Question 1

Under an average-cost pricing policy

Accepted Answer

Under an average-cost pricing policy, a regulatory agency picks a price at which a natural monopoly's demand curve intersects its average cost curve. This price will be equal to the average cost of production, and the firm will earn a normal rate of return (zero economic profit). This policy ensures that the price charged to consumers is reasonable and fair, while also allowing the firm to cover its costs and continue operating in the long run. Picking a price equal to marginal cost or average fixed cost may not be practical or sustainable for the firm. Firms may earn economic profits greater than zero if they are able to operate more efficiently than the average firm, but this would not be a result of the pricing policy itself.

Question 2

Figure 8.13
-Consider an unregulated monopoly in Figure 8.13. Suppose that a second firm enters the market. As a result, if a natural monopoly is inevitable in this market

Accepted Answer

In a natural monopoly, the long-run average cost curve is downward sloping over the relevant range of output. If a second firm enters, the market demand is split, and each firm's demand curve lies below the long-run average cost curve, making it unprofitable for both firms.

Question 3

If a natural monopoly is forced to follow a policy of average-cost pricing, the monopolist will

Accepted Answer

When a natural monopoly is forced to follow a policy of average-cost pricing, it is required to set its price equal to its average total cost. Since in a natural monopoly, average total cost is higher than the marginal cost, unregulated pricing policy can lead to a higher price and lower output. When the monopolist is forced to charge a price equal to average total cost, the price charged will be lower than the unregulated price but still, cover all its costs, including a normal profit. Therefore, the monopolist will charge a lower price than if it were not regulated.

Question 4

Under a policy of average-cost pricing, a monopolist must charge the price at which its ________ cost curve intersects its ________ curve.

Accepted Answer

Under average-cost pricing, the monopolist sets the price at the level where the average cost curve intersects the demand curve. This ensures that the price covers both variable and fixed costs, allowing the firm to earn a normal profit in the long run. The correct option is D, where the monopolist sets the price at the point where the average cost curve intersects the demand curve.

Question 5

When a monopoly is inevitable, the government often

Accepted Answer

When a monopoly is inevitable, the government may set a maximum price for the monopolist in order to prevent the monopolist from charging excessively high prices and taking advantage of consumers. The other options listed may not be as effective or may not make sense depending on the specific circumstances. However, it is important to note that some economists argue that a natural monopoly can still be efficient and beneficial, and breaking it up into smaller firms could actually lead to higher costs for consumers.

Question 6

A regulatory policy under which the government picks the point on the demand curve at which price equals average cost is known as

Accepted Answer

With average-cost pricing policy, the government sets the price at the point where it equals the average cost of production. This policy ensures that the producer earns a normal profit, covering both variable and fixed costs, without excessive profits. It is often used as a regulatory tool for natural monopolies, such as water or electricity utilities, where the high fixed costs make it difficult for new entrants to come into the market.

Question 7

If a regulatory agency mandates that a natural monopoly charge a price equal to its average cost

Accepted Answer

When a regulatory agency mandates that a natural monopoly charge a price equal to its average cost, it is referred to as a price ceiling. At this price, the firm will earn economic profits equal to zero. This is because the price equals the average cost, so there is no excess profit left over after covering production costs. The firm will not exit the industry because it is still able to cover its costs and continue operating. Other firms will not find it profitable to enter the industry because the natural monopoly has already established a barrier to entry.

Question 8

Government agencies often regulate the price natural monopolies charge because, if left unregulated, natural monopolies will

Accepted Answer

Natural monopolies have high fixed costs and low marginal costs, which means that they can produce at a lower cost per unit than any potential competitor. If left unregulated, they would charge a price greater than average cost to maximize profit, resulting in higher prices for consumers. Therefore, government agencies regulate their prices to ensure they do not exploit their monopoly power to the disadvantage of consumers.

Question 9

If a natural monopoly is forced to follow a policy of average-cost pricing, the monopolist will

Accepted Answer

Average-cost pricing requires the monopolist to set price equal to average cost, which typically results in a higher output level than the profit-maximizing output level of an unregulated monopoly.

Question 10

A policy of average-cost pricing will initially ________ price for a natural monopoly, but as costs increase price will ________.

Accepted Answer

Average-cost pricing involves setting the price of a product equal to its average total cost. In the case of a natural monopoly, this will result in a price that is initially higher than it would be under perfect competition, as the firm has market power. However, as costs increase over time, the price required to cover those costs will also increase, resulting in higher prices for consumers. Therefore, as costs increase, the policy of average-cost pricing will lead to an increase in price for the natural monopoly. Therefore, the correct answer is B.

Question 11

The quantity produced by a natural monopolist facing an average-cost pricing policy will be

Accepted Answer

Under an average-cost pricing policy, a natural monopolist will produce a quantity where the price equals the average cost, which is typically less than the quantity that would be produced under a marginal cost pricing policy. Marginal cost pricing would lead to a larger quantity because it sets prices equal to the marginal cost of production, which is usually lower than the average cost in the relevant range for natural monopolies.

