Question 1

Figure 8.14
-If price were regulated to be equal to long-run marginal cost the firm in Figure 8.14 would be

Accepted Answer

The answer of  Figure 8.14
-If price were regulated to...

Question 2

Recall the Application about the British experience with private water companies in the nineteenth century to answer the following question(s).
-Recall the Application. The British experience with water privatization showed that

Accepted Answer

The British experience with water privatization in the nineteenth century demonstrated that a single firm could be profitable due to the natural monopoly characteristics of water supply. Competition between two firms often led to inefficiencies and financial difficulties, making it unprofitable for both.

Question 3

Under the average-cost pricing policy, a regulated monopolist is guaranteed a normal economic profit even if there is a change in its cost of production.

Accepted Answer

Under average-cost pricing policy, a regulated monopolist is allowed to set the price of its products based on its average cost of production. This means that if the cost of production increases, the regulated monopolist is allowed to increase the price of its products to cover for the increased cost and still make a normal economic profit. Similarly, if the cost of production decreases, the regulated monopolist can reduce the price of its products and still make the same normal economic profit. Therefore, the statement is true.

Question 4

A natural monopoly is inevitable if the entry of a second firm shifts the demand curve facing each individual firm entirely below the average cost curve.

Accepted Answer

This statement describes the condition for a natural monopoly to exist, which occurs when it is more efficient and cost-effective for one firm to produce the entire output for the industry. If a second firm enters and drives down prices, both firms will face lower demand and will have to price below their average cost in order to stay in the market, leading to losses and ultimately exit. Therefore, a natural monopolist can maintain its dominant position without fear of competition.

Question 5

When demand falls, the price charged by a monopoly under an average-cost pricing policy will fall.

Accepted Answer

A monopoly under an average-cost pricing policy will not lower its price when demand falls because it sets its price based on its average costs, which do not change with changes in demand. The monopoly may decide to reduce its production level to match the lower demand, but it will not lower its price.

Question 6

Suppose a monopolist has costs such that when output is 500 units per hour, average costs are $3. If the monopolist is regulated by a policy of average-cost pricing, the monopolist will charge a price of

Accepted Answer

Average-cost pricing is a regulatory policy in which a firm is required to charge a price equal to its average costs of production. Therefore, if the monopolist has average costs of $3 when output is 500 units per hour, it will only charge a price of $3 if the quantity demanded is 500 units per hour at that price point. If the quantity demanded is greater or less than 500 units per hour, the monopolist will need to adjust the price to cover its costs and make a profit. Therefore, choice B is the best answer because it reflects the condition under which the monopolist would charge a price of $3 under average-cost pricing.

Question 7

Figure 8.14
-Consider the monopoly depicted in Figure 8.14. Relative to the cost of producing the quantity the monopolist would choose under an average-cost pricing policy, the cost of producing Q4 units is

Accepted Answer

The monopolist would choose to produce Q4 units under an average-cost pricing policy because this is the quantity at which average cost is minimized. The cost of producing Q4 units is therefore less than the cost of producing any other quantity.

Question 8

Government regulation of a natural monopoly causes its average cost curve to shift downward.

Accepted Answer

Government regulation typically aims to control prices or output levels in a natural monopoly, not directly alter the firm's cost structure. The average cost curve's position is determined by the technology and scale of production, not regulatory measures.

Question 9

Recall the Application about the merger of Sirius Satellite Radio and XM Satellite Radio to answer the following question(s).
-Recall the Application. Sirius and XM proposed the merger because they were

Accepted Answer

Sirius and XM proposed the merger because they were losing money due to very high fixed costs, which they hoped to reduce by merging.

Question 10

The average-cost pricing policy provides a greater incentive for a regulated monopolist to reduce its production costs.

Accepted Answer

The average-cost pricing policy can actually reduce the incentive for a regulated monopolist to minimize production costs, as the firm is allowed to set prices based on average costs, including a normal rate of return. This means that any cost reductions might not lead to higher profits, reducing the incentive to lower costs.

Question 11

Recall the Application about the merger of Sirius Satellite Radio and XM Satellite Radio to answer the following question(s).
-Recall the Application. After the merger of Sirius Satellite Radio and XM Satellite Radio, the new firm, Sirius XM, would be classified as a

Accepted Answer

Sirius XM would be classified as a natural monopoly because, after the merger, it became the sole provider of satellite radio services, indicating a market condition where a single firm can supply a product or service more efficiently than multiple firms could, due to high fixed costs and significant economies of scale.

Question 12

Figure 8.14
-With average cost pricing the firm in Figure 8.14 would be

Accepted Answer

With average cost pricing, a firm sets its price equal to its average costs at that level of output. This means it covers all its costs, including normal profit (which is considered a cost in economic terms), but does not make an economic profit above that.

Question 13

Compared with average cost at the quantity that an unregulated monopolist would choose, average costs are higher at the quantity chosen by a monopoly facing an average-cost pricing policy.

Accepted Answer

The answer of Compared with average cost at the quantity...

Question 14

The conventional way to regulate a natural monopolist is to force it to charge a price equal to marginal cost.

