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780 Miller Economics Today, 16th Edition
39) Refer to the above figure. If the government uses rate of return regulation for the natural
monopolist, the firm will charge price
A) P5and sell Q1units. B) P2and sell Q1units.
C) P3and sell Q3units. D) P1and sell Q4units.
40) Refer to the above figure. Suppose the government requires the natural monopolist to charge the
efficient price. Then profits for the firm will be
A) zero. B) losses equal to Q4times distance f g.
C) losses equal to Q3times distance d e. D) profits equal to Q1times distance a
b
.
41) Refer to the above figure. An unregulated natural monopolist s profits will be
A) profits equal to Q1times distance a c. B) losses equal to Q4times distance f g.
C) losses equal to Q3times distance d e. D) profits equal to Q1times distance a
b
.
42) Refer to the above figure. Regulators cannot force natural monopolies to operate in the long run
at a loss. Therefore, they usually require the firms to charge a price equal to
A) marginal cost, which is P1. B) marginal cost, which is P2.
C) average cost, which is P3. D) average cost, which is P4.
43) Refer to the above figure. What are the price and quantity if this monopolist is required to use
average cost pricing?
A) P5
,
Q1B) P3
,
Q3C) P2
,
Q1D) P1
,
Q4
44) Refer to the above figure. From the standpoint of society, the optimal output is
A) Q1 B) Q2 C) Q3 D) Q4
45) Refer to the above figure. From the standpoint of society, the optimal price is
A) P1 B) P2 C) P3 D) P5
46) If government regulators make the natural monopolist set price equal to marginal cost
A) the natural monopolist will make zero economic profits.
B) the natural monopolist will make normal profits.
C) the natural monopolist will make losses and go out of business.
D) the natural monopolist will make positive economic profits larger than if it wasn t
regulated at all.
47) When regulating a natural monopoly, average cost pricing is usually used rather than marginal
cost pricing because
A) average cost pricing allows the firm to earn a normal rate of return on investment, while
marginal cost pricing leads to economic losses.
B) average cost pricing is more economically efficient than marginal cost pricing.
C) average cost pricing leads to lower profits than marginal cost pricing.
D) average cost pricing leads to a lower market price than marginal cost pricing.
48) Under rate of return regulation, natural monopolies must use
A) marginal cost pricing. B) average cost pricing.
C) efficient pricing. D) monopoly pricing.
49) Under rate of return regulation, average cost pricing
A) is inflated so the firm can make economic profits.
B) includes variable costs but not a cost for capital.
C) includes what they consider to be a fair rate of return on investment.
D) includes a cost for capital that generates an above normal rate of return.
50) Cost of service regulation sets prices by considering
A) the actual variable cost of providing the service to the customer.
B) the actual total cost of providing the service to the customer.
C) the actual average cost of providing the service to the customer.
D) the actual marginal cost of providing the service to the customer.
51) Under rate of return regulation, the price is set so that
A) price equals the marginal cost of production.
B) the firm earns a positive economic profit.
C) the firm earns a monopoly profit.
D) the firm earns a normal rate of return on investment.
52) Which of the following best describes the difference between cost of service regulation and
rate of return regulation?
A) Costs determine prices in cost of service regulation and prices determine costs in
rate of return regulation.
B) Costs determine prices in cost of service regulation and prices are set in rate of return
regulation so the firm can make a normal rate of return.
C) Variable costs determine prices in cost of service regulation and prices are set in
rate of return regulation so the firm can make an economic profit.
D) Regulators determine prices in cost of service regulation and market forces determine
prices in rate of return regulation.
53) Use the above figure. A regulatory commission sets the maximum price this monopolist can
charge at P1. If this monopolist were to produce, it
A) would produce Q4output and generate losses.
B) would produce Q4output and generate profits.
C) would produce Q2output and generate losses.
D) would produce Q2output and generate profits.
54) Use the above figure. If a commission regulates the above monopoly using fair return (average
cost pricing), then the industry s output will be ________ and the product s price will be
________.
A) Q1; P1B) Q2; P3C) Q3; P2D) Q4; P1
55) Use the above figure. If a commission regulates the above monopoly using marginal cost
pricing, then the industry s output will be ________ and the product s price will be ________.
