Chapter 12: (De)Regulation of Business

Chapter 12: (De)Regulation of Business

Multiple Choice Questions

ANTITRUST VS. REGULATION

1. The doctrine of laissez faire is consistent with:

A) Use of the market mechanism. C) The invisible hand.
B) Undesirability of government intervention. D) All of the above.

Answer: D Type: Definition Page: 255

2. When firms have the power to restrict output, raise prices, stifle competition, and inhibit innovation the
market failure involved is:
A) Public goods. B) Externalities. C) Market power. D) Inequities.

Answer: C Type: Basic Understanding Page: 255

3. Which of the following leads to market failure?

A) Market power. B) Regulation. C) Antitrust laws. D) All of the above.

Answer: A Type: Basic Understanding Page: 255

4. Market failure includes:

A) Market power resulting in reduced output and higher price.
B) Antitrust laws.
C) Administrative costs of compliance.
D) Compliance costs.

Answer: A Type: Definition Page: 255

5. Which of the following is a form of government intervention?

A) Natural monopoly. B) Public goods. C) Regulation. D) Externalities.

Answer: C Type: Definition Page: 255

6. Which of the following is a form of government intervention that is designed to correct market failures?
A) Antitrust laws. B) Laissez faire. C) Public goods. D) All of the above.

Answer: A Type: Basic Understanding Page: 255

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7. Government intervention can focus on the structure or behavior of a market. Antitrust focuses:
A) On both, while regulation focuses mostly on behavior.
B) On both, while regulation focuses mostly on structure.
C) Mostly on behavior, while regulation focuses on both.
D) Mostly on structure, while regulation focuses on both.

Answer: A Type: Basic Understanding Page: 255

NATURAL MONOPOLY

8. A natural monopoly is a desirable market structure because:

A) When unregulated, it offers a firm a higher profit margin which creates jobs for the economy.
B) When regulated, it can be forced to produce at the same output level as an unregulated monopoly.
C) It can offer the products consumers want at the lowest possible price because of economies of scale.
D) It generates more jobs for the economy than a competitive market structure does.

Answer: C Type: Basic Understanding Page: 255

9. A natural monopoly is preferable to a competitive market because:

A) It can produce the products consumers want at the lowest possible price.
B) It can produce the products consumers want with the least amount of resources.
C) A competitive market does not experience the economies of scale that a natural monopoly experiences.
D) All of the above.

Answer: D Type: Basic Understanding Page: 255

10. Natural monopolies:

A) Always face downward-sloping long-run average total cost curves.
B) Capture economies of scale over the entire market.
C) Incur losses if they produce where P = MC.
D) All of the above.

Answer: D Type: Basic Understanding Page: 255

11. The long-run average total cost curve of a natural monopolist:

A) Is downward sloping in the relevant range of production.
B) Is U-shaped.
C) Reflects diseconomies of scale.
D) Is everywhere below the long-run marginal cost curve.

Answer: A Type: Basic Understanding Page: 255

12. The distinctive characteristic of a natural monopoly is its:

A) Horizontal demand curve.
B) Downward-sloping average total cost curve at market output.
C) Vertical marginal cost curve.
D) Kinked demand curve.

Answer: B Type: Basic Understanding Page: 255

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13. A natural monopoly:

A) Does not provide any basis for government regulation.
B) Is not a source of market failure.
C) Arises from the existence of substantial economies of scale.
D) All of the above.

Answer: C Type: Basic Understanding Page: 255

14. An industry in which one firm can achieve economies of scale over the entire range of market supply is a:
A) Contestable market. C) Kinked-demand curve oligopoly.
B) Natural monopoly. D) Perfectly competitive market.

Answer: B Type: Basic Understanding Page: 255

15. Breaking up an unregulated natural monopoly into many smaller competing firms would:
A) Decrease product price due to increased competition.
B) Increase product price due to decreased technical efficiency.
C) Destroy the cost advantage of economies of scale.
D) Decrease average total costs.

Answer: C Type: Complex Understanding Page: 256

16. If a natural monopoly was forced to break up into several small competitive firms, then the:
A) Cost of production should fall as the smaller firms become more efficient.
B) Price charged by the competitive firms should decrease as the firms become more efficient.
C) Price charged by the competitive firms should increase because the firms will be less efficient.
D) Total production for the industry should increase because of the efficiency generated by increased
competition.

