107) The firm shown in the figure above is
A) a natural monopoly because its LRAC curve slopes downward where it intersects the demand
curve.
B) not a natural monopoly because its LRAC curve slopes downward where it intersects the
demand curve.
C) not a natural monopoly because its MC curve is horizontal.
D) not a natural monopoly because its MC curve is below its LRAC curve.
108) If the firm in the figure above is unregulated, it will charge a price of
A) $5 per unit.
B) $25 per unit.
C) $40 per unit.
D) $20 per unit.
109) If the firm in the figure above is unregulated, it will produce
A) 5 units.
B) 20 units.
C) 30 units.
D) 40 units.
110) If the firm in the figure above is unregulated, it will make an economic profit of
A) zero.
B) -$240.
C) $100.
D) $400.
111) If the firm in the figure above is unregulated, the consumer surplus will be
A) zero.
B) $100.
C) $400.
D) $200.
112) If the firm in the figure above is unregulated, the deadweight loss will be
A) zero.
B) $100.
C) $200.
D) $400.
113) If a marginal cost pricing rule is imposed on the firm in the figure above, the price will be
A) $5 per unit.
B) $25 per unit.
C) $40 per unit.
D) $20 per unit.
114) If a marginal cost pricing rule is imposed on the firm in the figure above, the firm will
produce
A) 5 units.
B) 20 units.
C) 30 units.
D) 40 units.
115) If a marginal cost pricing rule is imposed on the firm in the figure above, the consumer
surplus will be
A) zero.
B) $800.
C) $400.
D) $200.
116) If a marginal cost pricing rule is imposed on the firm in the figure above, the total surplus
will be
A) zero.
B) $800.
C) $400.
D) $200.
117) If a marginal cost pricing rule is imposed on the firm in the figure above, the deadweight
loss will be
A) zero.
B) $100.
C) $200.
D) $50.
118) If an average cost pricing rule is imposed on the firm in the figure above, the price will be
A) $5 per unit.
B) $25 per unit.
C) $15 per unit.
D) $20 per unit.
119) If an average cost pricing rule is imposed on the firm in the figure above, the firm will
produce
A) 5 units.
B) 20 units.
C) 30 units.
D) 40 units.
120) If an average cost pricing rule is imposed on the firm in the figure above, the firm will make
an economic profit of
A) zero.
B) -$240.
C) $150.
D) $400.
121) If an average cost pricing rule is imposed on the firm in the figure above, the consumer
surplus will be
A) zero.
B) $450.
C) $400.
D) $200.
122) If an average cost pricing rule is imposed on the firm in the figure above, the deadweight
loss will be
A) zero.
B) $150.
C) $50.
D) $250.
123) When a firm is regulated so that its price enables it to earn a specified target percent return
on its capital, the regulation is called
A) rate of return regulation.
B) price cap regulation.
C) earnings limited regulation.
D) target pricing regulation.
124) Rate of return regulation sets the price at a level that enables the regulated firm to earn a
specified target percent return on its
A) total cost.
B) sales revenue.
C) capital.
D) variable cost.
125) Rate of return regulation is typically imposed on
A) monopolistically competitive firms.
B) an oligopoly.
C) a natural monopoly.
D) perfectly competitive firms.
126) Rate of return regulation is equivalent to
A) average cost pricing rule.
B) marginal cost pricing rule.
C) maximizing consumer surplus.
D) maximizing producer surplus.
127) Rate of return regulation is most similar to
A) a marginal cost pricing rule.
B) an average cost pricing rule.
C) an average variable cost pricing rule.
D) an inflation cost pricing rule.
128) Under rate of return regulation, a regulated firm has an incentive to
A) use an efficient amount of capital.
B) set its price equal to its marginal cost.
C) hide losses from bad debts.
D) inflate its costs.
129) Rate of return regulation, as currently applied to many natural monopolies such as public
utilities,
A) generally involves the use of price caps.
B) gives the firms an incentive to inflate their costs.
C) gives the firms an incentive to cut their costs as much as possible.
D) generally keeps their prices higher than if they were unregulated monopolists.
130) Which of the following types of economic regulation is most likely to encourage firms to
inflate their costs?