A) Q2; P1B) Q2; P3C) Q3; P2D) Q4; P1
56) Use the above figure. If this monopolist was not regulated, the profit maximizing quantity and
price would be
A) Q2 and P1. B) Q2 and P3. C) Q3 and P2. D) Q4 and P1.
57) Use the above figure. Suppose that a regulatory agency requires this natural monopolist to
engage in marginal cost pricing. This would lead to
A) losses, which would drive the monopolist out of business in the long run.
B) profits, which would encourage new producers to enter the industry in the long run.
C) profits, but new firms cannot enter the industry in the long run due to high barriers to
entry.
D) losses, which would encourage the monopolist to lower costs in the long run.
58) In the above figure, what would be the profit maximizing output and price for this natural
monopolist?
A) 1,200; $3 B) 900; $7 C) 700; $7 D) 700; $10
59) In the above figure, what would be the profit or loss at the profit maximizing output for this
natural monopolist?
A) $300 B) $2,700 C) $2,100 D) $1,200
60) In the above figure, if the monopolist engages in marginal cost pricing, what are its output and
price?
A) 1,200, $3 B) 900, $7 C) 700, $7 D) 700, $10
61) In the above figure, what would be the profit or loss at the marginal cost pricing point for this
natural monopolist?
A) $300 B) $2,700 C) $2,100 D) $1,200
62) In the above figure, what will be the output level produced if average cost pricing is used?
A) 1,200 B) 900
C) 700 D) somewhere between 900 and 1,200
63) Natural monopolies
A) have one lowest cost producer in an industry.
B) are not regulated.
C) have long run average costs equal to zero.
D) do not experience economies of scale.
64) Which of the following is the BEST example of a natural monopoly?
A)
b
ook publisher B) electric utility
C) tobacco products company D) airline
65) If a regulator forced a natural monopolist to set P MC,
A) the monopolist would earn economic profits.
B) the monopolist would suffer economic losses.
C) the monopolist would break even.
D) the monopolist would earn monopolistic profits.
66) When a regulator allows a monopolist to set its price equal to long run average cost, the
regulator is practicing
A) marginal cost pricing. B) operating cost pricing.
C) average cost pricing. D) optimal cost pricing.
67) The following table depicts the cost and demand structure a natural monopoly faces. Provided
that the firm operates as a monopolist, what is the price charged and quantity produced in order
to maximize profits?
Total Marginal Total Marginal
Quantity Price ($) Revenue Revenue Cost Cost
0 1,000 0 0 0 0
1 900 900 900 800 800
2 800 1,600 700 1,400 600
3 700 2,100 500 1,900 500
4 600 2,400 300 2,400 500
5 500 2,500 100 2,800 400
6 400 2,400 100 3,200 400
A) price charged of $900 and quantity produced of 1
B) price charged of $800 and quantity produced of 2
C) price charged of $700 and quantity produced of 3
D) price charged of $600 and quantity produced of 4
68) Regulation of a natural monopoly that forces it to price and produce as if it were a competitive
firm results in
A) the market being instantly competitive. B) higher profits for the monopoly.
C) economic losses for the monopoly. D) a highly unstable marketplace.
69) Using the figure as a guide, which of the following is FALSE with respect to profit maximization
and the monopolist?
A) A monopolist (like any other firm) will select an output rate at which marginal revenue is
equal to marginal cost, at the intersection of the marginal revenue curve and the marginal
cost curve.
B) The monopolist will produce quantity Qmand charge a price of Pm.
C) When compared to a competitive situation, consumers pay a higher price to the
monopolist, and consequently are forced to purchase more of a product as price varies
directly with quantity demanded.
D) Profits are the positive difference between total revenues and total costs.
70) Regulation of monopolies that allows prices to reflect only the actual cost of production and no
monopoly profits is referred to as
A) cost of service regulation. B) rate of return regulation.
C) service opportunity regulation. D) natural regulation.
71) The type of regulation that attempts to keep prices and the rate of return in an industry at a
competitive level is referred to as
A) cost of service regulation. B) rate of return regulation.
C) service opportunity regulation. D) natural regulation.
72) Regulation that is based on allowing prices to reflect only the actual operating cost of
production is known as
A) average cost regulation. B) marginal cost regulation.
