Question 1

Products that result in external benefits for society require regulation to correct for
A) underproduction.
B) overproduction.
C) an equilibrium price that is too low.
D) an equilibrium quantity that is too high.

Accepted Answer

When a product results in external benefits for society, such as clean air or reduced traffic congestion, the market tends to underproduce. This is because the producers do not receive the full value of the benefits they are providing to society, and therefore do not have enough incentive to produce the optimal amount. Regulation is necessary to correct for this underproduction and ensure that the optimal quantity is produced.

Question 2

Exhibit 13-1 Cable television monopolist

As shown in Exhibit 13-1, regulators might follow a marginal cost pricing strategy and require the cable television monopolist to operate at point:
A) A.
B) B.
C) C.
D) D.

Accepted Answer

The answer of Exhibit 13-1 Cable television monopolist

As shown in...

Question 3

Consider a regulated natural monopoly. If the regulatory commission wants to establish a fair-return price, then it should set a price ceiling where the demand curve crosses the monopoly's long-run:
A) marginal revenue curve.
B) average revenue curve.
C) marginal cost curve.
D) average cost curve.

Accepted Answer

A fair-return price, also known as a rate-of-return regulation, aims to allow the monopoly to cover its costs and earn a normal profit but not excessive profit. This is achieved by setting the price where the demand curve intersects the monopoly's long-run average cost curve, ensuring the firm can recover its costs, including a normal return on its investment.

Question 4

The government will have to subsidize a natural monopoly in the long run if regulators choose to pursue:
A) marginal cost pricing
B) fair-return pricing.
C) per se pricing.
D) any form of regulation.

Accepted Answer

Marginal cost pricing in the context of a natural monopoly means setting prices equal to the marginal cost of production, which is often below the average total cost in such industries. This leads to losses for the monopoly, necessitating government subsidies to sustain operations in the long run.

Question 5

Government regulators can achieve efficiency for a natural monopoly by setting a price ceiling equal to the intersection of the demand curve and the:
A) marginal revenue curve.
B) average cost curve.
C) marginal cost curve.
D) average fixed cost curve.

Accepted Answer

Setting a price ceiling at the intersection of the demand curve and the marginal cost curve ensures that the price reflects the true cost of producing an additional unit, leading to allocative efficiency.

Question 6

If regulation imposes marginal cost pricing on a natural monopoly, then the monopoly will:
A) suffer persistent economic losses.
B) earn a fair, but not excessive, return on its assets.
C) produce too little output to achieve efficiency.
D) experience diseconomies of scale.

Accepted Answer

Natural monopolies, due to their high fixed costs and economies of scale, would not cover their average total costs if they were to price at marginal cost, leading to economic losses.

Question 7

If a good causes a positive externality, regulation might take the form of a
A) subsidy.
B) ban on the product.
C) tax.
D) price floor.

Accepted Answer

A subsidy encourages the production or consumption of a certain good or service. If a good causes a positive externality (i.e. it benefits society as a whole), the government might offer a subsidy to incentivize its production or consumption. This can ultimately increase the overall social welfare.

Question 8

Economic regulation occurs when:
A) monopoly is the optimal market structure.
B) the industry is highly competitive.
C) the product is important to economic welfare.
D) the government owns the assets of the industry.

Accepted Answer

The answer of Economic regulation occurs when:
A) monopoly is the...

Question 9

Regulatory commissions may focus on establishing a "fair-return" price to be charged by a monopolist. Under this policy, the monopolist would earn:
A) positive economic profits.
B) zero economic profits.
C) negative economic profits.
D) monopoly profits.

Accepted Answer

The "fair-return" price policy aims to set a price that allows the monopolist to earn enough revenue to cover its costs and provide a reasonable return on investment, but not to earn excessive profits at the expense of consumers. Therefore, the monopolist would earn zero economic profits under this policy.

Question 10

Exhibit 13-1 Cable television monopolist

As shown in Exhibit 13-1, if regulators follow a fair return pricing strategy, the price will be:
A) $10, the quantity will be 100, and the profit will be negative.
B) $15, the quantity will be 80, and the profit will be $0.
C) $15, the quantity will be 40, and the profit will be $0.
D) $25, the quantity will be 40, and the profit will be positive.

