Question 1

Managers of a natural monopoly regulated using rate of return regulation have an incentive to
A)exaggerate the firm's costs.
B)underestimate the firm's costs.
C)minimize the monopoly's deadweight loss.
D)make zero economic profit.
E)exaggerate the firm's profit.

Accepted Answer

Managers of a natural monopoly regulated using rate of return regulation have an incentive to exaggerate the firm's costs in order to receive higher rates of return on their investment. This is because their profits depend on the allowed rate of return which is calculated based on the firm's costs. By exaggerating the costs, they can receive a higher allowed rate of return and therefore, higher profits.

Question 2

Earning-sharing regulation involves
A)setting the monopoly's price equal to its average total cost.
B)requiring that the monopoly share its profits with its customers if the profits rise above a certain level.
C)setting a maximum price the monopoly may charge and maintaining it for many years.
D)assuming a natural monopoly will not charge a higher than profit-maximizing price.
E)setting the monopoly's price equal to its marginal cost.

Accepted Answer

Earnings-sharing regulation involves requiring that the monopoly share its profits with its customers if the profits rise above a certain level. This approach aims to prevent monopolies from earning excessive profits at the expense of consumers.

Question 3

When regulated using rate of return regulation, who benefits from the practice of some natural monopolies to count sumptuous offices, free baseball tickets, golf excursions, and limousines as costs of production?
A)stockholders
B)managers of the monopoly
C)customers of the monopoly
D)regulators of the industry
E)None of the above answers is correct.

Accepted Answer

The managers of the monopoly benefit from the practice of counting sumptuous offices, free baseball tickets, golf excursions, and limousines as costs of production. This is because these expenses are included in the calculation of the rate of return, which determines how much profit the company is allowed to earn. By inflating their costs, the managers are able to justify higher prices and earn higher profits, which ultimately benefits them.

Question 4

A natural monopoly
A)faces more competition after regulation.
B)might exaggerate its costs if it is regulated using rate of return regulation.
C)might falsely minimize its costs if it is regulated using rate of return regulation.
D)might falsely minimize its costs if it is regulated using a marginal cost pricing rule.
E)is allowed to maximize its profit under a marginal cost pricing rule.

Accepted Answer

A natural monopoly has high fixed costs and low variable costs, which makes it very difficult for new competitors to enter the market. Therefore, natural monopolies are often regulated by the government. If a natural monopoly is regulated using rate of return regulation, it is incentivized to exaggerate its costs in order to receive a higher rate of return. This can lead to higher prices for consumers.

Question 5

The process of price cap regulation includes which of the following?
I. a price ceiling.
Ii. marginal cost pricing.
Iii. average cost pricing
A)i only
B)ii only
C)i and ii
D)ii and iii
E)i and iii

Accepted Answer

The answer of The process of price cap regulation includes...

Question 6

The theory that regulation seeks an efficient use of resources is the
A)social interest theory.
B)producer surplus theory.
C)consumer surplus theory.
D)capture theory.
E)deadweight loss theory.

Accepted Answer

The social interest theory posits that regulations seek to promote an efficient use of resources by internalizing costs and benefits that would otherwise be externalized. This aligns with the broader goal of maximizing social welfare.

Question 7

Under earnings-sharing regulation, if a firm's profits ________ above a certain level, they must be shared with the firm's ________.
A)rise; customers
B)fall; customers
C)rise; suppliers
D)fall; suppliers
E)rise; competitors

Accepted Answer

Under earnings-sharing regulation, if a firm's profits rise above a certain level, they must be shared with the firm's customers, not suppliers or competitors.

Question 8

-The above figure represents the market for cable television in Oakland, Florida. Time Warner Communications (TWC)is the sole provider of cable television to the residents of this Central Florida community. If TWC operated under a marginal cost pricing rule, what is the price of cable television in Oakland?
A)$40
B)$30
C)$20
D)$10
E)$0

Accepted Answer

The answer of 
-The above figure represents the market for...

