7) Under the social interest theory of regulation, the goal of regulating natural monopolies is
A) to provide a larger, though not maximum, profit for the firms.
B) to use average cost pricing.
C) to provide an outcome similar to the competitive outcome.
D) to provide a the maximum profit for the firms.
E) None of the above answers is correct.
8) Capture theory is
A) an economic theory of regulation.
B) a model about perfect competition.
C) the same as the public interest theory.
D) the theory that regulators capture firms’ attention by dictating a very low price.
E) a theory that explains behavior of competitive firms.
9) The theory that regulation helps producers to maximize profit is the
A) social interest theory.
B) consumer surplus theory.
C) antitrust theory.
D) capture theory.
E) oligopoly theory of regulatory bodies.
10) The capture theory of regulation is that regulations
A) help producers to maximize economic profits.
B) mean producers suffer losses.
C) result in diseconomies of scale.
D) benefit society, not producers.
E) benefit the regulators, not the producers or the consumers.
11) The capture theory of regulation assumes that regulation benefits
A) producers.
B) consumers.
C) government.
D) the general public.
E) the regulators.
12) The capture theory of regulation predicts that
A) regulation helps producers to maximize profits.
B) regulators capture the firm’s economic profit and transfer it to consumers as consumer
surplus.
C) regulators eliminate the deadweight loss a monopoly can create.
D) resources are used efficiently.
E) regulators capture the firm’s economic profit and transfer it to themselves.
13) The capture theory of regulation is defined as
A) the use of regulations to assure the efficient use of resources.
B) the constant reapplication of regulation on the cable TV industry.
C) the use of regulation to assist producers to maximize profits.
D) the removal of regulations on business activities.
E) regulation that focuses on consumers’ interests and ignores producers’ interests.
14) Suppose that a regulatory agency helps producers maximize economic profit. This type of
regulation coincides with
A) a natural monopoly.
B) a marginal cost pricing rule.
C) an average cost pricing rule.
D) the capture theory of regulation.
E) the social interest theory of regulation.
15) The capture theory of regulation predicts that regulations bring ________ to producers and
impose ________ on any individual consumer.
A) small benefits; small costs
B) small benefits; large costs
C) large benefits; small costs
D) large benefits; large costs
E) large benefits; no costs
16) When economies of scale exist so that one firm can meet the entire market demand at a lower
average total cost than two or more firms,
A) a natural monopoly develops.
B) the monopoly encounters competition.
C) economic profit is reduced to zero.
D) the monopoly converts all of the consumer surplus into economic profit.
E) there is always the opportunity to price discriminate.
17) A firm that is a natural monopoly
A) can supply the entire market at a lower cost than two or more firms.
B) has very small fixed costs and very large marginal costs.
C) is infrequently regulated because having one firm serve the market is economically sound.
D) cannot make an economic profit if it is not regulated because it must serve a very large
customer base.
E) produces the efficient quantity of output when it is not regulated.
18) A natural monopoly
A) sells to a single buyer.
B) sets price equal to marginal revenue.
C) is a firm than can supply the market at lower cost than two or more firms.
D) produces a natural resource.
E) faces a horizontal demand curve.
19) Today, you might be buying from a regulated natural monopoly when you purchase
A) a car, a truck, or a bicycle.
B) a computer, a phone, or a camera.
C) natural gas or electricity.
D) a house, a condominium, or a plot of land.
E) food in a grocery store or in a restaurant
20) Fixed costs are ________ in a natural monopoly, so average total cost ________ as output
increases.
A) large; increases
B) large; decreases
C) small; increases
D) small; decreases
E) nonexistent; decreases
21) A marginal cost pricing rule sets marginal cost equal to
A) minimum average variable cost.
B) price.
C) average cost.
D) marginal revenue.
E) the smaller of price or marginal revenue.