C) rate of return regulation. D) cost of service regulation.
73) Regulation that is based upon the cost of providing the good or service is known as
A) rate of return regulation. B) cost of service regulation.
C) social regulation. D) deregulation.
74) Regulation that keeps the rate of return in the industry competitive is known as
A) rate of return regulation. B) cost of service regulation.
C) social regulation. D) deregulation.
75) Which of the following is NOT an objective of economic regulation?
A) to regulate the prices enterprises are allowed to charge
B) to fix prices so that they are never allowed to rise
C) to keep rates of return in an industry at a competitive level
D) to prevent monopoly profits
76) In the above figure, a regulation requiring average cost pricing would force the firm to produce
at output level
A) Q1. B) Q2. C) Q3. D) Q4.
77) In the above figure, an unregulated natural monopolist will produce output level
A) Q1. B) Q2. C) Q3. D) Q4.
78) Cost of service regulation allows regulated companies to charge prices that
A) reflect the cost of regulating the industry, plus the marginal cost of the product.
B) allow monopoly profits to the producer.
C) reflect the actual average cost of providing the services to the customer.
D) are determined by competition in other geographic markets.
79) The difference between cost of service regulation and rate of return regulation is that
A) the former sets prices based on actual costs, and the latter focuses on setting prices such
that the firm earns a normal rate of return.
B) the latter sets prices first, and then the firm must keep costs in line if it wants to earn a
profit, and the former sets price high enough to cover costs.
C) the former uses marginal cost pricing and the latter uses average cost pricing.
D) the former uses average cost pricing and the latter uses marginal cost pricing.
80) One type of economic regulation often used in the United States by various public utility
commissions allows prices to reflect only the actual cost of production and no monopoly profits.
This type of economic regulation is known as
A) rate of return regulation.
B) cost of service regulation.
C) price per constant quality unit regulation.
D) creative response regulation.
81) What is the problem with marginal cost pricing in the natural monopoly situation? How do
regulatory agencies in the United States usually handle the problem?
82) Why do government regulators not enforce marginal cost pricing for natural monopolies? What
are the common regulatory solutions?
83) Using a graph, show the price output combination of a natural monopoly without regulation
and the price output combination if the government requires the monopoly to earn a normal
rate of return. What are economic profits in each situation?
84) Distinguish between cost of service regulation and rate of return regulation. What problem is
inherent in both types of regulation?
85) Today the U.S. telecommunications industry remains heavily regulated by the government as it
was some 30 years ago. Do you agree or disagree? Why?
27.3 Regulating Nonmonopolistic Industries
1) Which of the following is a possible market solution to the lemons problem?
A) Producers might offer product guarantees and warranties.
B) Producers might be required to meet certain legal standards to obtain licenses granting the
right to sell their products.
C) Government agencies might be charged with directly overseeing production and
distribution of certain products.
D) Liability laws might be established to ensure that firms selling certain products must face
penalties in the event the products function poorly.
2) One problem that might occur as a result of economic regulation is
A) the firm may be earning more than a normal rate of return on investment.
B) the quality of service might be lowered.
C) that social regulation may follow.
D) the demand for the good may be greater than the supply.
3) The potential for asymmetric information to bring about a general decline in product quality in
an industry is known as the ________ problem.
A) moral hazard B) liability C) capture D) lemons
4) When consumers have less information about a product than do sellers, then this is the situation
of
A) asymmetric information. B) symmetric information.
C) caveat emptor. D) a market failure.
5) Which of the following is the outcome of the lemons problem in the used car market?
A) Only low quality cars will be traded in the market.
B) Only high quality cars will be traded in the market.
C) Both low quality and high quality cars will be traded in the market.
D) No cars will be traded in the market.
6) The lemons problem is a situation of
A) perfect competition. B) asymmetric information.
C) creative response. D) a natural monopoly.
7) Which of the following is NOT a likely market solution to the lemons problem?
A) average cost pricing B) product warranty
C) industry standard D) product certification
8) Credence goods are particularly susceptible to the lemons problem because
A) they have qualities that are difficult for producers to fully assess.
B) they have qualities that are difficult for consumers to fully assess.
C) creative responses among producers create volatility in market supply.
D) creative responses among consumers create volatility in market demand.