A) price cap regulation
B) rate of return regulation
C) cartel regulation
D) earnings sharing and price cap regulation
131) Under rate of return regulation, a natural monopoly ________.
A) has an incentive to inflate its costs
B) has an incentive to deflate its costs and capture more of the market
C) makes an economic profit
D) sets price equal to marginal cost
132) A rule that specifies the highest price that a regulated firm is permitted to set is called
A) rate of return regulation.
B) price cap regulation.
C) maximum price regulation.
D) average/marginal cost pricing.
133) A price cap regulation ________.
A) is illegal
B) is a price floor
C) is a price ceiling
D) encourages a firm to operate inefficiently
134) Price cap regulation is a type of regulation that
A) offers price subsidies to firms that comply with regulation guidelines.
B) is equivalent to rate of return.
C) sets the maximum price the firm can charge.
D) sets the minimum price the firm can charge.
135) Price cap regulation is a
A) price ceiling.
B) price floor.
C) form of marginal cost regulation.
D) type of rate of return regulation.
136) Under a price cap regulation, the regulated industry has an incentive to
A) operate efficiently and not inflate its costs.
B) inflate costs.
C) decrease its output.
D) None of the above answers is correct.
137) Which of the following types of economic regulation is most likely to encourage a natural
monopoly to NOT inflate its costs?
A) average cost pricing rule
B) rate of return regulation
C) price cap regulation
D) None of the above encourages cost cutting.
138) Compared to the profit-maximizing equilibrium of a natural monopoly, a price cap
regulation ________ the firm’s price and ________ the firm’s output.
A) raises; decreases
B) lowers; increases
C) raises; increases
D) lowers; decreases
139) Regulation that specifies that a firm’s profits must be shared with its customers if the profit
rises above a target level is called
A) rate of return regulation.
B) minimum price regulation.
C) earnings sharing regulation.
D) average cost pricing.
140) If a natural monopoly is allowed to set its price above its average total cost, then
A) the company makes an economic profit.
B) the company incurs an economic loss.
C) competitors will enter the market.
D) the company will produce more than the efficient amount of output.
141) If a natural monopoly does not inflate its costs, the output it produces is the smallest when
the monopoly is
A) left unregulated.
B) regulated according to an average cost pricing rule.
C) regulated according to a marginal cost pricing rule.
D) regulated to maximize total surplus.
142) A natural monopoly under rate of return regulation has an incentive to
A) pad its costs.
B) produce more than the efficient quantity of output.
C) charge a price equal to marginal cost.
D) maximize consumer surplus.
150
6 News Based Questions
1) The iconic American drink-maker, Coca-Cola, announced plans in 2008 to buy the dominant
Chinese fruit juice company for $2.5 billion. But China just rolled out a new law to guard against
business monopolies. How would this rent-seeking behavior by Coca-Cola most likely affect
efficiency in the drink market?
A) Profit would increase.
B) Producer surplus would increase.
C) Consumer surplus would decrease.
D) Deadweight loss would increase.
2) The United States Mint is the only legal entity to produce circulating coinage for the United
States. Michael Jackson’s estate owns the copyrights to many of the Beatles songs. Xcel Energy
is a public utility company who is the sole provider of electricity and natural gas in some states
such as Colorado, New Mexico and Minnesota. Which of these entities, if any, is a natural
monopoly?
A) United States Mint
B) Xcel Energy
C) Michael Jackson’s estate
D) None of these are natural monopolies.
3) The United States Mint is the only legal entity to produce circulating coinage for the United
States. What are the barriers to entry, if any, that protect this firm from competition?
A) The United States Mint is a natural monopoly.
B) The United States Mint has a government license to produce coinage.
C) The United States Mint is a public franchise to produce coinage.
D) The United States Mint has a patent or copyright to produce coinage.
4) In July 2008, the Federal Communications Commission approved the merger of satellite radio
providers XM Satellite and Sirius Satellite Radio, establishing a single satellite radio company in
America. Under the terms of the deal, the companies agreed not to raise prices for the next three
years. Why would the FTC require prices not to increase for three years?
A) Compared to competition, monopolies are always worse for consumers.