Question 12

A likely consequence over time of an average-cost pricing policy for a natural monopoly is

Accepted Answer

An average-cost pricing policy means that the natural monopoly sets the price equal to the average cost of production. In the long run, if the price is set at the average cost, the firm will earn zero economic profit. However, if the average cost curve increases due to external factors such as an increase in the cost of inputs, the firm will have to increase its price to stay profitable. Therefore, over time, an average-cost pricing policy is likely to result in an increase in the average cost curve.

Question 13

Suppose a monopolist has costs such that when output is 1,000 units per hour, average cost is $5. If the monopolist is regulated by a policy of average-cost pricing, the monopolist will charge a price of

Accepted Answer

Under average-cost pricing regulation, the monopolist will charge a price equal to the average cost only if the quantity demanded at that price matches the output level where the average cost is calculated, which is 1,000 units per hour in this case.

Question 14

Because a monopolist has no incentive to control costs under a policy of average-cost pricing, we can expect

Accepted Answer

If a monopolist sets prices at the average cost, it will not have any incentives to control costs, resulting in the costs increasing over time. As a result of the increase in costs, the monopolist will raise the price, leading to an increase in profits. Therefore, we can expect the price to increase over time as costs rise.

Question 15

Production costs are likely to rise after an average-cost pricing policy is mandated because the monopolist will

Accepted Answer

With an average-cost pricing policy, the monopolist is guaranteed to earn a certain level of profit regardless of the production costs. Therefore, the monopolist has no incentive to control costs, which can lead to higher production costs over time.

Question 16

Consider a cable TV company which is subject to an average-cost pricing regulation. If the number of subscribers decreases

Accepted Answer

With an average-cost pricing regulation, the firm must charge a price that covers its average cost. If the number of subscribers decreases, the firm will have to spread its fixed costs over a smaller number of customers, which will increase its average cost. To cover the higher average cost, the firm will have to charge a higher price per customer. Therefore, choice C is the best answer. Choice A is incorrect because even though the company may have to operate at a smaller profit, it might not necessarily suffer an economic loss. Choice B is incorrect because the demand curve facing the firm does not necessarily shift to the left.

Question 17

When compared to the profit maximizing price and quantity supplied, an average-cost pricing policy for a natural monopoly causes the price the monopolist charges to ________ and the quantity it sells to ________.

Accepted Answer

An average-cost pricing policy for a natural monopoly results in a lower price than the profit-maximizing price, because it sets the price equal to average costs rather than marginal costs. This lower price increases the quantity sold, as it makes the product or service more affordable to consumers.

Question 18

Figure 8.13
-Consider an unregulated monopoly in Figure 8.13. If that monopoly sets its price equal to its marginal cost it would

Accepted Answer

If a monopoly sets its price equal to its marginal cost, it would not cover its average total costs, leading to negative profits.

Question 19

Because unregulated natural monopolies earn economic profits greater than zero in the long run, but cannot attract new entrants into the industry

Accepted Answer

Since natural monopolies earn economic profits greater than zero in the long run, there is no incentive for new firms to enter the industry and compete. Without competition, the monopoly may charge higher prices than in a competitive market, leading to consumer exploitation. To prevent this, government agencies may regulate the price natural monopolies can charge to ensure that they do not abuse their market power.

Question 20

Under average-cost pricing, an increase in the monopolist's production cost will

Accepted Answer

Under average-cost pricing, the government sets the price equal to the average cost. If production costs increase, the regulated price will also increase to match the new average cost, leaving the monopolist's profit unaffected.

Quiz 8: Market Entry, Monopolistic Competition, and Oligopoly

Under an average-cost pricing policy

Figure 8.13 -Consider an unregulated monopoly in Figure 8.13. Suppose that a second firm enters the market. As a result, if a natural monopoly is inevitable in this market

If a natural monopoly is forced to follow a policy of average-cost pricing, the monopolist will

Under a policy of average-cost pricing, a monopolist must charge the price at which its cost curve intersects its curve.

When a monopoly is inevitable, the government often

A regulatory policy under which the government picks the point on the demand curve at which price equals average cost is known as

If a regulatory agency mandates that a natural monopoly charge a price equal to its average cost

Government agencies often regulate the price natural monopolies charge because, if left unregulated, natural monopolies will

If a natural monopoly is forced to follow a policy of average-cost pricing, the monopolist will

A policy of average-cost pricing will initially price for a natural monopoly, but as costs increase price will .

The quantity produced by a natural monopolist facing an average-cost pricing policy will be

A likely consequence over time of an average-cost pricing policy for a natural monopoly is

Suppose a monopolist has costs such that when output is 1,000 units per hour, average cost is $5. If the monopolist is regulated by a policy of average-cost pricing, the monopolist will charge a price of

Because a monopolist has no incentive to control costs under a policy of average-cost pricing, we can expect

Production costs are likely to rise after an average-cost pricing policy is mandated because the monopolist will

Consider a cable TV company which is subject to an average-cost pricing regulation. If the number of subscribers decreases

When compared to the profit maximizing price and quantity supplied, an average-cost pricing policy for a natural monopoly causes the price the monopolist charges to and the quantity it sells to .

Figure 8.13 -Consider an unregulated monopoly in Figure 8.13. If that monopoly sets its price equal to its marginal cost it would

Because unregulated natural monopolies earn economic profits greater than zero in the long run, but cannot attract new entrants into the industry

Under average-cost pricing, an increase in the monopolist's production cost will