Question 9

-The above figure represents the market for cable television in Oakland, Florida. Time Warner Communications (TWC)is the sole provider of cable television to the residents of this Central Florida community. If TWC operated under a marginal cost pricing rule, how many households in Oakland are served?
A)20,000
B)30,000
C)40,000
D)50,000
E)10,000

Accepted Answer

Under a marginal cost pricing rule, a firm will produce and sell its product up to the point where the marginal cost (MC) of producing an additional unit equals the market price. Without the specific figure, we can't visually analyze the exact point where MC equals the market price. However, based on the information provided, if TWC were to follow this rule, it would serve the number of households where its marginal cost equals the price households are willing to pay. The correct answer typically corresponds to the quantity where the MC curve intersects the demand curve in the market diagram. Since the specific details or graph is not provided, the correct answer is chosen based on the assumption that the question implies C (40,000 households) is the correct level of output under marginal cost pricing.

Question 10

Rate of return regulation is designed to allow a natural monopoly to
A)make an economic profit.
B)make zero economic profit.
C)underestimate its average cost.
D)compete with any firm entering the market.
E)make zero normal profit.

Accepted Answer

Rate of return regulation sets the price at a level that allows a natural monopoly to cover its costs and earn a fair rate of return. This means that the monopoly can make a profit, but not an excessive amount that would be considered monopolistic behavior. Therefore, the goal is for the monopoly to make zero economic profit, not necessarily zero normal profit.

Question 11

Price cap regulation is regulation that
A)is a marginal cost pricing rule.
B)is an average cost pricing rule.
C)imposes a price ceiling on the regulated firm.
D)has the same incentive effects as does rate of return regulation.
E)is the same as allowing the firm to operate as if it was totally unregulated.

Accepted Answer

Price cap regulation imposes a price ceiling on the regulated firm, meaning the firm cannot charge prices above a certain limit set by the regulator. This is different from marginal or average cost pricing rules, which set prices based on the firm's production costs, and it is also different from rate of return regulation, which sets a target rate of return for the firm and allows them to adjust prices to meet that target. Price cap regulation is a form of regulation that attempts to balance the interests of consumers and firms, by allowing the firm to earn a fair rate of return while keeping prices affordable for consumers. However, it does not allow the firm to operate as if it was totally unregulated, as there are still limits on their pricing decisions.

Question 12

-The above figure represents the market for cable television in Oakland, Florida. Time Warner Communications (TWC)is the sole provider of cable television to the residents of this Central Florida community. Compared to a marginal cost pricing rule, under an average cost pricing rule, TWC ________ output by ________ households.
A)increases; 20,000
B)decreases; 10,000
C)increases; 30,000
D)decreases; 50,000
E)decreases; 40,000

Accepted Answer

The answer of 
-The above figure represents the market for...

Question 13

When a regulatory agency uses rate of return regulation, the
A)agency is able to eliminate the deadweight loss.
B)firm's managers have an incentive to inflate the firm's costs.
C)regulated firm's profit must be maximized for the market to be efficient.
D)regulated firm must receive a government subsidy.
E)agency is using a form of marginal cost pricing.

Accepted Answer

When a regulatory agency uses rate of return regulation, the firm's managers have an incentive to inflate the firm's costs. This is because the rate of return is based on the firm's costs, so if the firm can show higher costs, they will be able to earn a higher rate of return. This creates a potential for inefficiency and higher prices for consumers.

Question 14

Price cap regulation involves
A)setting the monopoly's price equal to its average total cost.
B)setting the monopoly's price equal to its profit-maximizing price.
C)setting a maximum price the monopoly may charge.
D)assuming a natural monopoly will not charge a higher than profit-maximizing price.
E)setting the monopoly's price equal to its marginal cost.

Accepted Answer

Price cap regulation involves setting a maximum price that a monopoly may charge, with the intention of preventing the monopoly from charging excessive prices to consumers. This can be an effective way to regulate prices in industries where natural monopolies exist, but it does not necessarily ensure that prices are set at a level that is efficient or socially optimal.

