CSS Inc.) and Wal-Mart. Which of the following will always be true?

Accepted Answer

With an enforceable resale price maintenance agreement, the retailers (CSS Inc. and Wal-Mart) are required to sell Apple Computers for exactly the same price, so B is always true. The wholesale price may be the same or different for the retailers, but that is not necessarily always true. There is no evidence to suggest that Wal-Mart will benefit from customers going to CSS Inc. for information or that CSS Inc. will sell Apple computers at a lower price than Wal-Mart.

Question 19

A government can impose a tax on a regulated monopolist to address the problems associated with marginal-cost pricing.

Accepted Answer

The answer of A government can impose a tax on...

Question 20

Suppose Peach Computers has entered into a resale price maintenance agreement with Computer Super Stores Inc. (CSS Inc.), but not with CompuMart. In this case:

Accepted Answer

CompuMart may benefit from customers who go to CSS Inc. for information about different computers because they can use that information to make more informed purchasing decisions at CompuMart. However, it is not clear whether CSS Inc. will sell Peach computers at a lower price or whether the wholesale price will be different for different retailers. It is also not necessarily true that Peach computers will never increase profits by having a resale price maintenance agreement with all retail outlets.

Quiz 18: Competition Policy