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Chapter 16: GOVERNMENT REGULATION OF BUSINESS
e. none of the above
16-33 A municipal water utility employs quasi-fixed capital inputs—the water treatment plant and
distribution lines to homes—to supply water to 20,000 households in the community it serves.
The figure below shows the cost structure of this utility for various levels of water service.
Quantity of water consumption is measured in 1,000-gallon units per month. AQFC is the average
quasi-fixed cost curve, and LAC is long-run average cost. Long-run marginal cost, LMC, is
constant and equal to $4 per 1,000-gallon unit. The inverse demand equation is
P=24 -0.0004Qd
.
Quasi-fixed capital inputs cost per month is $____.
a. 150,000
b. 200,000
c. 250,000
Chapter 16: GOVERNMENT REGULATION OF BUSINESS
d. 300,000
e. 350,000
16-34 A municipal water utility employs quasi-fixed capital inputs—the water treatment plant and
distribution lines to homes—to supply water to 20,000 households in the community it serves.
The figure below shows the cost structure of this utility for various levels of water service.
Quantity of water consumption is measured in 1,000-gallon units per month. AQFC is the average
quasi-fixed cost curve, and LAC is long-run average cost. Long-run marginal cost, LMC, is
constant and equal to $4 per 1,000-gallon unit. The inverse demand equation is
P=24 -0.0004Qd
.
The price and output of water that maximize social surplus are _____ and _____, respectively.
a. $9.00; 50,000
b. $4.00; 25,000
Chapter 16: GOVERNMENT REGULATION OF BUSINESS
c. $4.00; 50,000
d. none of the above
16-35 A municipal water utility employs quasi-fixed capital inputs—the water treatment plant and
distribution lines to homes—to supply water to 20,000 households in the community it serves.
The figure below shows the cost structure of this utility for various levels of water service.
Quantity of water consumption is measured in 1,000-gallon units per month. AQFC is the average
quasi-fixed cost curve, and LAC is long-run average cost. Long-run marginal cost, LMC, is
constant and equal to $4 per 1,000-gallon unit. The inverse demand equation is
P=24 -0.0004Qd
.
Regulators at the Public Service Commission are unlikely to choose the price in the previous
question because
a. the water utility company will lose money at that price.
Chapter 16: GOVERNMENT REGULATION OF BUSINESS
b. the utility company will require a subsidy to continue operation in the long run.
c. government failure is a common problem at Public Service Commissions.
d. both a and b
e. all of the above
16-36 A municipal water utility employs quasi-fixed capital inputs—the water treatment plant and
distribution lines to homes—to supply water to 20,000 households in the community it serves.
The figure below shows the cost structure of this utility for various levels of water service.
Quantity of water consumption is measured in 1,000-gallon units per month. AQFC is the average
quasi-fixed cost curve, and LAC is long-run average cost. Long-run marginal cost, LMC, is
constant and equal to $4 per 1,000-gallon unit. The inverse demand equation is
P=24 -0.0004Qd
.
Chapter 16: GOVERNMENT REGULATION OF BUSINESS
If the Public Service Commission undertakes second-best pricing, the price and output of water
are __________ and _________, respectively.
a. $2.00; 55,000
b. $9.00; 50,000
c. $2.50; 27,500
d. $9.50; 55,000
e. none of the above
16-37 A municipal water utility employs quasi-fixed capital inputs—the water treatment plant and
distribution lines to homes—to supply water to 20,000 households in the community it serves.
The figure below shows the cost structure of this utility for various levels of water service.
Quantity of water consumption is measured in 1,000-gallon units per month. AQFC is the average
quasi-fixed cost curve, and LAC is long-run average cost. Long-run marginal cost, LMC, is
constant and equal to $4 per 1,000-gallon unit. The inverse demand equation is
P=24 -0.0004Qd
.
Chapter 16: GOVERNMENT REGULATION OF BUSINESS
Second-best pricing does not achieve social economic efficiency because there is a deadweight
loss of
a. $125,000.
b. $150,000.
c. $200,000.
d. $250,000
e. $300,000
16-38 A municipal water utility employs quasi-fixed capital inputs—the water treatment plant and
distribution lines to homes—to supply water to 20,000 households in the community it serves.
The figure below shows the cost structure of this utility for various levels of water service.
Quantity of water consumption is measured in 1,000-gallon units per month. AQFC is the average
quasi-fixed cost curve, and LAC is long-run average cost. Long-run marginal cost, LMC, is
constant and equal to $4 per 1,000-gallon unit. The inverse demand equation is
P=24 -0.0004Qd
.
Chapter 16: GOVERNMENT REGULATION OF BUSINESS
If the Public Service Commission implements an optimal two-part pricing plan, the usage fee is
set at $_____ per 1,000-gallon units per month and the fixed monthly access charge must then be
$_____ per household.
a. $4.00; $12.00
b. $4.00; $12.50
c. $5.00; $12.00
d. $5.00; $12.50
Chapter 16: GOVERNMENT REGULATION OF BUSINESS
16-39 A municipal water utility employs quasi-fixed capital inputs—the water treatment plant and
distribution lines to homes—to supply water to 20,000 households in the community it serves.
