Question 1

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

Accepted Answer

In the diagram, S1 is the socially optimal output level which corresponds to P1. However, at this quantity, the natural monopoly incurs losses due to its high fixed costs. Therefore, regulation is needed to allow the firm to earn a normal profit at the socially optimal quantity. This is achieved by setting a price of P0, which is equal to the average total cost at the quantity where the firm earns zero economic profit, i.e., the intersection of the marginal cost (MC) and average total cost (ATC) curves. Therefore, the allocatively efficient price is ^PA.

Question 2

The concept of laissez faire calls for government intervention if market failure is evident.

Accepted Answer

The concept of laissez faire promotes minimal government intervention in economic affairs and does not advocate for government intervention in case of market failure.

Question 3

Output regulation for the natural monopoly in Figure 27.2 would result in an output of

Accepted Answer

The answer of  Output regulation for the natural monopoly...

Question 4

The unregulated monopoly in Figure 27.2 will experience

Accepted Answer

The answer of  The unregulated monopoly in Figure 27.2...

Question 5

It is not necessary to offer a subsidy in order to make price efficiency regulation viable in the long run.

Accepted Answer

The answer of It is not necessary to offer a...

Question 6

The term market failure means the market mechanism has not generated the best possible mix of output.

Accepted Answer

Market failure occurs when the market does not efficiently allocate resources leading to suboptimal outcomes such as underproduction or overproduction of goods and services.

Question 7

The "JetBlue Effect" has caused all of the following except

Accepted Answer

The "JetBlue Effect" refers to JetBlue's entry into new markets leading to increased competition and lower fares. It has led to an increase in daily passengers and an increase in JetBlue's local traffic share, but it has not caused a decrease in jet fuel prices.

Question 8

Government regulation is designed to change both the structure of an industry and the behavior of firms in the industry.

Accepted Answer

The answer of Government regulation is designed to change both...

Question 9

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

Accepted Answer

The article's title suggests that Bell monopolies are trying to disconnect competition, indicating that they are trying to monopolize the market. If rivals are required to pay a high access fee, it becomes a barrier to entry, making it difficult for new companies to enter the market and compete with the monopoly.

Question 10

In Figure 27.2, profit regulation will lead the natural monopoly to produce

Accepted Answer

Profit regulation leads the natural monopoly to produce at the point where MC=MR, which is Q_B in this case. The price charged would be P_B which is equal to average cost at this output level.

Question 11

According to the article "Financial Woes Heating Up," California utilities

Accepted Answer

The article states that California utilities experienced rising wholesale prices for electricity while retail rates were subject to a price ceiling, leading to financial difficulties. Option A is incorrect because the article states that the utilities do control distribution. Option C is incorrect because the article states that there was excess demand, not capacity, and falling wholesale prices, not retail prices. Option D is also incorrect because the article does not mention any takeovers by the state.

Question 12

A natural monopolist can produce total industry output more efficiently than several smaller but competitive firms.

Accepted Answer

A natural monopolist, due to economies of scale, can produce at a lower average cost than several smaller firms. This is because fixed costs are spread across a larger output, leading to lower per-unit costs. As a result, a natural monopolist can produce total industry output more efficiently than several smaller but competitive firms.

Question 13

Marginal cost pricing implies a loss on every unit of output produced by natural monopoly.

Accepted Answer

Marginal cost pricing means that prices are set equal to the marginal cost of production, which for a natural monopoly will always be below average total cost. This means that the firm will not be able to cover all of its costs and will have a loss on every unit of output produced.

Question 14

One In the News article says that when JetBlue "… comes to town, fares go down … " If entry barriers are low enough, a market

Accepted Answer

If entry barriers are low enough, it means that new firms can easily enter the market and compete with existing firms. This promotes contestability in the market, which can lead to lower prices and more efficient outcomes without the need for regulation or antitrust intervention. Therefore, the best choice is D.

Question 15

The major problem with price efficiency regulation is that the natural monopolist loses money or earns negative profits.

Accepted Answer

Price efficiency regulation sets a maximum price that natural monopolists can charge, which can lead to a decrease in their profits or even negative profits if their costs are higher than the regulated price.

Question 16

The argument for government intervention implies that government regulation can improve market outcomes.

Accepted Answer

The argument for government intervention is based on the idea that markets may not always allocate resources efficiently, and that government intervention can correct market failure and improve outcomes. Therefore, the statement is true.

Question 17

Unregulated natural monopolists produce suboptimal rates of output.

Accepted Answer

Unregulated natural monopolies can limit output to increase profits since there are no competitors to take away market share. This can lead to inefficiency and underproduction compared to a competitive market.

Question 18

According to "Sleep Rules Raise Trucking Costs," in 2013 the Federal Motor Carrier Safety Administration estimated the new rules regulating the transportation industry would cost trucking companies about $2 billion.What benefits did the government expect from the costly regulations?

Accepted Answer

The article states that the government expected the regulations to reduce highway fatalities by reducing driver fatigue.

Question 19

In Figure 27.2, an unregulated natural monopoly will produce

Accepted Answer

The answer of  In Figure 27.2, an unregulated natural...

Question 20

Which of the following is true about this firm?

Accepted Answer

The code "11ea9534_880a_0f12_9016_dfcc597bbe1e_TB5718_00" does not give any information about the firm or the industry it belongs to. Therefore, we cannot determine whether it is a natural monopoly or not. However, if society can benefit from government regulation using marginal cost pricing without a subsidy, it suggests that the firm may have market power and is charging a price above marginal cost. Marginal cost pricing would ensure that the firm is operating at a socially efficient level of output, which would benefit society. Marginal cost pricing does not necessarily assure technical efficiency or allocative efficiency, but it does ensure that the firm is producing at the lowest possible cost, given its current level of technology and resources.

Quiz 13: Natural Monopolies: Deregulation