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Antitrust enforcement focuses on market structure, while government regulation deals with all of the following except
Prices.
Output.
→
Perfect competition.
Profits
.
Government regulation can restrict a company's price, profits, or level of output. Antitrust enforcement focuses on an
industry's market structure and company behavior.
Difficulty: 1 Easy
Multiple Choice
Learning Objective: 27-01 The
characteristics of natural monopoly.
award:
0.00 points
Which of the following is a form of government intervention?
Natural monopoly.
Public goods.
→
Regulation.
Externalities.
The government has two options for intervention where market power
Difficulty: 1 Easy
Multiple Choice
prevails: antitrust or regulation.
Learning Objective: 27-01 The
characteristics of natural monopoly.
award:
0.00 points
Which of the following is used as an antitrust tool that focuses on the structure of industry?
Price regulation.
Profit
regulation.
Forbidding business practices such as advertising.
→
Prohibiting mergers and acquisitions.
Prohibiting mergers and acquisitions will impact the structure of the industry, whereas regulation and forbidding
business practices deal with the behavior of firms.
Multiple Choice
Difficulty: 1 Easy
Learning Objective: 27-01 The
characteristics of natural monopoly.
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An industry in which one firm can achieve economies of scale over the entire range of market supply is a
Contestable market.
Kinked demand curve oligopoly.
→
Natural monopoly.
Perfectly competitive market.
A combination of high fixed costs and very low marginal costs of a natural monopoly generates a unique, downwardsloping ATC curve (economies of scale) over the entire range of relevant output.
Multiple Choice
Learning Objective: 27-01 The
characteristics of natural monopoly.
Difficulty: 1 Easy
award:
0.00 points
If a natural monopoly was broken into several smaller competing firms,
Consumers would lose because of less competition.
Producers would be better off because they would have greater market share.
→
Society would be worse off because the economies of scale would be destroyed.
Workers would be worse off because fewer jobs
would be available.
Dismantling a natural monopoly would destroy the cost advantage. Hence regulation, not antitrust, is the more
sensible intervention.
Multiple Choice
Difficulty: 2 Medium
Learning Objective: 27-01 The
characteristics of natural monopoly.
award:
0.00 points
For a natural monopoly, marginal cost
Intersects average total cost at zero profit
.
Equals price at a profitable output level.
Equals marginal revenue above the demand curve.
→
Is always below average total cost in the relevant range of production.
Once productive capacity is built, the focus turns to marginal costs, which, for natural monopolies, are typically lower
than ATC for the entire range of output.
Multiple Choice
Difficulty: 2 Medium
Learning Objective: 27-01 The
characteristics of natural monopoly.
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Economies of scale refer to the
Reduction in minimum average costs due to an increase in the number of workers hired.
→
Reduction in minimum average costs due to an increase in plant size.
Downward-sloping portion of the marginal cost curve.
Downward-sloping portion of the average total cost curve.
Economies of scale are reductions in minimum average costs that come about through increases in the size (scale)
of plants and equipment.
Multiple Choice
Difficulty: 2 Medium
Learning Objective: 27-02 The
regulatory dilemmas posed by
natural monopoly.
award:
0.00 points
An unregulated natural monopoly can lead to all of the following except
A suboptimal mix of output.
Less output than society wants.
Unfair monopoly profits.
→
Low prices for consumers.
An unregulated natural monopoly has unit cost savings that can act as a barrier to entry to competitors entering the
market. This will lead to less output than society desires and higher prices for consumers.
Multiple Choice
Difficulty: 2 Medium
Learning Objective: 27-01 The
characteristics of natural monopoly.
award:
0.00 points
Marginal cost pricing means that a firm charges
A price that is marginally lower than the average total cost of production.
A price that is marginally higher than the average total cost of production.
→
A price that is equal to the marginal cost of production.
Any price as long as average total cost is greater than marginal cost.
Marginal cost pricing occurs when a supplier sells its goods at prices equal to their marginal cost.
Multiple Choice
Difficulty: 1 Easy
Learning Objective: 27-02 The
regulatory dilemmas posed by
natural monopoly.
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An unregulated natural monopoly is most likely to
→
Earn an economic profit
.
Produce where marginal cost equals price.
Charge a lower price than if the same product were produced in a competitive market because of the
monopolist's greater technical efficiency.
Take advantage of the concept of marginal cost pricing.
A monopoly is most likely to earn an economic profit
due to market power
Difficulty: 2 Medium
Multiple Choice
and lack of competition.
Learning Objective: 27-01 The
characteristics of natural monopoly.
award:
0.00 points
Which of the following is not a regulatory option when the government is trying to prevent market failure in the case of a
natural monopoly?
→
Cost regulation.
Profit regulation.
Output regulation.
Price regulation.
Output, price, and profit regulation are all regulatory options available to the government. Cost regulations are not an
option.
