Question 1

Which of the following is a form of government intervention that is designed to correct market failures?

Accepted Answer

Antitrust laws are a form of government intervention designed to prevent monopolies and promote competition, thereby correcting market failures.

Question 2

An industry in which one firm can achieve economies of scale over the entire range of market supply is a

Accepted Answer

A natural monopoly is an industry in which the most efficient level of production is reached when one firm supplies the entire market demand. This means that the firm can achieve economies of scale over the entire range of market supply, making it the only efficient producer in the market.

Question 3

A natural monopoly occurs because of

Accepted Answer

A natural monopoly occurs when there are significant economies of scale in production, meaning it becomes more efficient and less costly to produce at a larger scale. As a result, the firm with the largest market share can produce at lower costs than any potential competitors, effectively creating a natural monopoly.

Question 4

If a natural monopoly was broken into several smaller competing firms,

Accepted Answer

Natural monopolies generally have economies of scale. Breaking them up into smaller firms would likely destroy these economies of scale and lead to higher costs for producers and consumers. Society as a whole would be worse off in this scenario.

Question 5

If a natural monopoly was forced to break up into several small competitive firms, the

Accepted Answer

Natural monopolies exist because they can achieve lower average costs of production due to economies of scale. Breaking up the monopoly into smaller firms would eliminate the ability to take advantage of economies of scale, leading to higher average costs of production for each firm. This would result in higher prices for consumers as firms would need to charge more to cover their higher costs.

Question 6

All of the following are examples of natural monopolies except

Accepted Answer

Natural monopolies have high fixed costs of production, low variable costs, and can serve the entire market with a single firm. Local telephone companies, electricity companies, and railroad companies are all examples of industries where these conditions are met. However, college bookstores do not meet these conditions and thus, are not an example of a natural monopoly.

Question 7

The goal of antitrust laws is to

Accepted Answer

The goal of antitrust laws is to both control the structure of an industry and alter industry behavior in order to prevent monopolies from forming. By controlling the structure of an industry, antitrust laws aim to ensure a competitive market by breaking up monopolies or preventing them from forming in the first place. By altering industry behavior, antitrust laws aim to prevent anti-competitive practices such as price fixing or market sharing agreements between competitors. Therefore, D is the best choice as it includes both aspects of the goal of antitrust laws.

Question 8

All of the following are necessary conditions for pure laissez faire except

Accepted Answer

In a pure laissez-faire economy, the presence of firms with market power contradicts the ideal of perfect competition, where no single firm can influence market prices or conditions significantly.

Question 9

A natural monopoly is a desirable market structure because

Accepted Answer

A natural monopoly occurs when a single firm can produce a good or service at a lower cost than any potential competitor. This is often the result of economies of scale, where the cost per unit of output decreases as the firm's production increases. As a result, a natural monopoly can produce and sell their product at a lower cost, leading to lower prices for consumers. This can also incentivize the firm to invest in research and development to improve the quality of the product. Therefore, a natural monopoly is a desirable market structure because it allows the producer to deliver products to the market at the lowest possible cost.

Question 10

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

Accepted Answer

Antitrust enforcement focuses on preventing the formation of monopolies or other anti-competitive market structures, while government regulation can address a variety of issues including prices, output, and profits. The one option that government regulation typically does not attempt to create is perfect competition, as this is generally considered impractical or impossible to achieve in most markets.

Question 11

The best way to address a natural monopoly without dismantling the economies of scale is

Accepted Answer

The best way to address a natural monopoly without dismantling the economies of scale is through regulation. Regulation can help ensure that the natural monopolist does not abuse its market power, such as by charging excessively high prices or engaging in anticompetitive behavior. By setting prices and/or requiring the monopolist to offer open access to its infrastructure, the regulator can promote competition and protect consumers while still allowing the firm to achieve economies of scale.

Question 12

Market failure can result from all of the following except

Accepted Answer

Regulation is a policy tool used to correct market failures, so it cannot be a cause of market failure itself. Market failure can result from A, C, and D due to the presence of monopolies or other factors that restrict competition and output in the market, leading to inefficiencies and suboptimal outcomes.

Question 13

Market failure

Accepted Answer

Market failure occurs whenever there is an imperfection in the market mechanism which causes inefficient allocation of resources and prevents optimal outcomes. These imperfections can include externalities, public goods, market power, information asymmetry, and incomplete markets. Government intervention may sometimes be necessary to correct these imperfections and promote efficient outcomes. Laissez-faire policies may lead to market failure in situations where the market mechanisms do not work as expected or where there are externalities that need to be addressed. Therefore, options A and B are incorrect. Option D is also incorrect as market failures do occur in real-life situations.

Question 14

Which of the following is used as an antitrust tool that focuses on the structure of industry?

Accepted Answer

Prohibiting mergers and acquisitions is a tool used by antitrust laws to prevent the formation of monopolies or oligopolies, or to break them up if they already exist. This tool focuses on the structure of the industry rather than regulating prices or profits or forbidding specific business practices.

Question 15

The long-run average total cost curve of a natural monopolist

Accepted Answer

The long-run average total cost curve of a natural monopolist is downward-sloping in the relevant range of production because natural monopolies typically experience economies of scale over a wide range of output, meaning that as they produce more, the average cost of production decreases.

Question 16

When firms have the ability to restrict output, raise prices, stifle competition, and inhibit innovation, the market failure involved is

Accepted Answer

The ability to restrict output, raise prices, stifle competition, and inhibit innovation suggests that the firm has market power, which is a market failure. Market power occurs when a firm has the ability to influence market conditions, and this often results in reduced efficiency and higher prices for consumers.

Question 17

When the market does not lead to an optimal allocation of resources, there must be

Accepted Answer

When the market does not lead to an optimal allocation of resources, it means that there is a market failure. This could be due to externalities, imperfect competition, information asymmetry, and other factors. Therefore, the best choice is B, which is a market failure. The other choices may be relevant in certain situations, but they do not necessarily address the root cause of the market failure.

Question 18

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

Accepted Answer

Antitrust laws are designed to alter both firm behavior and industry structure by preventing monopolies, promoting competition, and regulating mergers and acquisitions. Deregulation and tax policy may affect firm behavior to some extent but may not necessarily have a significant impact on industry structure. Regulation can affect firm behavior but may not necessarily alter the industry structure.

Question 19

The major aim of government regulation is to

Accepted Answer

The major aim of government regulation is to alter industry behavior. Government regulations are policies and procedures developed by the government to influence the behavior and conduct of individuals and organizations in a particular industry. The aim is not to restrict competition but rather to ensure fair competition and protect consumers from monopoly practices. The government may also regulate to safeguard public health, safety, or welfare.

Question 20

Which of the following is a form of government intervention?

Accepted Answer

Regulation is a form of government intervention where rules and guidelines are put in place to control and govern specific industries or market activities. Natural monopoly, public goods, and externalities are all market failures that may require government intervention, but they are not forms of government intervention themselves.

Quiz 13: Natural Monopolies: Deregulation