Accepted Answer

The answer of Exhibit 13-1 Cable television monopolist

As shown in...

Question 11

A local cable company has its rates set at P = $15 by a regulatory commission. Its current output is 10,000 households and its costs are as follows: ATC = $17; AVC = $14; and MC = $15. From this, we can tell that this is:
A) a fair price, and the firm earns a normal profit.
B) a fair price, and the firm earns an economic loss.
C) marginal cost pricing, and the firm earns a normal profit.
D) marginal cost pricing, and the firm earns an economic loss.

Accepted Answer

The regulated price of $15 is equal to the firm's marginal cost, indicating that the company is using marginal cost pricing.

However, the firm's average total cost is higher than the regulated price, at $17 per household. This means that the company is incurring an economic loss (revenue from 10,000 households at $15 per household = $150,000, while the total cost of serving those households is $170,000).

Therefore, the best choice is D: marginal cost pricing, and the firm earns an economic loss.

Question 12

Exhibit 13-3 A monopolist

In Exhibit 13-3, if this is an unregulated monopoly firm, the price and output which would maximize profits are:
A) price = $8; output = 25.
B) price = $10; output = 25.
C) price = $5; output = 40.
D) price = $4; output = 25.

Accepted Answer

The profit maximizing point for a monopolist is where marginal revenue (MR) equals marginal cost (MC). In the given graph, the marginal cost curve intersects the marginal revenue curve at an output of 25 units. The corresponding price of $10 can be observed by locating the point on the demand curve at an output of 25 units. Hence, the answer is B.

Question 13

Exhibit 13-3 A monopolist

In Exhibit 13-3, if this industry is regulated and the regulatory commission wants revenue to just cover cost, the proper price and output combination to be set is:
A) price = $10; output = 25.
B) price = $8; output = 30.
C) price = $5; output = 40.
D) price = $4; output = 25.

Accepted Answer

In a regulated industry where revenue is set to merely cover cost, the regulator would set price equal to marginal cost (MC) to ensure that the monopolist produces at the efficient level of output. From the graph, we can see that MC is equal to $5, and the corresponding level of output is 40 units. Therefore, the proper price and output combination to be set is Price = $5 and output = 40 units. Thus, option C is the correct answer.

Question 14

The task of economic regulation is to:
A) protect monopoly profits.
B) approximate the results of the competitive market.
C) replace competition with government ownership.
D) increase competition within the market.

Accepted Answer

Economic regulation aims to simulate the outcomes of a competitive market, even in industries that may not naturally have a competitive structure. The purpose is to promote efficiency, pricing accuracy, and prevent abusive market power, but without the drastic and usually unsustainable measures of replacing competition with government ownership. Protecting monopoly profits or increasing competition within the market are not the goals of economic regulation, per se.

Question 15

Which of the following statements is true ?
A) A vertical merger is a merger of firms that compete in the same market.
B) The rule of reason doctrine declares that the existence of monopoly alone is illegal.
C) Government regulation is economically justifiable for a natural monopoly.
D) Deficient information on unsafe products causes underconsumption.

Accepted Answer

Government regulation is justified for a natural monopoly because such a company will be the sole supplier of a product or service that consumers cannot do without, so without regulation, the company could charge monopoly prices, resulting in consumer surplus loss. A) is incorrect because a vertical merger is a merger of firms operating in different stages of the production process. B) is incorrect because the rule of reason doctrine states that monopolies are not illegal unless they engage in anti-competitive behavior. D) is incorrect because deficient information on unsafe products causes overconsumption, as consumers may not be aware of the risks associated with the product.

Question 16

Exhibit 13-1 Cable television monopolist

As shown in Exhibit 13-1, regulators might follow a fair return pricing strategy and require the cable television monopolist to operate at point:
A) A.
B) B.
C) C.
D) D.

Accepted Answer

A fair return pricing strategy seeks to ensure that the monopolist earns a fair return on its investment while also ensuring that consumers are not charged excessively high prices. Point C represents the intersection of the firm’s average total cost curve and the demand curve. At this point, the firm earns a fair return on investment, and consumers pay a price that is not considered excessive. Therefore, choice C is the best option.