The figure below shows the cost structure of this utility for various levels of water service.
Quantity of water consumption is measured in 1,000-gallon units per month. AQFC is the average
quasi-fixed cost curve, and LAC is long-run average cost. Long-run marginal cost, LMC, is
constant and equal to $4 per 1,000-gallon unit. The inverse demand equation is
P=24 -0.0004Qd
.
Two-part pricing is a desirable method of pricing water because
a. it is more profitable for the utility company than average-cost-pricing (i.e., second-best
pricing).
b. deadweight loss is zero.
c. the deadweight loss is paid for by the users of water.
d. it easy to implement in practice.
e. both a and d
Chapter 16: GOVERNMENT REGULATION OF BUSINESS
Chapter 16: GOVERNMENT REGULATION OF BUSINESS
16-40 Use the figure below, which shows the linear demand and constant cost conditions facing a firm
with a high barrier to entry, to answer the question.
The firm will earn economic profit of $______.
a. $500,000
b. $750,000
c. $1,000,000
d. $1,250,000
16-41 Use the figure below, which shows the linear demand and constant cost conditions facing a firm
with a high barrier to entry, to answer the question.
If the entry barrier is removed consumers will be better off because
Chapter 16: GOVERNMENT REGULATION OF BUSINESS
a. consumers will enjoy greater consumer surplus.
b. productive efficiency will be restored.
c. competition will eliminate the shortage caused by the entry barrier.
d. all of the above
16-42 Use the figure below, which shows the linear demand and constant cost conditions facing a firm
with a high barrier to entry, to answer the question.
$_________ the deadweight loss is caused by the market power created by the high entry barrier
a. $625,000
b. $1,000,000
c. $1,500,000
d. $2,000,000
16-43 An underallocation of resources in an industry means that for the last unit produced,
a. economic profit is still rising.
b. society places a higher value on the resources required to produce the last unit than the
value society places on consuming the last unit.
c. the demand price for the last unit exceeds the marginal cost of producing the last unit.
d. the cost of producing the last unit exceeds its value to society.
Chapter 16: GOVERNMENT REGULATION OF BUSINESS
16-44 When we say that market prices allocate goods to the highest-valued users, we mean that
a. Only consumers with higher incomes will get any of the good, while lower income
consumers get none of the good.
b. Only consumers who value the good more than the market price of the good will choose
to buy the good.
c. Government allocation of the good is warranted because government can make sure that
the good gets consumed by deserving individuals.
d. Consumer surplus is maximized.
e. both a and d
16-45 The less accurate consumer information is about product quality,
a. the greater will be the loss of social surplus due to productive inefficiency.
b. the smaller will be the loss of social surplus due to productive inefficiency.
c. the greater will be the loss of social surplus due to allocative inefficiency.
d. the smaller will be the loss of social surplus due to allocative inefficiency.
16-46 Private provision of public goods fails to occur because
a. the free rider problem causes overproduction of the good.
b. the free rider problem prevents collection of sufficient revenue.
c. the price of the privately supplied public good must be zero.
d. both a and c
e. both b and c
Chapter 16: GOVERNMENT REGULATION OF BUSINESS
16-47 The figure below shows the marginal damage and marginal abatement cost curves for sulfur
dioxide emissions in North Zulch. EPA officials have imposed an emissions tax of $100 per ton
of sulfur dioxide.
The optimal level of sulfur dioxide emission is not zero because it would cost $_______ to avoid
or abate the last ton of pollution, while the benefit of abating the last ton is $_______.
a. $300; $100
b. $300; $0
c. $13,500; 6,750
d. $13,500; $0
16-48 The figure below shows the marginal damage and marginal abatement cost curves for sulfur
dioxide emissions in North Zulch. EPA officials have imposed an emissions tax of $100 per ton
of sulfur dioxide.
With the $100 per ton emission tax enforced in North Zulch, firms will abate _______ tons and
pay total emission taxes of $_________.
Chapter 16: GOVERNMENT REGULATION OF BUSINESS
a. 30; $8,000
b. 40; $5,000
c. 50; $4,500
d. 50; $5,000
e. 90; $4,500
16-49 The figure below shows the marginal damage and marginal abatement cost curves for sulfur
dioxide emissions in North Zulch. EPA officials have imposed an emissions tax of $100 per ton
of sulfur dioxide.
With the $100 per ton emission tax enforced in North Zulch, firms will pay total abatement costs
of $____________.
a. $2,000
b. $2,500
c. $3,000
d. $5,500
e. $6,000
Chapter 16: GOVERNMENT REGULATION OF BUSINESS
16-50 The figure below shows the marginal damage and marginal abatement cost curves for sulfur
dioxide emissions in North Zulch. EPA officials have imposed an emissions tax of $100 per ton
of sulfur dioxide.
With the $100 per ton emission tax enforced in North Zulch, residents of North Zulch incur total
damages from sulfur dioxide emissions of $____________.
a. $2,000
b. $2,500
c. $3,000
d. $5,500
e. $6,000