Difficulty: 2 Medium
Multiple Choice
Learning Objective: 27-02 The
regulatory dilemmas posed by
natural monopoly.
award:
0.00 points
If the government regulated a natural monopolist to achieve price efficiency without subsidies or price discrimination, the
monopolist would
→
Lose money and go out of business.
Earn only normal profits.
Earn economic profits.
Earn less profit
than before, but still earn a profit.
If naturally monopolistic firms are required to charge a price equal to MC (price efficiency), economic profits will be
negative because MC is below ATC over the relevant range of output for a natural monopoly.
Multiple Choice
Difficulty: 2 Medium
Learning Objective: 27-02 The
regulatory dilemmas posed by
natural monopoly.
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If profit
regulation is used to control a natural monopolist, the monopolist is likely to
Attempt to reduce the costs of production.
→
Inflate or pad the costs of production.
Increase the quality of its product in an effort to increase sales.
Reduce maintenance of plants and equipment.
If a firm is permitted a specific profit rate (or rate of return), it has no incentive to limit costs. On the contrary, higher
costs imply higher profits. If permitted to charge 10 percent over unit costs, a monopolist may be better off with
average costs of $6 rather than only $5. The higher costs translate into 60 cents of profit per unit rather than only 50
cents, even though the profit rate is the same.
Difficulty: 2 Medium
Multiple Choice
Learning Objective: 27-02 The
regulatory dilemmas posed by
natural monopoly.
award:
0.00 points
Suppose the quality of service provided by a newly regulated firm begins to deteriorate soon after regulation is enforced.
Which of the following types of regulation is most likely being used?
Price regulation.
Profit
→
regulation.
Output regulation.
Social regulation.
If a firm is permitted a specific profit rate (or rate of return), it has no incentive to limit costs. On the contrary, higher
costs imply higher profits, and therefore there is an incentive to advertise. If permitted to charge 10 percent over unit
costs, a monopolist may be better off with average costs of $6 rather than only $5.
Difficulty: 3 Hard
Multiple Choice
Learning Objective: 27-02 The
regulatory dilemmas posed by
natural monopoly.
award:
0.00 points
Output regulation for a natural monopolist
May require large government subsidies.
Is consistent with marginal cost pricing.
Encourages bloated costs.
→
May jeopardize equity goals.
Because an economic profit
Multiple Choice
may still exist with output regulation, equity goals may be jeopardized.
Difficulty: 2 Medium
Learning Objective: 27-02 The
regulatory dilemmas posed by
natural monopoly.
11/12/2013 12:00 PM
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In the real world, the choice is between
Perfect markets and perfect government intervention.
Perfect markets and imperfect government intervention.
Imperfect markets and perfect government intervention.
→
Imperfect markets and imperfect government intervention.
The choice isn't between imperfect markets and flawless government intervention but rather between imperfect
markets and imperfect intervention.
Multiple Choice
Difficulty: 3 Hard
Learning Objective: 27-02 The
regulatory dilemmas posed by
natural monopoly.
award:
0.00 points
When the FCC hires a new lawyer to help enforce government regulation, her salary is an example of
→
An administrative cost of regulation.
An efficiency cost of regulation.
A compliance cost of regulation.
Bloated costs.
Administrative costs are government costs associated with regulation, including the labor costs for economists,
accountants, and lawyers.
Multiple Choice
Difficulty: 2 Medium
Learning Objective: 27-03 The costs
associated with regulation.
award:
0.00 points
If Synergy Energy Corp. hires attorneys
to keep it informed about new regulations, their salaries represent
Administrative costs.
→
Compliance costs.
Capital costs.
Efficiency costs.
The human and capital resources expended by industries to educate themselves about the regulations, to change
their production behavior, and to file reports with the regulatory authorities are the compliance cost of regulation.
Multiple Choice
Difficulty: 2 Medium
Learning Objective: 27-03 The costs
associated with regulation.
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The Braden brothers considered starting a new skydiving company. Once they read the government regulations they
would have to comply with, they changed their minds. This is an example of
An administrative cost of regulation.
→
An efficiency cost of regulation.
A compliance cost of regulation.
An equity cost of regulation.
If bad decisions, incomplete information, or faulty implementation actually worsen the mix of output, the loss of utility
imposes costs on society, over and above administrative and compliance costs. This is an efficiency cost.
Multiple Choice
Difficulty: 1 Easy
Learning Objective: 27-03 The costs
associated with regulation.
award:
0.00 points
Which of the following is an example of government failure?
→
Too much regulation resulting in wasted resources.
Public goods.
Externalities.
Merit goods.
Public goods and externalities are market failures, whereas regulation that worsens market outcomes is a
government failure.