B) Compared to competition, monopolies restrict output and charge higher prices.
C) Compared to competition, monopolies increase prices and output.
D) Compared to competition, monopolies restrict output and charge lower prices.
5) In July 2008, the Federal Communications Commission approved the merger of satellite radio
providers XM Satellite and Sirius Satellite Radio, establishing a single satellite radio company in
America. The deal is tough for many to swallow. “We continue to believe that consumers are
best served by competition rather than monopolies,” said National Association of Broadcasters
Vice President Dennis Wharton. What does Wharton argue?
A) Producer surplus is greater with competition.
B) Total surplus is greater with a monopoly.
C) Consumer surplus is greater with competition.
D) Prices are lower with a monopoly.
6) In July 2008, the Federal Communications Commission approved the merger of satellite radio
providers XM Satellite and Sirius Satellite Radio, establishing a single satellite radio company in
America. If the new company was a natural monopoly, which of the following would be a
regulation to ensure an efficient quantity of satellite radio service?
A) application of the average cost pricing rule
B) government subsidization
C) government taxation
D) application of the marginal cost pricing rule
7) In July 2008, the Federal Communications Commission approved the merger of satellite radio
providers XM Satellite and Sirius Satellite Radio, establishing a single satellite radio company in
America. What do you predict will happen to efficiency in the market for satellite radio?
A) Deadweight loss will increase when an industry moves from competition to monopoly.
B) Consumer surplus will increase when an industry moves from competition to monopoly.
C) Producer surplus will decrease when an industry moves from competition to monopoly.
D) Total surplus will increase when an industry moves from competition to monopoly.
8) Before summer 2008, if you wanted a cell phone in Bhutan, you only had one choice: B-
Mobile, owned and operated by the government. What does Kuenga Gyalthen mean he states
that, “Up until now, because of the monopoly, we’ve all been suffering. So, I mean, it’s finally
time the consumer actually is king for a little while.”?
A) He believes that producer surplus is greater with competition.
B) He believes that total surplus is greater with a monopoly.
C) He believes that prices are lower with a monopoly.
D) He believes that consumer surplus is greater with competition.
9) Before summer 2008, if you wanted a cell phone in Bhutan, you only had one choice: B-
Mobile, owned and operated by the government. Then, this past spring, a privately owned
competitor, Tashi, was let in. What do you predict will happen to equilibrium price and quantity
in the cell phone market?
A) Price will decrease and quantity will increase.
B) Price will increase and quantity will decrease.
C) Both price and quantity will increase.
D) Both price and quantity will decrease.
10) While smoking is on the decline in the United States, China is still puffing away madly.
That’s not because the government is eager to protect its citizens from the hazards of smoking.
It’s because China is eager to protect its own tobacco industry which is a state monopoly. Why
did China announce in 2009 that it won’t allow foreign companies to build new cigarette
factories or enter joint ventures?
A) because China is concerned about the negative effects of smoking
B) because China wants to protect the economic profits its state monopoly makes
C) because China wants to protect jobs
D) because China regulates the tobacco industry
11) While smoking is on the decline in the United States, China is still puffing away madly.
That’s not because the government is eager to protect its citizens from the hazards of smoking.
It’s because China is eager to protect its own tobacco industry which is a state monopoly. What
barriers, if any, exist in this market?
A) natural barriers to entry
B) ownership barrier to entry
C) legal barrier to entry; a government license
D) legal barrier to entry; a public franchise
12) While smoking is on the decline in the United States, China is still puffing away madly.
That’s not because the government is eager to protect its citizens from the hazards of smoking.
It’s because China is eager to protect its own tobacco industry which is a state monopoly. How
would entry of foreign companies into the tobacco market affect the economic profit of the state
monopoly?
A) Its economic profits would decrease because of increased competition.
B) Its economic profits would increase because of increased competition.
C) Its economic profits would decrease because of rent seeking activity.
D) Its economic profits would increase because of rent seeking activity.
13) The WaveHouse on Mission Beach in San Diego features the Bruticus Maximus, a ten foot
wave, which tests the skills of even the most talented surf and wake board riders on the planet.