22) For a regulated natural monopoly, the marginal cost pricing rule is a rule that sets price
________ marginal cost and achieves an ________ amount of output.
A) equal to; efficient
B) above; inefficient
C) below; efficient
D) equal to; inefficient
E) above; efficient
23) How should a natural monopoly be regulated under the social interest theory of regulation?
A) by setting price equal to the average cost of production
B) by allowing a price that maximizes the profit of the natural monopoly
C) by using a marginal cost pricing rule
D) by subsidizing other producers to compete with the monopoly
E) by using rate of return regulation
24) The outcome of regulating a natural monopoly using the marginal cost pricing rule is
A) that the firm earns a normal profit.
B) that the firm maximizes its profit.
C) that consumer surplus is less than what it would be if the firm maximized its profit.
D) an efficient level of production.
E) that the firm earns an economic profit.
25) For a natural monopoly, the efficient quantity is produced when the firm is regulated so that
A) P = ATC.
B) P > ATC.
C) P = MC.
D) P > MC.
E) P < MC.
26) If a natural monopoly is regulated using
A) a marginal cost pricing rule, the firm maximizes its profit.
B) an average cost pricing rule, the firm incurs an economic loss.
C) a total cost pricing rule, the firm will exit the industry.
D) a marginal cost pricing rule, the firm incurs an economic loss.
E) an average cost pricing rule, the firm maximizes its profit.
27) Under a marginal cost pricing rule, a natural monopoly
A) earns a reasonable profit.
B) earns large economic profits.
C) earns accounting profits, but breaks even in economic terms.
D) incurs an economic loss.
E) earns a normal profit but it cannot be determined whether or not it earns an accounting profit.
28) A natural monopoly that is regulated to set price equal to marginal cost
A) earns an economic profit.
B) breaks even by earning a normal profit.
C) incurs an economic loss.
D) could make an economic loss, an economic profit, a normal profit.
E) earns zero normal profit.
29) Which of the following explains why the marginal cost pricing rule results in an economic
loss for a natural monopoly?
A) The ATC curve is downward sloping throughout the relevant range, therefore the MC is lower
than the ATC.
B) The demand curve is downward sloping, therefore price falls as quantity increases.
C) The MC is constant and equal to price.
D) Because output is determined by setting MC equal to the price, consumer surplus is
maximized.
E) The firm’s MR is always less than its price.
30) Regulated natural monopolies can obey a marginal cost pricing rule and still earn a normal
profit by engaging in
A) least cost pricing and average cost pricing.
B) price discrimination and two-part tariff pricing.
C) zero profit pricing.
D) profit-maximizing pricing.
E) None of the above answers is correct because a natural monopoly regulated using a marginal
cost pricing rule always incurs an economic loss.
31) Which of the following is an example of a two-part tariff?
A) price discrimination based on the buyers’ willingness to pay
B) charging a hookup fee plus a monthly charge equal to marginal cost
C) higher sales tax on specific products
D) different prices based on the cost of production and quantity bought
E) a regulated firm uses marginal cost pricing for some customers and average cost pricing for
other customers
32) One way a company can cover its costs and, at the same time, obey a marginal cost pricing
rule is by
A) choosing output levels according to the profit-maximizing rule.
B) using price discrimination.
C) increasing production.
D) decreasing production.
E) decreasing its marginal cost but not changing its average total cost.
33) If a regulatory agency sets the price equal to marginal cost for a natural monopoly, the
A) government might have to provide a subsidy to the firm to keep it in business.
B) price is the same as the unregulated monopoly price.
C) firm earns an economic profit, though not the maximum economic profit.
D) firm earns the maximum economic profit.
E) firm earns a normal profit.
34) What problem is caused by subsidizing a natural monopoly regulated using a marginal cost
pricing rule?
A) The regulated firm ends up earning an economic profit.
B) Consumers pay too much for the product of the monopoly.
C) This policy is a two-part tariff, which creates inefficiency.
D) The taxes required to gain the revenue used as the subsidy result in a deadweight loss that
subtracts from gains in efficiency which result from use of the marginal cost pricing rule.