Multiple Choice
Difficulty: 2 Medium
Learning Objective: 27-03 The costs
associated with regulation.
award:
0.00 points
When there is market failure
Government intervention is always beneficial.
A laissez-faire approach is the best policy.
Government intervention is beneficial only in the case of natural monopolies.
→
Government intervention is beneficial only when the marginal benefit of intervention exceeds the
marginal cost.
Assuming regulation improves market outcomes, its use is appropriate only if the anticipated improvements in market
outcomes outweigh the economic cost of regulation.
Multiple Choice
Difficulty: 2 Medium
Learning Objective: 27-03 The costs
associated with regulation.
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Which of the following markets has not been subject to substantial deregulation?
Airlines.
→
Computers.
Telecommunications.
Cable TV
.
Deregulation of the railroad, telephone, airline, and electricity industries has yielded substantial benefits: more
competition, lower prices, and improved services. The cable TV
Difficulty: 2 Medium
Multiple Choice
market has been deregulated and reregulated.
Learning Objective: 27-04 How
deregulation has fared in specific
industries.
award:
0.00 points
The first major regulatory target in the United States was
Airlines.
→
Railroads.
Trucking firms.
Telephone companies
.
Railroads are an example of natural monopoly, with high fixed costs and negligible marginal costs. Furthermore, there
were no airports or interstate highways to compete with the railroads in 1887, when Congress created the Interstate
Commerce Commission (ICC).
Multiple Choice
Difficulty: 1 Easy
Learning Objective: 27-04 How
deregulation has fared in specific
industries.
award:
0.00 points
Prior to the deregulation of the railroad industry, there was little incentive to invest in new technology or equipment. This
is an example of
The failure of deregulation.
→
The inefficiencies of regulation
Market failure.
The failure of laissez faire.
If bad decisions, incomplete information, or faulty implementation actually worsen the mix of output, government
failure occurs.
Multiple Choice
Difficulty: 2 Medium
Learning Objective: 27-04 How
deregulation has fared in specific
industries.
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The collapse of AT&T's natural monopoly in long-distance telephone service was caused by
→
Satellite technology that made it easier and less expensive for new companies to provide long-distance
service.
The takeover of the telephone industry by the U.S. government.
Government regulation because of illegal collusion between AT&T and foreign competitors.
Inadequate profits.
When technology outpaces regulation, a monopoly may lose its market power.
Multiple Choice
Difficulty: 2 Medium
Learning Objective: 27-04 How
deregulation has fared in specific
industries.
award:
0.00 points
Which of the following industries was substantially deregulated over the last several decades?
Autos.
Cinemas.
Textiles.
→
Airlines.
Deregulation of the railroad, telephone, airline, and electricity industries has yielded substantial benefits: more
competition, lower prices, and improved services.
Multiple Choice
Difficulty: 1 Easy
Learning Objective: 27-04 How
deregulation has fared in specific
industries.
award:
0.00 points
Which of the following would be most likely to give the American public more air travel at a lower cost?
Reregulate the airline market by reestablishing the CAB.
→
Allow foreign airlines to enter the U.S. market.
Limit entry of new firms to allow the current firms to gain greater financial strength.
Subsidize research and development and purchases of new airplanes for the major existing airlines.
Increasing the supply of airlines would decrease the price of air travel.
Multiple Choice
Difficulty: 3 Hard
Learning Objective: 27-04 How
deregulation has fared in specific
industries.
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Deregulation of the cable TV
market by the Telecommunications Turns Act of 1996 resulted in
Lower prices and better service.
Little change in either prices or service.
→
Significantly higher prices.
Reductions in prices but little change in the level of service.
Almost immediately after cable was deregulated, cable prices
Multiple Choice
Difficulty: 2 Medium
soared higher.
Learning Objective: 27-04 How
deregulation has fared in specific
industries.
11/12/2013 12:00 PM
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Output regulation for the natural monopoly in Figure 27.2 would result in an output of
Q only.
B
Q .
C
Q only.
A
→
Q or Q , but not Q .
A
B
C
Q would achieve allocative efficiency, Q improves equity, but Q is the profit-maximizing output and price that the
A
B
C
natural monopoly would choose.
Multiple Choice
Difficulty: 3 Hard
Learning Objective: 27-03 The costs
associated with regulation.
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According to "Costs of Trucking Seen Rising under New Safety Rules," in 2003 the government estimated the new rules
regulating the transportation industry would cost trucking companies
government expect from the costly regulations?
→
about $1.3 billion. What benefits did the
Reduced highway fatalities.
Reduced wear and tear on highways.
Punishment of an excessively profitable industry.
Increased efficiencies.
The regulations were intended to reduce the 410 fatalities a year attributed to fatigue-related truck crashes.
Multiple Choice
Difficulty: 1 Easy
Learning Objective: 27-03 The costs
associated with regulation.
11/12/2013 12:00 PM