Review Questions, Chapter 27 (12) - (De) Regulation of Business
(1) The distinctive characteristic of a natural monopoly is its:
(a) horizontal demand curve.
(b) downward-sloping average total cost curve when considering market demand.
(c) vertical marginal cost curve.
(d) kinked demand curve.
(2) To maximize profit, a natural monopolist produces the level of output at which:
(a) price equals average total cost.
(b) marginal cost equals the minimum of long-run average total cost.
(c) marginal revenue equals marginal cost.
(d) All of the above.
(3) An unregulated natural monopolist will produce where:
(a) average total cost is minimized.
(b) marginal revenue equals marginal cost.
(c) demand equals marginal cost.
(d) demand equals average total cost.
(4) The costs associated with the employment of more than 100,000 workers by the federal government regulatory agencies are an example of:
(a) administrative costs of government.
(b) compliance costs by the private sector.
(c) efficiency costs imposed by inappropriate production techniques required by regulations.
(d) None of the above.
(5) When a firm must educate its employees concerning government regulations, the cost of regulation is classified as:
(a) administrative costs of government.
(b) compliance costs by the firm.
(c) efficiency costs imposed by inappropriate production techniques required by regulations.
(d) None of the above.
Consider Figure 1 in answering Questions (6) and (7).
Figure 1
(6) To maximize profits, a natural monopolist would choose which combination of price and output in Figure 1?
(a) P(4), Q(4).
(b) P(2), Q(2).
(c) P(3), Q(3).
(d) P(1), Q(1).
(7) In Figure 1, the socially optimum pricing approach would lead to a price and output combination of:
(a) P(4), Q(4).
(b) P(0), Q(1).
(c) P(3), Q(3).
(d) P(1), Q(1).
Consider Figure 2 in answering Questions (8) and (9) below.
Figure 2
(8) In Figure 2, for a natural monopoly, regulation to ensure that economic profits are zero would involve:
(a) 1,000 units of output, and a price of $14.
(b) 1,000 units of output, and a price of $12.
(c) 1,500 units of output, and a price of $10.
(d) 2,200 units of output, and a price of $8.
(9) In Figure 2, efficient pricing would result in a price of:
(a) $14.
(b) $12.
(c) $10.
(d) $8.
Consider Figure 3 in answering Question (10) below.
Figure 3
Quantity (Q)
(10) In Figure 3, which of the following is true?
(a) The socially optimum price and output will involve the firm to operate at an economic loss which would require a subsidy.
(b) Society can benefit from government regulation by requiring socially optimum price and output while avoiding the need for a subsidy to cover losses.
(c) The industry is an oligopoly.
(d) None of the above.