9) The main rationale for government regulatory functions is
A) to regulate for profit institutions.
B) to make sure that firms are maximizing profits.
C) to expand the scope of the government.
D) to protect consumer interests.
10) Which of the following is NOT a reason for the government to regulate a nonmonopolistic
industry?
A) To allow firms to achieve the profit maximizing output.
B) Asymmetric information.
C) To protect consumer interests.
D) Market failures.
11) During the production process Ajax Corporation releases pollution into the air. Ajax
Corporation operates in a monopolistic competitive industry. Which of the following statements
addresses the pollution situation?
A) Ajax is taking advantage of asymmetric information.
B) This is an example of a market failure and is a reason for the government to regulate the
industry.
C) The quality of the product could be improved if the amount of pollution can be reduced.
D) This is known as the lemons problem.
12) Asymmetric information is
A) when a market failure occurs.
B) an externality.
C) when the producer has information on the product that the consumer lacks.
D) the regulatory price for a natural monopoly.
13) The lemons problem occurs mainly because of
A) asymmetric information. B) a market failure.
C) negative externality. D) a monopoly.
14) The problem of excess pollution mainly occurs because of
A) asymmetric information. B) a positive externality.
C) a negative externality. D) a monopoly.
15) The problem of asymmetric information that brings about a general decline in product quality in
an industry is
A) a market failure. B) the result of government regulation.
C) creative response. D) the lemons problem.
16) A possible market solution that a reputable firm can engage in when faced with the lemons
problem is
A) to offer a warranty. B) to engage in externalities.
C) to create asymmetric information. D) to use average cost pricing.
17) Which of the following is NOT a government response to asymmetric information?
A) Liability laws B) Social regulation
C) Manufacturer s warranties D) Government licensing
18) Which of the following is a government response to asymmetric information?
A) Product guarantees B) External product certification
C) Manufacturer s warranties D) Government licensing
19) Which of the following is most subject to the lemons problem?
A) credence goods B) homogeneous goods
C) search goods D) inferior goods
20) The two most important rationales for government intervention in non monopolistic markets
are
A) market failure and asymmetric information.
B) substandard products and job creation for public employees.
C)
j
ob creation and income maintenance.
D) unfair pricing and usury.
21) The potential for a decline in product quality due to asymmetric information is commonly
referred to as
A) the lemons problem. B) planned obsolescence.
C) diminishing marginal product. D) the externality problem.
22) What are the major rationales for consumer protection in nonmonopolistic industries?
23) What is the lemons problem? How do firms try to address this problem?
27.4 Incentives and Costs of Regulation
1) The benefits of social regulation usually are
A) small.
B) obvious to people while the costs are hidden.
C) less than the costs of social regulation, reducing overall welfare.
D) difficult to measure.
2) All of the following are possible criticisms of social regulation EXCEPT
A) that the costs may outweigh the benefits.
B) that social regulation may create anticompetitive effects.
C) that the regulations have not resulted in safer working conditions.
D) that the regulations lead to higher production costs.
3) A firm that responds to a regulatory rule in a way that permits technical compliance while
allowing the firm to violate the spirit of the regulation has.
A) reduced the scope of the lemons problem.
B) shared the gains and pains of regulation.
C) engaged in a creative response to regulation.
D)
b
ecome a captured regulator.
4) According to the text, the federal government spends the most taxpayer provided funds
regulating which area of the economy?
A) The environment B) Finance and banking
C) Consumer safety and health D) Transportation
5) A potential benefit that comes from social regulations would be
A) higher costs. B) a cleaner environment.
C) higher tax collections. D) more layoffs.
6) According to the text, critics point out that the costs incurred by firms due to regulations
A) increase production costs.
B) lower production costs to the shutdown point.
C) reduce taxes too far.
D) none of the above.
7) The benefits of social regulation are
A) easy to measure by the marginal value method.
B) often difficult to measure.
C) obvious to almost everyone, but the costs are usually hidden.
D) greater than the costs of social regulation in every example in the country today.
8) Regulation focused on the impact of production on the environment and society, the working
conditions under which production occurs, or the physical attributes of goods, is known as
A) cost of service regulation. B) rate of return regulation.
C) social regulation. D) monopoly regulation.