Question 15

One of the tendencies that is common among firms regulated using rate of return regulation is to
A)increase production to an inefficient level.
B)inflate the costs of production.
C)incur an economic loss.
D)understate the costs of production.
E)overstate their total revenue.

Accepted Answer

Firms regulated using rate of return regulation have an incentive to inflate the costs of production because their profits are tied to their costs. The higher their costs, the higher the returns they can earn. This can lead to inefficiency and higher prices for consumers.

Question 16

-The above figure represents the market for cable television in Oakland, Florida. Time Warner Communications (TWC)is the sole provider of cable television to the residents of this Central Florida community. If TWC operated under an average cost pricing rule, what is the price of cable television in Oakland?
A)$40
B)$30
C)$20
D)$10
E)$50

Accepted Answer

The answer of 
-The above figure represents the market for...

Question 17

Price cap regulation is defined as regulation that
A)imposes a price ceiling on the regulated firm.
B)encourages firms to exaggerate costs to increase profits.
C)uses marginal cost pricing to ensure efficient output.
D)uses average cost pricing to ensure costs are covered.
E)is essentially the same as rate of return regulation.

Accepted Answer

Price cap regulation imposes a maximum price that a regulated firm can charge, thereby placing a price ceiling on its products or services. This is different from other types of regulation, such as rate of return regulation, which focus on ensuring that the firm earns a fair return on its investments. Price cap regulation is often used in industries where there is a concern that firms may have market power and be able to charge excessive prices.

Question 18

Price cap regulation
A)does not provide incentives to firms to minimize their costs because firms cannot change prices.
B)sets the maximum price these firms can charge.
C)gives firms the incentive to exaggerate their costs.
D)Both answers A and C are correct.
E)Both answers A and B are correct.

Accepted Answer

The answer of Price cap regulation
A)does not provide incentives to...

Question 19

Which of the following best describes the capture theory of regulation?
I. Regulation seeks an efficient use of resources.
Ii. Regulation is aimed at keeping prices as low as possible.
Iii. Regulation helps firms maximize economic profit.
A)i only
B)ii only
C)iii only
D)i and ii
E)i, ii, and iii

Accepted Answer

The capture theory of regulation suggests that regulatory agencies may come to be dominated by the industries they are charged with regulating, leading to regulations that serve the interests of firms, potentially helping them maximize economic profits.

Question 20

-The above figure represents the market for cable television in Oakland, Florida. Time Warner Communications (TWC)is the sole provider of cable television to the residents of this Central Florida community. If TWC operated under an average cost pricing rule, how many households in Oakland are served?
A)20,000
B)30,000
C)40,000
D)50,000
E)None of the above answers is correct.

Accepted Answer

The answer of 
-The above figure represents the market for...

Quiz 12: Monopoly

Managers of a natural monopoly regulated using rate of return regulation have an incentive to

Earning-sharing regulation involves

When regulated using rate of return regulation, who benefits from the practice of some natural monopolies to count sumptuous offices, free baseball tickets, golf excursions, and limousines as costs of production?

A natural monopoly

The process of price cap regulation includes which of the following? I. a price ceiling. Ii. marginal cost pricing. Iii. average cost pricing

The theory that regulation seeks an efficient use of resources is the

Under earnings-sharing regulation, if a firm's profits above a certain level, they must be shared with the firm's .

Rate of return regulation is designed to allow a natural monopoly to

Price cap regulation is regulation that

When a regulatory agency uses rate of return regulation, the

Price cap regulation involves

One of the tendencies that is common among firms regulated using rate of return regulation is to

Price cap regulation is defined as regulation that

Price cap regulation

Which of the following best describes the capture theory of regulation? I. Regulation seeks an efficient use of resources. Ii. Regulation is aimed at keeping prices as low as possible. Iii. Regulation helps firms maximize economic profit.