E) The regulated firm goes out of business if it is subsidized.
35) With a natural monopoly
A) no regulation is necessary because it is a natural monopoly.
B) regulation takes the form of forcing competition from new firms.
C) regulation takes the form of forcing the company out of business.
D) regulation can take the form of average cost pricing to allow coverage of costs.
E) regulation takes the form of breaking the company into several competing firms.
36) When a firm is regulated so it uses an average cost pricing rule, the price
A) exceeds average total cost.
B) equals marginal cost.
C) is less than marginal cost.
D) equals average total cost.
E) equals marginal revenue.
37) For a natural monopoly to cover its total cost, its price must equal its
A) average total cost.
B) marginal cost.
C) demand.
D) total fixed cost.
E) marginal revenue.
38) When used with a natural monopoly, an average cost pricing rule results in
A) the efficient level of output.
B) economic losses for the firm.
C) the need for government to subsidize the natural monopoly.
D) zero economic profit for the firm.
E) the firm earning an economic profit.
39) With an average cost pricing rule, the quantity produced by the natural monopoly is
________ the quantity produced with a marginal cost pricing rule.
A) greater than
B) less than
C) equal to
D) greater than in the long run and less than in the short run than
E) not comparable to
40) A natural monopoly’s output is less if it is regulated with
A) a marginal cost pricing rule than if it is unregulated.
B) an average cost pricing rule than if it is unregulated.
C) an average cost pricing rule than if it is regulated with a marginal cost pricing rule.
D) a marginal cost pricing rule than if it is regulated with an average cost pricing rule.
E) More information about the firm’s demand is needed to determine how its output depends on
what regulation it faces.
41) If we compare regulating a natural monopoly using a marginal cost pricing rule to using an
average cost pricing rule, we see that output is
A) greater with marginal cost pricing but average cost pricing allows for costs to be covered.
B) the same under both cases but the profit is greater with average cost pricing.
C) greater under average cost pricing but profits are greater with marginal cost pricing.
D) the same but profits are greater with marginal cost pricing.
E) greater with marginal cost pricing and the firm’s profit is larger with marginal cost pricing.
42) Gene’s Car Wash is a natural monopoly. To wash 100 cars a week, if Gene is unregulated, he
would charge a price of $10. Gene’s average total cost for washing 100 cars is $8, his average
variable cost is $6, and his marginal cost is $4. If Gene is regulated using a marginal cost pricing
rule, the price he is allowed to charge to wash 100 cars is
A) $10.
B) $8.
C) $6.
D) $4.
E) $400.
43) Gene’s Car Wash is a natural monopoly. To wash 100 cars a week, if Gene is unregulated, he
would charge a price of $10. Gene’s average total cost for washing 100 cars is $8, his average
variable cost is $6, and his marginal cost is $4. If Gene is regulated using an average cost pricing
rule, the price he is allowed to charge to wash 100 cars is
A) $10.
B) $8.
C) $6.
D) $4.
E) $400.
44) 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 is left unregulated, how many households in Oakland are
served?
A) 20,000
B) 30,000
C) 40,000
D) 50,000
E) 10,000
45) 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 is left unregulated, what is the price of cable television in
Oakland?
A) $40
B) $30
C) $20
D) $10
E) $50
46) 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
47) 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
48) 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.
49) 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
50) 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
51) Rate of return regulation is designed to allow a natural monopoly to
A) earn an economic profit.
B) earn a normal profit.
C) underestimate its average cost.
D) compete with any firm entering the market.
E) earn zero normal profit.
52) 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) the agency is using a form of marginal cost pricing.
53) 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) earn zero economic profit.
E) exaggerate the firm’s profit.
54) 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.
55) 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 losses.
D) understate the costs of production.
E) overstate their total revenue.
56) 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.
57) 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.
58) 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.
59) 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.
60) 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.
61) 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