WaveHouse is the only place in San Diego where this service is offered. You can ride B. Max for
$40 for the first hour, $33 for the second hour, and $26 for the third hour. Why would
WaveHouse charge different prices for each subsequent hour of riding?
A) to capture consumer surplus among groups of buyers
B) to capture consumer surplus among units of a good
C) to create customer loyalty
D) to encourage skill development
14) The WaveHouse on Mission Beach in San Diego features the Bruticus Maximus, a ten foot
wave, which tests the skills of even the most talented surf and wake board riders on the planet.
WaveHouse is the only place in San Diego where this service is offered. You can ride B. Max for
$40 for the first hour, $33 for the second hour, and $26 for the third hour. Charging a different
price for subsequent hours is a form of
A) price discrimination among groups of buyers.
B) rent seeking behavior.
C) price discrimination among units of a good.
D) monopoly regulation.
15) The WaveHouse on Mission Beach in San Diego features the Bruticus Maximus, a ten foot
wave, which tests the skills of even the most talented surf and wake board riders on the planet.
WaveHouse is the only place in San Diego where this service is offered. You can ride B. Max for
$40 for the first hour, $33 for the second hour, and $26 for the third hour. An effect of this price
discrimination is that
A) consumer surplus increases.
B) deadweight loss increases.
C) consumer surplus is completely eliminated.
D) producer profit increases.
16) The WaveHouse on Mission Beach in San Diego features the Bruticus Maximus, a ten foot
wave, which tests the skills of even the most talented surf and wake board riders on the planet.
WaveHouse is the only place in San Diego where this service is offered. If you are a member of
WaveHouse, you can ride for half the price that a non-member pays. This is an example of
A) price discrimination among groups of buyers.
B) price discrimination among units of a good.
C) rent seeking behavior.
D) monopoly regulation.
17) The WaveHouse on Mission Beach in San Diego features the Bruticus Maximus, a ten foot
wave, which tests the skills of even the most talented surf and wake board riders on the planet.
WaveHouse is the only place in San Diego where this service is offered. To maximize profits,
WaveHouse would produce a quantity where
A) marginal revenue is greater than marginal cost.
B) marginal revenue is equal to marginal cost.
C) marginal revenue is less than marginal cost.
D) price is maximized.
1) What are the conditions that define a monopoly?
156
2) Describe the general types of barriers.
3) What is a legal barrier to entry?
4) Patents provide a firm with a monopoly on a given product. What is the economic rationale
for granting patents?
5) Are some monopolies created by government legislation that gives a firm the unique right to
produce a good or service?
6) Competition keeps prices lower for consumers. So why do we have patent laws?
7) What is a natural monopoly?
8) A monopolist, unlike a perfect competitor, has total control in its market because it is the
single producer. Why, then, must a single-price monopolist decrease its price if it wants to
increase its output?
9) What is the relationship between the marginal revenue curve and the demand curve for a
single-price monopolist?
10) How does marginal revenue compare to price for a single-price monopoly?
11) What does the marginal revenue equal when a monopoly’s total revenue is maximized? What
is the elasticity of demand when the total revenue is maximized?
12) Comment on the following: “A monopolist is a firm that can raise its price without
experiencing a decrease in its total revenue.”
13) “A profit-maximizing monopoly never produces an output in the inelastic range of its
demand curve.” True or false? Explain.
14) What is the relationship between price, marginal revenue, and marginal cost when a single-
price monopoly is maximizing profit?
15) A monopolist can set any price it wants. So why does it still produce at a point where
MC=MR, just like a perfectly competitive firm?
16) Why do perfectly competitive firms maximize their profits by producing so that the price is
equal to marginal cost, but monopolists maximize their profits by setting a price that is greater
than marginal cost?
17) “A single-price monopolist will always charge a price that is on the elastic range of its
demand.” Explain why the previous statement is correct or incorrect.
18) Why will a profit-maximizing, single-price monopolist NOT produce the amount of output
that maximizes its total revenue?
19) Can an unregulated monopoly make an economic profit in the long run? Explain your
answer.
20) What factor(s) enable a monopoly to make an economic profit in the long run?
21) What kind of profit can a monopoly make in the short run? In the long run? Explain your
answers.