Answer: C Type: Complex Understanding Page: 256

17. A natural monopoly:

A) Provides a basis for government regulation. C) Results from substantial economies of scale.
B) Is a source of market failure. D) All of the above.

Answer: D Type: Basic Understanding Page: 256

18. According to the text, what type of market failure provides the best case for government regulation?
A) Market power. B) Public goods. C) Inequalities. D) Natural monopoly.

Answer: D Type: Basic Understanding Page: 256

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19. For a natural monopoly, marginal cost:

A) Intersects average total cost at zero profit.
B) Equals price at a profitable output level.
C) Equals marginal revenue above the demand curve.
D) Is always below average total cost in the relevant range of production.

Answer: D Type: Basic Understanding Page: 256

20. In a natural monopoly, marginal cost:

A) Is always above the ATC.
B) Is constant, and equal to the ATC .
C) Is always below the ATC in the relevant range of production.
D) Is always rising.

Answer: C Type: Basic Understanding Page: 256

21. The long-run average total cost curve of a natural monopolist:

A) Is U-shaped.
B) Reflects declining average fixed costs.
C) Is always above the marginal cost curve in the relevant range of production.
D) Reflects diminishing returns.

Answer: C Type: Basic Understanding Page: 256

22. To maximize profit, a natural monopolist produces the level of output at which:
A) Price equals average total cost.
B) Marginal cost equals the minimum of long-run average total cost.
C) Marginal revenue equals marginal cost.
D) All of the above.

Answer: C Type: Basic Understanding Page: 256

23. An unregulated natural monopolist will:

A) Minimize average total cost. C) Use marginal cost pricing.
B) Produce where MR = MC. D) Achieve allocative efficiency.

Answer: B Type: Complex Understanding Page: 256

24. For a natural monopoly, production efficiency is achieved where:

A) Price equals marginal cost. C) Marginal revenue equals marginal cost.
B) Zero economic profits are earned. D) ATC is at a minimum.

Answer: D Type: Basic Understanding Page: 256

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25. An unregulated natural monopoly is most likely to:

A) Earn an economic profit.
B) Produce where marginal cost equals price.
C) Charge a lower price than if the same product were produced in a competitive market because of the
monopolist's greater technical efficiency.
D) Take advantage of the concept of marginal cost pricing.

Answer: A Type: Complex Understanding Page: 256

26. When a firm experiences positive economic profits over the long run:
A) Technical efficiency cannot be achieved. C) The firm must be a natural monopoly.
B) Allocative efficiency cannot be achieved. D) Equity may not be achieved.

Answer: D Type: Complex Understanding Page: 256

REGULATORY OPTIONS

27. Price efficiency is achieved if price is equal to:

A) ATC. B) AVC. C) MC. D) AFC.

Answer: C Type: Basic Understanding Page: 257

28. If a natural monopoly is forced to use marginal cost pricing, which of the following is not true?
A) Average total costs would increase. C) Output would increase.
B) Allocative efficiency would be achieved. D) Economic profits would be reduced.

Answer: A Type: Complex Understanding Page: 257

29. If the government forces a natural monopoly to produce the output where P = MC, the firm:
A) Will fail to produce efficiently.
B) Will be producing less than the profit-maximizing level of output.
C) Will incur losses.
D) All of the above.

Answer: C Type: Basic Understanding Page: 257

30. If the government regulated a natural monopolist to achieve price efficiency without subsidies or price
discrimination, the monopolist would:
A) Earn economic profits.
B) Earn only normal profits.
C) Lose money and go out of business.
D) Earn less of a profit than before, but still earn a profit.

Answer: C Type: Basic Understanding Page: 257

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31. To produce with the greatest possible price efficiency, a natural monopoly:
A) Should be allowed to maximize profit without government interference.
B) Sets price equal to average total cost.
C) Must be subsidized by the government to overcome losses.
D) All of the above.

Answer: C Type: Basic Understanding Page: 257

32. If the government wants a natural monopolist to achieve allocative efficiency, then the government should:
A) Subsidize the firm and require marginal cost pricing.
B) Assure the firm produces at full capacity.
C) Regulate the firm so that it produces the output where economic profit is zero.
D) Use price ceilings so the firm will earn a normal profit.

Answer: A Type: Complex Understanding Page: 257

33. A regulated natural monopoly is more likely to advertise freely under which of the following types of
regulation?
A) Price regulation. B) Profit regulation. C) Output regulation. D) Social regulation.