Accepted Answer

The conventional way to regulate a natural monopolist is to force it to charge a price equal to average total cost, not marginal cost. This is because in a natural monopoly, the firm’s cost of production is lower than any potential competitor due to economies of scale. Therefore, setting price equal to marginal cost would result in the firm operating at a loss, which is not sustainable in the long run. Setting price equal to average total cost allows the firm to earn a normal profit while still providing goods or services at a reasonable cost to consumers.

Question 15

Figure 8.14
-Where it wants to produce, the firm in Figure 8.14 would be

Accepted Answer

At the quantity where marginal revenue equals marginal cost, the firm is producing at its profit-maximizing level. At this level, the price is higher than the average total cost, meaning the firm is making a positive economic profit. Therefore, the best choice for the firm is to continue producing at this level.

Question 16

Figure 8.14
-The natural monopoly in Figure 8.14 wants to charge a price of

Accepted Answer

The answer of  Figure 8.14
-The natural monopoly in Figure...

Question 17

Figure 8.14
-The natural monopoly in Figure 8.14 wants to produce

Accepted Answer

The best choice for the natural monopoly is to produce at Q₂, where MC=MR and charge P₂. This is where it maximizes profits and operates at the efficient scale. Producing any less than Q₂ would not fully utilize its fixed costs, and producing any more than Q₂ would result in increasing marginal costs and decreasing profits. Therefore, the natural monopoly chooses to produce Q₂.

Question 18

Recall the Application about the British experience with private water companies in the nineteenth century to answer the following question(s).
-Recall the Application. The British experience with water privatization showed that the distribution of water is

Accepted Answer

The British experience with water privatization demonstrated that the distribution of water is a natural monopoly, as private companies had little incentive to invest in expanding access to areas with lower profit margins, leading to unequal access and inadequate service for some customers. This ultimately led to the re-nationalization of water distribution in the UK in the 20th century.

Question 19

In the case of a natural monopoly, two firms can produce at lower average cost than one firm can.

Accepted Answer

A natural monopoly occurs when a single firm can produce output at a lower average cost than any potential competitor. Therefore, having two firms would not result in lower average costs.

Question 20

Recall the Application about the merger of Sirius Satellite Radio and XM Satellite Radio to answer the following question(s).
-Recall the Application. One might expect no more firms to enter after the market consolidated into one firm because

Accepted Answer

The primary reason no more firms are expected to enter after the market consolidated into one firm is due to the high fixed costs associated with setting up a company system and acquiring programming. This creates a significant barrier to entry for new competitors.

Quiz 8: Market Entry, Monopolistic Competition, and Oligopoly

Figure 8.14 -If price were regulated to be equal to long-run marginal cost the firm in Figure 8.14 would be

Recall the Application about the British experience with private water companies in the nineteenth century to answer the following question(s) . -Recall the Application. The British experience with water privatization showed that

Under the average-cost pricing policy, a regulated monopolist is guaranteed a normal economic profit even if there is a change in its cost of production.

A natural monopoly is inevitable if the entry of a second firm shifts the demand curve facing each individual firm entirely below the average cost curve.

When demand falls, the price charged by a monopoly under an average-cost pricing policy will fall.

Suppose a monopolist has costs such that when output is 500 units per hour, average costs are $3. If the monopolist is regulated by a policy of average-cost pricing, the monopolist will charge a price of

Figure 8.14 -Consider the monopoly depicted in Figure 8.14. Relative to the cost of producing the quantity the monopolist would choose under an average-cost pricing policy, the cost of producing Q4 units is

Government regulation of a natural monopoly causes its average cost curve to shift downward.

Recall the Application about the merger of Sirius Satellite Radio and XM Satellite Radio to answer the following question(s) . -Recall the Application. Sirius and XM proposed the merger because they were

The average-cost pricing policy provides a greater incentive for a regulated monopolist to reduce its production costs.

Recall the Application about the merger of Sirius Satellite Radio and XM Satellite Radio to answer the following question(s) . -Recall the Application. After the merger of Sirius Satellite Radio and XM Satellite Radio, the new firm, Sirius XM, would be classified as a

Figure 8.14 -With average cost pricing the firm in Figure 8.14 would be

Compared with average cost at the quantity that an unregulated monopolist would choose, average costs are higher at the quantity chosen by a monopoly facing an average-cost pricing policy.

The conventional way to regulate a natural monopolist is to force it to charge a price equal to marginal cost.

Figure 8.14 -Where it wants to produce, the firm in Figure 8.14 would be

Figure 8.14 -The natural monopoly in Figure 8.14 wants to charge a price of

Figure 8.14 -The natural monopoly in Figure 8.14 wants to produce

Recall the Application about the British experience with private water companies in the nineteenth century to answer the following question(s) . -Recall the Application. The British experience with water privatization showed that the distribution of water is

In the case of a natural monopoly, two firms can produce at lower average cost than one firm can.

Recall the Application about the merger of Sirius Satellite Radio and XM Satellite Radio to answer the following question(s) . -Recall the Application. One might expect no more firms to enter after the market consolidated into one firm because