Question41) If a monopolistically competitive seller’s marginal cost is $3.56, the firm will decrease its outputif

41) If a monopolistically competitive seller’s marginal cost is $3.56, the firm will decrease its output

if

A) its marginal revenue is less than $3.56.

B) its marginal revenue is equal to $3.56.

C) its marginal revenue is more than $3.56.

D) its average total cost is equal to $4.00.

E) Both answers B and D are correct.

41)

42) In monopolistic competition, profit is maximized by producing so that marginal revenue

A) equals price.

B) equals average total cost but not marginal cost.

C) equals marginal cost and which are less than price.

D) equals marginal cost and equals price.

E) is negative.

42)

43) The absence of barriers to entry in monopolistic competition means that in the long run firms

A) earn either an economic profit or zero economic profit.

B) earn zero economic profit.

C) incur an economic loss.

D) earn an economic profit.

E) earn either zero economic profit or suffer an economic loss.

43)

10

44) With an average cost pricing rule, the quantity produced by the natural monopoly is ________

the quantity produced with a marginal cost pricing rule.

A) less than

B) greater than

C) not comparable to

D) equal to

E) greater than in the long run and less than in the short run than

44)

45) Because of the number of firms in monopolistic competition

A) each firm has a large market share.

B) it is possible for the firms to collude.

C) one firm has the ability to dictate market conditions.

D) each firm must carefully monitor what its competitors do.

E) no one firm can dominate the market.

45)

46) If a large number of firms are competing, the market could be

A) monopolistic competition or monopoly.

B) perfect competition or monopoly.

C) oligopoly or monopoly.

D) perfect competition or monopolistic competition.

E) monopolistic competition or oligopoly.

46)

47) With a natural monopoly

A) no regulation is necessary because it is a natural monopoly.

B) regulation takes the form of breaking the company into several competing firms.

C) regulation takes the form of forcing the company out of business.

D) regulation can take the form of average cost pricing to allow coverage of costs.

E) regulation takes the form of forcing competition from new firms.

47)

48) If a natural monopoly is regulated using

A) a total cost pricing rule, the firm will exit the industry.

B) a marginal cost pricing rule, the firm maximizes its profit.

C) an average cost pricing rule, the firm maximizes its profit.

D) a marginal cost pricing rule, the firm incurs an economic loss.

E) an average cost pricing rule, the firm incurs an economic loss.

48)

49) Price cap regulation is defined as regulation that

A) imposes a price ceiling on the regulated firm.

B) is essentially the same as rate of return regulation.

C) uses average cost pricing to ensure costs are covered.

D) uses marginal cost pricing to ensure efficient output.

E) encourages firms to exaggerate costs to increase profits.

49)

50) The process of price cap regulation includes which of the following?

i. a price ceiling.

ii. marginal cost pricing.

iii. average cost pricing

A) i and ii B) i and iii C) ii only D) ii and iii E) i only

50)

11

51) The above figure represents the market for cable television in Oakland, Florida. Time Warner

Communications (TWC) is the sole provider of cable television to the residents of this Central

Florida community. If TWC is left unregulated, what is the price of cable television in Oakland?

A) $10 B) $20 C) $50 D) $30 E) $40

51)

52) The above figure represents the market for cable television in Oakland, Florida. Time Warner

Communications (TWC) is the sole provider of cable television to the residents of this Central

Florida community. If TWC is left unregulated, how many households in Oakland are served?

A) 40,000 B) 50,000 C) 10,000 D) 30,000 E) 20,000

52)

53) If a regulatory agency sets the price equal to marginal cost for a natural monopoly, the

A) price is the same as the unregulated monopoly price.

B) firm earns an economic profit, though not the maximum economic profit.

C) firm earns a normal profit.

D) firm earns the maximum economic profit.

E) government might have to provide a subsidy to the firm to keep it in business.

53)

54) Capture theory is

A) a model about perfect competition.

B) a theory that explains behavior of competitive firms.

C) an economic theory of regulation.

D) the theory that regulators capture firms’ attention by dictating a very low price.

E) the same as the public interest theory.

54)

55) A monopoly creates a deadweight loss because the monopoly

A) sets a price that is too low.

B) produces less than the efficient quantity.

C) produces more than the efficient quantity.

D) does not maximize profit.

E) earns a normal profit.

55)

12

56) Which of the following explains why the marginal cost pricing rule results in an economic loss

for a natural monopoly?

A) TheATCcurve is downward sloping throughout the relevant range, therefore theMCis

lower than theATC.

B) TheMCis constant and equal to price.

C) Because output is determined by settingMC equal to the price, consumer surplus is

maximized.

D) The demand curve is downward sloping, therefore price falls as quantity increases.

E) The firm’sMRis always less than its price.

56)

57) ________ natural monopolies is a commonly used, potential solution to the problems presented

by natural monopolies.

A) Giving incentives to firms to become

B) Breaking up firms that are

C) Regulating

D) Refusing to grant patents to

E) Outlawing price discrimination by

57)

58) With perfect price discrimination, the level of output

A) is the same as the amount produced by any monopoly that price discriminates.

B) equals the amount produced by a single-price monopoly.

C) is the same as the amount produced in a perfectly competitive market.

D) exceeds the efficient quantity.

E) is unknown.

58)

59) Comparing a perfectly competitive market to a single-price monopoly with the same costs, we

see that

A) the monopoly market always is more efficient in the use of resources.

B) the monopoly market achieves efficiency in resource use while perfectly competitive

market does not.

C) both markets are equally efficient in their use of resources.

D) the perfectly competitive market achieves efficiency in resource use while the monopoly

market does not.

E) None of the above answers is correct because comparing a perfectly competitive market to

a monopoly is impossible.

59)

60) When a perfectly competitive industry is taken over by a monopoly, some consumer surplus is

transferred to the monopolist in the form of

A) taxes.

B) marginal cost.

C) deadweight loss.

D) economic profit.

E) average variable cost.

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