Answer: B Type: Complex Understanding Page: 257

34. If a regulatory agency decides to pursue profit regulation of a natural monopoly, price and output will be
determined by the:
A) Minimum point of ATC. C) Intersection of the demand and ATC curves.
B) Intersection of MR and MC. D) Intersection of the demand and MC curves.

Answer: C Type: Basic Understanding Page: 258

35. If profit regulation is used to control a natural monopolist, then the monopolist is likely to:
A) Attempt to reduce the costs of production.
B) Inflate or pad the costs of production.
C) Increase the quality of their product in an effort to increase sales.
D) Reduce maintenance of plant and equipment.

Answer: B Type: Basic Understanding Page: 258

36. Profit regulation of a natural monopoly is achieved where:

A) P = ATC. B) P = MC. C) MR = MC. D) MR = minimum ATC.

Answer: A Type: Basic Understanding Page: 258

37. Profit regulation is appealing because:

A) It allows the focus to be on profits only.
B) It eliminates the need to subsidize the monopolist.
C) It removes the need to develop demand and cost curves.
D) All of the above.

Answer: D Type: Basic Understanding Page: 258

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38. 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?
A) Price regulation. B) Profit regulation. C) Output regulation. D) Social regulation.

Answer: C Type: Complex Understanding Page: 258

39. Output regulation forces the natural monopolist to produce at an output:

A) That perfectly competitive firms would choose. C) Greater than its profit-maximizing choice.
B) Where MR = MC. D) Where MR equals zero.

Answer: C Type: Basic Understanding Page: 258

40. Regulation of the quantity produced may:

A) Encourage the padding of costs. C) Induce a decline in quality.
B) Result in shortages. D) Cause the exit of inefficient firms.

Answer: C Type: Basic Understanding Page: 258

41. Output regulations:

A) Encourage quality decline. C) May jeopardize equity goals.
B) Violate the principle of marginal cost pricing. D) All of the above.

Answer: D Type: Basic Understanding Page: 258

42. Compared with the profit-maximizing choice of a natural monopolist, output regulation will result in:
A) A higher level of output and a higher price. C) A lower level of output and a higher price.
B) A higher level of output and a lower price. D) A lower level of output and a lower price.

Answer: B Type: Basic Understanding Page: 258

43. When market outcomes improve after government regulation is enforced:

A) Technical efficiency is being achieved.
B) The net effect of government intervention on society has been beneficial.
C) Government intervention still may not be justified if the economic costs are too high.
D) All of the above.

Answer: C Type: Complex Understanding Page: 260

44. Regulations that offer imperfect answers:

A) Are options that should never be implemented.
B) Reflect the realistic choices that society must make between imperfect markets and imperfect
government intervention.
C) Are not consistent with utility maximization in the real world.
D) Will always have cost greater than benefits.

Answer: B Type: Complex Understanding Page: 260

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45. Which of the following leads to possible government failure?

A) Market power. B) Antitrust laws. C) Externalities. D) Inequities from the market mechanism.

Answer: B Type: Basic Understanding Page: 260

46. If government failure did not exist:

A) Laissez faire would apply to all markets.
B) Deregulation would be unnecessary.
C) The invisible hand would be the most efficient and equitable way to run the economy.
D) All markets would be regulated.

Answer: B Type: Complex Understanding Page: 260

47. Government failure occurs when:

A) Dealing with a natural monopoly.
B) Government intervention fails to improve economic outcomes.
C) There is market power.
D) Public goods are present.

Answer: B Type: Basic Understanding Page: 260

THE COSTS OF REGULATION

48. The costs associated with the employment of more than 100,000 workers by the federal government
regulatory agencies are an example of:
A) Administrative costs. B) Compliance costs. C) Efficiency costs. D) Human costs.

Answer: A Type: Basic Understanding Page: 260

49. When a regulatory agency hires personnel to enforce regulations, the cost is:
A) An administrative cost. B) A compliance cost. C) An efficiency cost. D) An information cost.

Answer: A Type: Basic Understanding Page: 260

50. The costs that firms incur to learn about the regulations in their industry are referred to as:
A) Efficiency costs. B) Capital costs. C) Compliance costs. D) Administrative costs.

Answer: C Type: Definition Page: 261

51. Which regulatory cost is borne by the firms which are regulated?
A) Efficiency costs. B) Subsidy. C) Compliance costs. D) Administrative costs.

Answer: C Type: Definition Page: 261

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52. When a firm must educate its employees concerning government regulations, the cost of government
involvement is:
A) An administrative cost. B) A compliance cost. C) An efficiency cost. D) An education cost.

Answer: B Type: Basic Understanding Page: 261

53. When regulation results in an inferior mix of output there are:

A) Administrative costs. B) Compliance costs. C) Efficiency costs. D) All of the above.

Answer: C Type: Basic Understanding Page: 262

54. When the regulatory process itself impedes new technology and improved production processes, there are:
A) Administrative costs. B) Compliance costs. C) Efficiency costs. D) Technological costs.

Answer: C Type: Basic Understanding Page: 262

55. When the regulatory process itself becomes a drag on economic growth, society experiences:
A) Compliance costs of regulation. C) Administrative costs of regulation.
B) Efficiency costs of regulation. D) Budgetary costs of regulation.

Answer: B Type: Basic Understanding Page: 262

56. Regulation is appropriate if:

A) Government failure exists.
B) Market failure exists and the benefits of regulation exceed the costs.
C) It improves market outcomes regardless of costs.
D) An economic profit is being earned.

Answer: B Type: Basic Understanding Page: 262

57. In cost-benefit analysis, regulatory intervention can be justified if the:

A) Marginal benefit of regulation exceeds its marginal cost.
B) Economic cost of regulation exceeds the value of the improvements in government intervention.
C) Value of government failure exceeds the value of market failure.
D) Intervention improves market outcomes, regardless of costs.

Answer: A Type: Basic Understanding Page: 262

58. When there is market failure:

A) Government intervention is always beneficial.
B) A laissez-faire approach is the best policy.
C) Government intervention is beneficial only in the case of natural monopolies.
D) Government intervention is beneficial only when the marginal benefit of intervention exceeds the
marginal cost.

Answer: D Type: Complex Understanding Page: 262

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59. The case for deregulation rests on the argument that:

A) Costs of market failure exceed costs of government failure.
B) Regulations are more costly to implement than the market failure that is to be corrected.
C) Regulation aids adaptation to market changes in tastes, costs, and technology.
D) Antitrust intervention is less costly than regulation.

Answer: B Type: Complex Understanding Page: 262

60. The case for deregulation rests on the argument that:

A) Government imperfections are worse than the market imperfections they were designed to cure.
B) Public goods are best provided by laissez faire.
C) Economies of scale are better achieved with the invisible hand.
D) All of the above.

Answer: A Type: Complex Understanding Page: 262

61. The basic issue in regulatory policy is:

A) Whether or not the benefits of government regulation exceed the costs.
B) How to achieve second-best solutions in all markets.
C) How to eliminate all natural monopolies.
D) How to achieve profit regulation in all industries.

Answer: A Type: Basic Understanding Page: 262

62. Which of the following is an example of government failure?

A) Too much regulation resulting in wasted resources.
B) Public goods.
C) Externalities.
D) All of the above.

Answer: A Type: Basic Understanding Page: 262

63. Critics of government intervention frequently point out that:

A) Government regulation may not be justified from a cost-benefit standpoint.
B) Regulation may lead to price, cost, or production outcomes that are inferior to those of an unregulated
market.
C) Government intervention might worsen the mix of output or the distribution of income.
D) All of the above.

Answer: D Type: Basic Understanding Page: 262

DEREGULATION IN PRACTICE

64. The first major regulatory target in the United States was:
A) Airlines. B) Railroads. C) Trucking firms. D) Telephone companies.

Answer: B Type: Basic Understanding Page: 262

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65. Which of the following industries was substantially deregulated over the last several decades?
A) Airlines. B) Cable TV. C) Telephone service. D) All of the above.

Answer: D Type: Basic Understanding Page: 262

66. Which of the following markets has not been subject to substantial deregulation?
A) Airlines. B) Computers. C) Telecommunications. D) Cable TV.

Answer: B Type: Basic Understanding Page: 262

67. Deregulation of the railroad industry led to:

A) Decreased rates. C) Reconfigured routes and services.
B) Decreased operating costs. D) All of the above.

Answer: D Type: Basic Understanding Page: 262

68. Prior to the deregulation of the railroad industry, there was little incentive to invest in new technology or
equipment. This is an example of:
A) The failure of deregulation. C) Government failure.
B) Market failure. D) The failure of laissez faire.

Answer: C Type: Basic Understanding Page: 262

69. Before the deregulation in telecommunications, AT&T charged higher rates on long-distance service in order
to make local service rates lower. Such a practice is an example of:
A) Price discrimination because different prices were charged for the same service.
B) The pricing of public goods.
C) Cross-subsidization of local phone service.
D) Predatory price cutting to eliminate local telephone companies.

Answer: C Type: Basic Understanding Page: 263

70. The collapse of AT&T's natural monopoly in long distance telephone service was caused by:
A) Satellite technology which made it easier and less expensive for new companies to provide long-distance
service.
B) The takeover of the telephone industry by the U.S. government.
C) Government regulation because of illegal collusion between AT&T and foreign competitors.
D) Inadequate profits.

Answer: A Type: Complex Understanding Page: 263

71. Before deregulation of the telephone industry:

A) Telephone service prices were lower than after deregulation.
B) Cutthroat competition eliminated profits.
C) The volume of communication was lower than after deregulation.
D) There was greater variety and quality of service than after deregulation.

Answer: C Type: Basic Understanding Page: 263

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72. When a telecommunication company uses the money from long-distance service to lower the price for local
service, it engages in:
A) Marginal cost pricing. C) Cross-subsidization.
B) Price discrimination. D) Product differentiation.

Answer: C Type: Basic Understanding Page: 263

73. Deregulation in the airline market has:

A) Caused the industry to become more concentrated in most markets.
B) Increased output.
C) Caused prices to fall for the industry.
D) All of the above.

Answer: D Type: Complex Understanding Page: 263

74. After deregulation, the airline market experienced:

A) Decreased market entry. C) Higher prices.
B) Increased industry concentration. D) All of the above.

Answer: B Type: Basic Understanding Page: 263

75. In which of the following markets did deregulation contribute to increased industry concentration?
A) Airlines. B) Telecommunications. C) Trucking. D) Railroads.

Answer: A Type: Basic Understanding Page: 265

76. If entry barriers into a monopolized market are kept low:

A) Market power increases. C) A market is contestable.
B) Government failure exists. D) All of the above.

Answer: C Type: Basic Understanding Page: 268

77. Which of the following would be most likely to give the American public more air travel at a lower cost?
A) Reregulate the airline market by reestablishing the CAB.
B) Allow foreign airlines to enter the U.S. market.
C) Limit entry of new firms to allow the current firms to gain greater financial strength.
D) Subsidize research and development and purchases of new airplanes for the major existing airlines.

Answer: B Type: Complex Understanding Page: 268

78. The ownership of airport landing slots by airlines:

A) Acts as an entry barrier to other airlines. C) Increases hub dominance by the airline.
B) Most likely results in an increase in airfares. D) All of the above.

Answer: D Type: Complex Understanding Page: 268

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79. Which of the following is most likely to give consumers more cable programming at a lower price?
A) A ban on direct satellite broadcasts.
B) Deregulation of the local cable TV monopolies.
C) Allowing telephone companies to provide cable TV services over telephone wires.
D) The Telecommunications Turns Act of 1996.

Answer: C Type: Complex Understanding Page: 269

80. Deregulation of the cable TV market by the Telecommunications Turns Act of 1996 resulted in:
A) Lower prices and better service.
B) Little change in either prices or service.
C) Prices that rose four times faster than the rate of inflation.
D) Reductions in prices but little change in the level of service.

Answer: C Type: Complex Understanding Page: 269

81. Critics of the Telecommunications Turns Act of 1996 argue that the deregulation of cable TV:
A) Will result in unfair competition for the existing firms.
B) Is not appropriate because alternative technologies are not yet viable competition for cable.
C) Will increase the concentration of producers, increasing prices and reducing the quality of service.
D) Will increase barriers to entry allowing existing firms to gain market power.

Answer: B Type: Complex Understanding Page: 269

82. The industry that is the most recent target of deregulation is the:
A) Trucking industry. C) Electric utility industry.
B) Airline industry. D) Long distance telephone service.

Answer: C Type: Basic Understanding Page: 270

83. The electric utility industry became a target for deregulation when:
A) The cost of constructing nuclear power plants declined.
B) New technology allowed the transmission of power from region to region without significant power loss.
C) Local utility companies began behaving like monopolies.
D) All of the above.

Answer: B Type: Basic Understanding Page: 270

84. Proponents of electric utility industry deregulation said that:

A) Profit regulation had resulted in increased costs and higher prices.
B) Profit regulation had resulted in too much investment in highly efficient energy production.
C) Profit regulation had resulted in industry output that was too great.
D) Regulation of electricity producers favored industrial electricity users.

Answer: A Type: Basic Understanding Page: 270

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85. Proponents of electric utility industry deregulation argued that deregulation was justified because:
A) Other industries had been deregulated.
B) Improvements in technology allowed easy transmission of electricity using satellite technology.
C) Improvements in technology allowed easy transmission of electricity through the deregulates telephone
system.
D) Improvements in technology allowed the development of high-voltage transmission power lines.

Answer: D Type: Basic Understanding Page: 270

Use the following to answer questions 86-91:

Figure 12.1

86. To maximize profits, an unregulated natural monopolist would choose which combination of price and
output in Figure 12.1?
A) P4, Q4. B) P2, Q2. C) P3, Q3. D) P1, Q1.

Answer: B Type: Analytical Page: 256

87. The socially optimum price and output combination in Figure 12.1 is:
A) P4, Q4. B) P0, Q1. C) P3, Q3. D) P1, Q1.

Answer: A Type: Analytical Page: 256

88. If regulation of the natural monopolist called for marginal cost pricing in Figure 12.1, the regulatory agency
should set the price at:
A) P2. B) P0. C) P3. D) P4.

Answer: D Type: Analytical Page: 256

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89. The use of marginal cost pricing in Figure 12.1 will result in:
A) Economic profits. C) Economic losses.
B) A fair rate of return on invested capital. D) Only normal profits.

Answer: C Type: Analytical Page: 256

90. Adherence to marginal cost pricing in Figure 12.1 will necessitate:

A) Taxing away the economic profits which will be realized.
B) Giving the firm a subsidy.
C) Regulation of the firm's profits.
D) Setting minimum output at Q2.

Answer: B Type: Analytical Page: 256

91. If regulation of the firm called for it to earn only a normal profit or rate of return in Figure 12.1, the regulatory
agency should set the price at:
A) P1. B) P2. C) P0. D) P3.

Answer: D Type: Analytical Page: 256

Use the following to answer questions 92-96:

Figure 12.2

PC C
Demand
Price (per unit)

PD D
B
PB ATC

A MC
PA

MR
0 qC qB qA
Quantity (units of output)

92. Using Figure 12.2, an unregulated natural monopoly will produce:

A) qA and charge PA. B) qB and charge PB. C) qB and charge PD. D) qC and charge PC.

Answer: D Type: Analytical Page: 256

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93. The unregulated monopoly in Figure 12.2 will experience:

A) Profits equal to PCPDDC. C) Losses equal to PA0qAA.
B) Profits equal to PD0qCD. D) Losses equal to PBPDDB.

Answer: A Type: Analytical Page: 256

94. Output regulation for the natural monopoly in Figure 12.2 would result in an output of:
A) qB. B) qC. C) qA. D) qA or qB, but not qC.

Answer: D Type: Analytical Page: 256

95. Using Figure 12.2, regulation designed to achieve allocatively efficient pricing for the natural monopoly will
result in a price of:
A) PA. B) PB. C) PC. D) PD.

Answer: A Type: Analytical Page: 256

96. Using Figure 12.2, profit regulation will lead the natural monopoly to produce:
A) qA and charge PA. B) qB and charge PB. C) qC and charge PD. D) qC and charge PC.

Answer: B Type: Analytical Page: 256

Use the following to answer questions 97-99:

Figure 12.3

14
Price (dollars per unit)

12

10

1000 1500 2200

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97. Refer to Figure 12.3 for a natural monopoly. If this monopoly was unregulated, it would produce:
A) 1000 units and charge $14. C) 1500 units and charge $10.
B) 1000 units and charge $12. D) 2200 units and charge $4.

Answer: A Type: Complex Understanding Page: 256

98. Refer to Figure 12.3 for a natural monopoly. Regulation designed to achieve efficient prices for this
monopoly would result in a price of:
A) $14. B) $12. C) $10. D) $8.

Answer: D Type: Complex Understanding Page: 256

99. Refer to Figure 12.3 for a natural monopoly. Profit regulation would require this monopoly to produce:
A) 1000 units and charge $14. C) 1500 units and charge $10.
B) 1000 units and charge $12. D) 2200 units and charge $4.

Answer: C Type: Complex Understanding Page: 256

Use the following to answer questions 100-103:

Figure 12.4

20 A
PRICE OR COST
(dollars per unit)

16 C
14 B
12 G I
E
ATC
MC
8
F
D
MR

0 12 16 20 24

QUANTITY

100. Refer to Figure 12.4 for a natural monopoly. To maximize profits, this monopolist would produce:
A) 12 units and charge $20. C) 20 units and charge $12.
B) 16 units and charge $16. D) 24 units and charge $8.

Answer: B Type: Complex Understanding Page: 256

101. Refer to Figure 12.4 for a natural monopoly. Marginal cost pricing regulation would call for a price of:
A) $20. B) $16. C) $12. D) $8.

Answer: D Type: Complex Understanding Page: 256

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102. Refer to Figure 12.4 for a natural monopoly. The use of marginal cost pricing for this monopolist would
result in:
A) Economic profits.
B) A normal rate of return on invested capital.
C) A loss per unit equal to the line segment EF.
D) An incentive to reduce the quality of its product.

Answer: C Type: Complex Understanding Page: 256

103. Refer to Figure 12.4 for a natural monopoly. If regulation of this firm called for it to earn only a normal profit,
the price should be set at:
A) $20. B) $16. C) $12. D) $8.

Answer: C Type: Complex Understanding Page: 256

Use the following to answer question 104:

Figure 12.5

MC
PRICE OR COST

ATC
(per unit)

MR

QUANTITY

104. Refer to Figure 12.5 for a monopoly. Which of the following is true about this firm?
A) It is a natural monopoly.
B) Society can benefit from government regulation using marginal cost pricing without a subsidy.
C) Marginal cost pricing will assure technical efficiency.
D) Profit regulation will assure allocative efficiency.

Answer: B Type: Complex Understanding Page: 256

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Use the following to answer question 105:

Figure 12.6
(dollars per unit)
PRICE

10 Regulated price
ATC
MC

MR D

55 70 80 120

QUANTITY (lamps)

105. Refer to Figure 12.6 for a natural monopoly producing lamps. Suppose the government sets a price of $10 for
every lamp this firm sells, no matter how many lamps are produced. This firm will maximize its profits, given
the regulated price, at an output of:
A) 55 units. B) 70 units. C) 80 units. D) 120 units.

Answer: D Type: Complex Understanding Page: 256

The following multiple-choice questions require critical thinking about In the News and World View articles that
appeared in the text.

106. One In the News article reported "The commission found that Nynex violated complex rules of accounting
that are designed to keep telephone companies from subsidizing unregulated subsidiaries with money that
they collect from customers of their monopoly phone service." Nynex apparently used:
A) Cross-subsidization. B) Predatory pricing. C) Price discrimination. D) Second-best solutions.

Answer: A Type: Complex Understanding Page: 259

107. One In the News article titled "FCC: Nynex Padded Millions in Profits" claims profit regulation provides an
incentive for firms to:
A) Limit costs. B) Inflate costs. C) Limit quantity. D) Inflate price.

Answer: B Type: Complex Understanding Page: 259

108. One In the News article reports that ". . . the agency won't have enough staff to enforce regulations . . ."
According to the quote, the costs involved in hiring personnel to enforce regulations are:
A) Compliance costs. B) Efficiency costs. C) Administrative costs. D) All of the above.

Answer: C Type: Complex Understanding Page: 260

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109. An In the News article carries the headline "Flock of New Low-Fare Carriers Means Savings for Consumers."
If entry barriers are low enough, a market:
A) Is inefficient. B) Violates antitrust laws. C) Requires regulation. D) Is contestable.

Answer: D Type: Complex Understanding Page: 269

110. An In the News article titled "Competition in Local Phone Service Fails to Connect" indicates the price of
local telephone service has increased at a significantly higher rate than long-distance service and cell phone
service. Which of the following reasons are given in the text for this price divergence?
A) The continuing near monopoly dominance of the Baby Bells in local service.
B) The Telecommunications Act of 1996.
C) The existence of efficient natural monopolies in long distance service.
D) All of the above.

Answer: A Type: Complex Understanding Page: 258

ANTITRUST VS. REGULATION

T F 111. The argument for regulation is that markets can generate imperfect outcomes, while the argument
for deregulation is that government sometimes worsens market outcomes.

Answer: True Type: Basic Understanding Page: 255

T F 112. The concept of laissez faire calls for government intervention if market failure is evident.

Answer: False Type: Basic Understanding Page: 255

T F 113. The term market failure means the market mechanism has not generated the best possible mix of
output.

Answer: True Type: Definition Page: 255

T F 114. The argument for government intervention implies government regulation can improve market
outcomes.

Answer: True Type: Basic Understanding Page: 255

T F 115. Antitrust laws focus only on the structure of an industry, not on its behavior.

Answer: False Type: Basic Understanding Page: 255

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NATURAL MONOPOLY

T F 116. A natural monopoly occurs when one firm can achieve economies of scale over the entire range of
market demand.

Answer: True Type: Definition Page: 255

T F 117. A natural monopolist can produce total industry output more efficiently than several smaller but
competitive firms.

Answer: True Type: Basic Understanding Page: 256

T F 118. Unregulated natural monopolists produce sub-optimal rates of output.

Answer: True Type: Basic Understanding Page: 256

T F 119. An unregulated natural monopolist will produce and sell an output at which price equals marginal
cost.

Answer: False Type: Basic Understanding Page: 256

REGULATORY OPTIONS

T F 120. Marginal-cost pricing implies a loss on every unit of output produced by natural monopoly.

Answer: True Type: Basic Understanding Page: 257

T F 121. Eliminating economic profit of a natural monopolist may be justifiable on the basis of society's
equity goal.

Answer: True Type: Basic Understanding Page: 257

T F 122. Price regulation of a natural monopoly may require subsidies.

Answer: True Type: Basic Understanding Page: 257

T F 123. Profit regulation is desirable because if a firm is permitted a specific profit rate, it has an incentive to
limit costs.

Answer: False Type: Basic Understanding Page: 258

T F 124. Regulated monopolies that are allowed a specific profit rate have an incentive to hold down costs.

Answer: False Type: Basic Understanding Page: 258

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T F 125. Regulation of the quantity produced by a monopolist typically has no impact on the quality of the
product.

Answer: False Type: Basic Understanding Page: 259

T F 126. Once regulations are enforced, the cost to society is zero.

Answer: False Type: Basic Understanding Page: 260

T F 127. The costs associated with regulation are a source of government failure.

Answer: True Type: Basic Understanding Page: 260

T F 128. Deregulation implies that government failure is worse than the market failure that regulation is
designed to correct.

Answer: True Type: Basic Understanding Page: 260

T F 129. Government failure can never be worse than the market failure it attempts to correct.

Answer: False Type: Basic Understanding Page: 260

THE COSTS OF REGULATION

T F 130. The administrative costs of regulation include the opportunity costs of the factors of production used
by government to administer the regulations.

Answer: True Type: Basic Understanding Page: 260

T F 131. The human and capital resources used by businesses to satisfy regulatory requirements are known as
compliance costs.

Answer: True Type: Definition Page: 261

T F 132. The loss of utility associated with an inferior mix of output because of poorly designed regulations is
known as regulation costs.

Answer: False Type: Definition Page: 261

T F 133. The marginal benefits of regulation should exceed the marginal costs of regulation if additional
regulations are to be imposed.

Answer: True Type: Basic Understanding Page: 262

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DEREGULATION IN PRACTICE

T F 134. Deregulation in railroads, airlines, and telephone service has generally resulted in higher prices.

Answer: False Type: Basic Understanding Page: 262

T F 135. Deregulation in railroads, airlines, and telephone service has resulted in higher prices in some
segments of the market.

Answer: True Type: Basic Understanding Page: 262

T F 136. In response to deregulation, the quality and variety of airline services rose.

Answer: True Type: Basic Understanding Page: 265

T F 137. Initially, the number of airline firms fell, in response to deregulation.

Answer: False Type: Basic Understanding Page: 265

T F 138. In industries where government regulates price, individual firms often engage in product
differentiation.

Answer: True Type: Basic Understanding Page: 266

T F 139. One consequence of airline deregulation in the 1980s was an increased concentration ratio.

Answer: True Type: Basic Understanding Page: 267

T F 140. In the pursuit of profits, unregulated airlines are likely to increase airport security.

Answer: False Type: Basic Understanding Page: 268

T F 141. When profits are regulated, monopolists are likely to increase their fixed costs.

Answer: True Type: Basic Understanding Page: 268

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