Clayate 27 Please read the following: 1. After carefully reading each question, mark your answers in the appropriate spaces in the on-line testing system at www.agu.edu. 2. Submit any inquiries through "Contact Us" on the webpage, or by contacting Student Services at studentservices@agu.edu. MULTIPLE CHOICE: Question 1: When firms have the ability 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 Question 2: Market failure can result from all of the following except: (a) Market power (b) Regulation (c) Restricted output (d) Monopoly Question 3: Market failure: (a) Occurs whenever the government intervenes in the market mechanism ( b ) Occurs whenever the government pursues laissez-faire policies (c) Occurs whenever an imperfection in the market mechanism prevents optimal outcomes (d) Never occurs Question 4: The major aim of government regulation is to: (a) Control the structure of an industry ( b ) Alter industry behavior ( c ) Prevent monopolies from forming (d) Restrict competitionQuestion 5: Which of the following is a form of government intervention? (a) Natural monopoly (b) Public goods (c) Regulation (d) Externalities Question 6: The goal of antitrust laws is to: (a) Control the structure of an industry only (b ) Alter industry behavior only (c ) Prevent monopolies from forming (d) Control the structure of an industry or prevent the abuse of market power Question 7: A natural monopoly occurs because of: (a) Legal restrictions preventing entry into the industry (b) Low fixed costs (c) The existence of economies of scale (d) High marginal costs Question 8: A natural monopoly: (a) Has low barriers to entry ( b ) Has high marginal costs (c) Charges a lower price than a competitive firm (d) Will charge high prices if unregulated Question 9: The long-run average total cost curve of a natural monopolist: (a) Is U-shaped ( b ) Reflects declining average fixed costs Falls continuously as more output is produced (d) Reflects diminishing returns Question 10: 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 Question 11: If the government forces a natural monopoly to produce the output level at which P = MC, the firm will: (a) Fail to produce efficiently ( b ) Produce less than the profit-maximizing level of output (c) Incur losses (d) Produce where ATC is at a minimumQuestion 12: What is meant by price efficiency? (a) Price is greater than marginal cost (b) Price is equal to marginal cost (c ) Price is equal to average total cost (d) Price is greater than average total cost Question 13: A major drawback of providing subsidies to private companies that are natural monopolies is that: (a) Taxpayers dislike this use of their tax dollars (b ) Private companies are less efficient than public companies The companies have no incentive to limit costs (d) The companies will allow product quality to decline Question 14: Production efficiency under a natural monopoly is achieved: Where marginal cost equals demand Where marginal revenue equals marginal cost Where marginal cost is minimized (d) At capacity production where ATC is at a minimum Question 15: If profit regulation is used to control a natural monopolist, 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 its product in an effort to increase sales (d) Reduce maintenance of plants and equipment Question 16: Profit regulation occurs when regulation requires the natural monopolist to set: (a) Price equal to average total cost (b) Price equal to marginal cost (c) Marginal revenue equal to average total cost (d) Price equal to average variable cost Question 17: Output regulation is likely to result in: (a) A surplus of the product ( b ) A decline in the quality of the product (c) An increase in the cost of subsidies (d) Profit maximization for the monopolistQuestion 18: The over 280,000 people employed in regulatory agencies of the federal government represent: (a) A compliance cost ( b ) An efficiency cost An administrative cost (d) An information cost Question 19: Which regulatory cost is borne by the firms that are regulated? (a) Efficiency costs (b) Subsidy costs (c) Compliance costs (d) Administrative costs Question 20: When regulation results in an inferior mix of output, there are: (a) Administrative costs ( b ) Compliance costs Efficiency costs Equity costs Question 21: 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 Question 22: Before deregulation of the telephone industry: (a) Telephone service prices were lower than after deregulation ( b ) Cutthroat competition eliminated profits (c ) The volume of long distance phone use was lower than after deregulation (d) There were greater variety and quality of service than after deregulation Question 23: Cross-subsidization occurs when: (a) Profits on one product are used to subsidize low prices on another product (b) The government subsidizes production of a product (c) Profitable firms in an industry are forced to share their profits with the unprofitable firms (d) Firms are required to subsidize government research and development that may benefit their industryQuestion 24: What development turned the cable TV market into a contestable one? (a) Economies of scale (b) Satellite and broadband technology (C ) Cable TV firms raised prices (d) Cable TV firms were earning economic profits Question 25: 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 deregulated telephone system (d) Improvements in technology allowed the development of high-voltage transmission power lines