Chapter 13

Question 1

Market failure

Answer 1

occurs whenever an imperfection in the market mechanism prevents optimal outcomes.

Question 2

Which of the following is a form of government intervention that is designed to correct market failures?

Answer 2

antitrust laws

Question 3

Which of the following can the government use to alter both firm behavior and industry structure?

Answer 3

antitrust laws

Question 4

The goal of antitrust laws is to

Answer 4

control the structure of an industry or prevent the abuse of market power.

Question 5

Which of the following is used as an antitrust tool that focuses on the structure of industry?

Answer 5

prohibiting mergers and acquisitions

Question 6

A natural monopoly is a desirable market structure because

Answer 6

it allows the producer to deliver products to the market at the lowest possible cost.

Question 7

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

Answer 7

is downward-sloping in the relevant range of production.

Question 8

A natural monopoly occurs because of

Answer 8

the existence of economies of scale.

Question 9

An unregulated natural monopoly can lead to

Answer 9

higher prices for consumers.

Question 10

For a natural monopoly, marginal cost

Answer 10

is always below average total cost in the relevant range of production.

Question 11

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

Answer 11

falls continuously as more output is produced.

Question 12

To maximize profit, a natural monopolist produces the level of output at which

Answer 12

marginal revenue equals marginal cost.

Question 13

An unregulated natural monopoly is most likely to

Answer 13

earn an economic profit.

Question 14

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?

Answer 14

cost regulation

Question 15

If the government forces a natural monopoly to produce the output level at which P = MC, the firm will

Answer 15

incur losses

Question 16

If a natural monopoly is forced to set a price consistent with price efficiency, it will

Answer 16

incur a loss on every unit of output produced.

Question 17

For a natural monopoly, price efficiency means

Answer 17

price is set equal to marginal cost.

Question 18

If the government wants a natural monopolist to achieve allocative efficiency, the government should

Answer 18

subsidize the firm and require marginal cost pricing.

Question 19

A major drawback of providing subsidies to private companies that are natural monopolies is that

Answer 19

taxpayers dislike this use of their tax dollars.

Question 20

A natural monopoly has no incentive to limit its costs of production under which type of regulation?

Answer 20

profit regulation