Question 17

Exhibit 13-1 Cable television monopolist

As shown in Exhibit 13-1, an unregulated cable television monopolist would operate at which point on its demand curve:
A) A.
B) B.
C) C.
D) D.

Accepted Answer

The answer of Exhibit 13-1 Cable television monopolist

As shown in...

Question 18

The argument in favor of regulation for natural monopolies, externalities, and cases of imperfect information is:
A) market failure.
B) overallocation of resources to production.
C) insufficient economic profits.
D) excessive entry of new firms.

Accepted Answer

Regulation is needed in cases of natural monopolies, externalities, and imperfect information because these are examples of market failures, which occur when the market fails to allocate resources efficiently. In these cases, regulation is required to ensure that resources are allocated efficiently and that there is no market power abuse or negative externalities that harm society.

Question 19

Exhibit 13-3 A monopolist

In Exhibit 13-3, if this industry is regulated and the regulatory commission wants price to be set equal to marginal cost, the proper price and output combination to be set is:
A) price = $8; output = 30.
B) price = $5; output = 40.
C) price = $4; output = 25.
D) price = $3; output = 50.

Accepted Answer

The answer of Exhibit 13-3 A monopolist

In Exhibit 13-3, if...

Question 20

Marginal cost pricing is a system of pricing in which the price charged equals the marginal cost of:
A) the last unit produced and the firm earns zero profit.
B) each unit produced and the firm earns zero profit.
C) the last unit produced and the firm suffers a loss unless the government gives the firm a subsidy.
D) the profit-maximization unit and the firm earns an economic profit.

Accepted Answer

Marginal cost pricing involves setting the price of a product equal to the marginal cost of producing the last unit. This often results in the firm not covering its total costs (including fixed costs), leading to a loss unless compensated, for example, by a government subsidy.

Quiz 13: Antitrust and Regulation

Products that result in external benefits for society require regulation to correct for

Exhibit 13-1 Cable television monopolist As shown in Exhibit 13-1, regulators might follow a marginal cost pricing strategy and require the cable television monopolist to operate at point:

Consider a regulated natural monopoly. If the regulatory commission wants to establish a fair-return price, then it should set a price ceiling where the demand curve crosses the monopoly's long-run:

The government will have to subsidize a natural monopoly in the long run if regulators choose to pursue:

Government regulators can achieve efficiency for a natural monopoly by setting a price ceiling equal to the intersection of the demand curve and the:

If regulation imposes marginal cost pricing on a natural monopoly, then the monopoly will:

If a good causes a positive externality, regulation might take the form of a

Economic regulation occurs when:

Regulatory commissions may focus on establishing a "fair-return" price to be charged by a monopolist. Under this policy, the monopolist would earn:

Exhibit 13-1 Cable television monopolist As shown in Exhibit 13-1, if regulators follow a fair return pricing strategy, the price will be:

A local cable company has its rates set at P = $15 by a regulatory commission. Its current output is 10,000 households and its costs are as follows: ATC = $17; AVC = $14; and MC = $15. From this, we can tell that this is:

Exhibit 13-3 A monopolist In Exhibit 13-3, if this is an unregulated monopoly firm, the price and output which would maximize profits are:

Exhibit 13-3 A monopolist In Exhibit 13-3, if this industry is regulated and the regulatory commission wants revenue to just cover cost, the proper price and output combination to be set is:

The task of economic regulation is to:

Which of the following statements is true ?

Exhibit 13-1 Cable television monopolist As shown in Exhibit 13-1, regulators might follow a fair return pricing strategy and require the cable television monopolist to operate at point:

Exhibit 13-1 Cable television monopolist As shown in Exhibit 13-1, an unregulated cable television monopolist would operate at which point on its demand curve:

The argument in favor of regulation for natural monopolies, externalities, and cases of imperfect information is:

Exhibit 13-3 A monopolist In Exhibit 13-3, if this industry is regulated and the regulatory commission wants price to be set equal to marginal cost, the proper price and output combination to be set is:

Marginal cost pricing is a system of pricing in which the price charged equals the marginal cost of: