Natural Monopolies Quiz Questions
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ECON 101 Exam 4
- 1.
A natural monopoly is a desirable market structure because:
- A.
When unregulated, it offers a firm a higher profit margin which creates jobs for the economy.
- B.
When regulated, it can be forced to produce at the same output level as an unregulated monopoly
- C.
It can offer the products consumers want at the lowest possible price because of economies of scale.
- D.
It generates more jobs for the economy than a competitive market structure does.
Correct Answer
C. It can offer the products consumers want at the lowest possible price because of economies of scale.Explanation
A natural monopoly is a desirable market structure because it can offer the products consumers want at the lowest possible price because of economies of scale. This means that as the company produces more goods, the average cost per unit decreases, allowing them to offer products at a lower price compared to smaller competitors. This benefits consumers as they can purchase the desired products at a more affordable price, enhancing their overall satisfaction.Rate this question:
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- 2.
Natural monopolies:
- A.
Always face downward-sloping long-run average total cost curves.
- B.
Capture economies of scale over the entire market.
- C.
Incur losses if they produce where P = MC.
- D.
D. All of the above.
Correct Answer
D. D. All of the above.Explanation
Natural monopolies always face downward-sloping long-run average total cost curves because they are able to capture economies of scale over the entire market. This means that as they produce more output, their average costs decrease. Additionally, natural monopolies will incur losses if they produce where P = MC because their costs would be higher than the price they can charge. Therefore, all of the statements mentioned in the options are correct.Rate this question:
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- 3.
The distinctive characteristic of a natural monopoly is its:
- A.
Horizontal demand curve.
- B.
Downward-sloping average total cost curve at market output.
- C.
Vertical marginal cost curve.
- D.
Kinked demand curve.
Correct Answer
B. Downward-sloping average total cost curve at market output.Explanation
A natural monopoly is characterized by a downward-sloping average total cost curve at market output. This means that as the quantity produced increases, the average cost of production decreases. This is because natural monopolies often have high fixed costs and low marginal costs. As the company produces more units, the fixed costs can be spread out over a larger quantity, leading to a decrease in average total cost. This characteristic allows natural monopolies to have a cost advantage over potential competitors, making it difficult for other firms to enter the market and compete effectively.Rate this question:
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- 4.
The natural monopolist's preferred outcome violates the competitive principle of:
- A.
Laissez faire.
- B.
Marginal cost pricing.
- C.
Diminishing marginal returns.
- D.
Economies of scale.
Correct Answer
B. Marginal cost pricing.Explanation
The natural monopolist's preferred outcome violates the competitive principle of marginal cost pricing. Marginal cost pricing is a principle that suggests that prices should be set at the level of marginal cost in order to achieve efficiency and prevent monopolistic behavior. However, natural monopolists have the ability to set prices above marginal cost, leading to higher prices and potentially reducing consumer welfare. Therefore, the natural monopolist's preferred outcome contradicts the principle of marginal cost pricing.Rate this question:
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- 5.
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?
- A.
Cost regulation.
- B.
Profit regulation.
- C.
Output regulation.
- D.
Price regulation.
Correct Answer
A. Cost regulation.Explanation
Cost regulation is not a regulatory option when the government is trying to prevent market failure in the case of a natural monopoly. Cost regulation refers to the government setting limits on the costs that a natural monopoly can incur in providing its services. However, in the case of a natural monopoly, where there are significant economies of scale and only one firm can efficiently serve the market, cost regulation may not be effective in preventing market failure. Instead, other regulatory options such as profit regulation, output regulation, or price regulation may be more suitable in ensuring fair competition and consumer welfare.Rate this question:
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- 6.
If the government forces a natural monopoly to produce the output where P = MC, the firm:
- A.
Will fail to produce efficiently.
- B.
Will be producing less than the profit-maximizing level of output.
- C.
Will incur losses.
- D.
All of the above.
Correct Answer
C. Will incur losses.Explanation
If the government forces a natural monopoly to produce the output where P = MC, the firm will incur losses. This is because in a natural monopoly, the firm has the ability to set prices higher than marginal cost in order to maximize profits. However, when the government forces the firm to produce at the price equal to marginal cost, the firm will not be able to cover its costs and will incur losses.Rate this question:
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- 7.
If a regulatory agency decides to pursue profit regulation of a natural monopoly, price and output will be determined by the:
- A.
Minimum point of ATC.
- B.
Intersection of MR and MC.
- C.
Intersection of the demand and ATC curves.
- D.
Intersection of the demand and MC curves.
Correct Answer
C. Intersection of the demand and ATC curves.Explanation
When a regulatory agency decides to pursue profit regulation of a natural monopoly, the intersection of the demand and ATC curves will determine the price and output. At this intersection, the demand curve represents the price that consumers are willing to pay for the product, while the ATC curve represents the average total cost of producing that product. By setting the price at this intersection, the regulatory agency ensures that the natural monopoly is able to cover its costs and earn a fair return on investment, while also providing the product at a price that consumers are willing to pay.Rate this question:
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- 8.
Output regulations
- A.
Encourage quality decline.
- B.
Violate the principle of marginal cost pricing.
- C.
May jeopardize equity goals.
- D.
All of the above.
Correct Answer
D. All of the above.Explanation
The statement "All of the above" is the correct answer because output regulations can indeed encourage quality decline, violate the principle of marginal cost pricing, and jeopardize equity goals. Encouraging quality decline means that the regulations may not prioritize or enforce high-quality standards, leading to a decline in the overall quality of goods or services. Violating the principle of marginal cost pricing suggests that the regulations may not allow prices to be set based on the actual costs of production, potentially distorting market efficiency. Lastly, jeopardizing equity goals implies that the regulations may not ensure fair and equal access to goods or services for all individuals or groups.Rate this question:
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- 9.
From an economic standpoint, the pursuit of a pollution-free environment is:
- A.
The morally correct strategy and costs should not be a consideration.
- B.
Probably not in society's best interest, in view of the very high opportunity costs.
- C.
The economically correct strategy.
- D.
The economically correct strategy as long as benefits accrue to society.
Correct Answer
B. Probably not in society's best interest, in view of the very high opportunity costs.Explanation
This answer suggests that pursuing a pollution-free environment may not be in society's best interest due to the high opportunity costs involved. This means that the resources and benefits that could be gained from alternative uses of those resources would be significantly sacrificed in the pursuit of a pollution-free environment. Therefore, the answer implies that the economic costs outweigh the potential benefits, making it not the economically correct strategy.Rate this question:
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- 10.
Assigning values to environmental damage is relatively:
- A.
Easy because of current scientific techniques
- B.
Easy because all items have a market value
- C.
. Difficult because many items have intangible benefits and therefore do not have a market price.
- D.
Easy because the government has the legislative authority to assign prices .
Correct Answer
C. . Difficult because many items have intangible benefits and therefore do not have a market price.Explanation
Assigning values to environmental damage is difficult because many items have intangible benefits and therefore do not have a market price. This means that it is challenging to quantify the value of environmental damage in monetary terms, as there may not be a direct market value associated with intangible benefits such as clean air, biodiversity, or cultural heritage. Additionally, the subjective nature of assigning value to these intangible benefits further complicates the process.Rate this question:
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- 11.
The efficiency decision involves choosing:
- A.
The profit-maximizing level of output
- B.
The socially most desirable production process for any given level of output.
- C.
The lowest cost production process for any level of output.
- D.
. A production process in which marginal social benefit exceeds marginal social cost.
Correct Answer
C. The lowest cost production process for any level of output.Explanation
The efficiency decision involves choosing the lowest cost production process for any level of output. This means that the decision-maker aims to minimize the cost of producing goods or services while maintaining the desired level of output. By selecting the lowest cost production process, a company can maximize its profits and remain competitive in the market. This decision is important as it helps to optimize resource allocation and ensure efficient use of inputs in the production process.Rate this question:
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- 12.
Requiring that a firm engage in pollution abatement tends to:
- A.
Reduce profits for the firm.
- B.
Reduce the amount of output the firm produces
- C.
Shift the firm's MC and ATC curves upward.
- D.
All of the above.
Correct Answer
D. All of the above.Explanation
Requiring a firm to engage in pollution abatement will have multiple effects. Firstly, it will reduce profits for the firm as they will have to invest in pollution control measures, which can be costly. Secondly, it will reduce the amount of output the firm produces, as resources will be diverted towards pollution control instead. Lastly, it will shift the firm's marginal cost (MC) and average total cost (ATC) curves upward, as additional costs are incurred due to pollution abatement. Therefore, all of the above statements are true.Rate this question:
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- 13.
The reason pollution occurs is because people tend to:
- A.
Consider the impact of their activities on society first.
- B.
Maximize their personal welfare, balancing private benefits against private costs
- C.
Maximize their personal welfare, balancing social benefits social costs.
- D.
Maximize society's welfare, balancing private benefits against private costs.
Correct Answer
B. Maximize their personal welfare, balancing private benefits against private costsExplanation
The correct answer suggests that people tend to prioritize their personal welfare and make decisions based on the balance between the benefits they receive and the costs they incur individually. This implies that individuals prioritize their own well-being and make choices that maximize their personal benefits while minimizing their personal costs. This self-centered behavior can contribute to pollution as individuals may prioritize their own immediate gains over the negative impact it has on society.Rate this question:
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- 14.
Social costs minus private costs equal:
- A.
Economic profit.
- B.
Opportunity costs.
- C.
Full resources costs.
- D.
External costs
Correct Answer
D. External costsExplanation
When social costs are subtracted from private costs, the result is external costs. External costs refer to the costs imposed on society as a whole due to the actions of individuals or businesses. These costs are not borne directly by the individuals or businesses involved, but by society in general. External costs can include environmental damage, health impacts, or other negative effects that are not accounted for in private costs. Therefore, the correct answer is external costs.Rate this question:
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- 15.
If firms were charged the full social opportunity cost of the resources they used, then there would be:
- A.
No external costs
- B.
Government failure.
- C.
Market failure.
- D.
A need for government intervention.
Correct Answer
A. No external costsExplanation
If firms were charged the full social opportunity cost of the resources they used, it means that they would be paying for all the costs associated with their production, including any negative externalities or costs imposed on society. Therefore, there would be no external costs, as firms would be internalizing all the costs they generate. This would also imply that the market is functioning efficiently, as firms are taking into account all the costs and benefits of their actions. Hence, there would be no market failure. However, since firms would still need to be charged the full social opportunity cost, it suggests that there is a need for government intervention to ensure that firms are held accountable for their actions and that the market operates in a socially optimal manner.Rate this question:
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- 16.
A completely successful emission fee charge would:
- A.
Shift the private MC curve until the curve intersects with price at zero output and pollution is completely eliminated.
- B.
Shift the private MC curve to the same position as the social MC curve.
- C.
Shift the social MC curve to the same position as the private MC curve.
- D.
Not shift either the private or social MC curve.
Correct Answer
B. Shift the private MC curve to the same position as the social MC curve.Explanation
A completely successful emission fee charge would shift the private MC curve to the same position as the social MC curve. This means that the cost to the polluter for emitting pollutants would be equal to the social cost imposed on society. By aligning these two curves, the emission fee charge would internalize the external costs of pollution and incentivize the polluter to reduce emissions to the socially optimal level. This would result in a more efficient allocation of resources and a reduction in pollution.Rate this question:
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- 17.
The primary purpose of tradable pollution permits is to:
- A.
Reduce the level of pollution to optimal levels
- B.
Reduce the cost of pollution control.
- C.
Eliminate private costs.
- D.
Completely eliminate pollution.
Correct Answer
B. Reduce the cost of pollution control.Explanation
Tradable pollution permits aim to reduce the cost of pollution control. By allowing companies to buy and sell permits, they can choose to either reduce their own pollution levels or purchase permits from other companies who have reduced their pollution levels. This system provides an incentive for companies to find cost-effective ways to control pollution, as they can sell any unused permits for profit. As a result, the overall cost of pollution control is reduced while still achieving a decrease in pollution levels. It does not aim to completely eliminate pollution or eliminate private costs.Rate this question:
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- 18.
Which of the following is true about marketable pollution permits?
- A.
They are auctioned at the Chicago Board of Trade.
- B.
They were first used as an incentive to reduce pollution in 1992.
- C.
They reduce the average cost of pollution control.
- D.
All of the above.
Correct Answer
D. All of the above.Explanation
Marketable pollution permits are true in that they are auctioned at the Chicago Board of Trade. They were also first used as an incentive to reduce pollution in 1992. Additionally, they have the benefit of reducing the average cost of pollution control. Therefore, all of the statements provided are true about marketable pollution permits.Rate this question:
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- 19.
The command-and-control strategy for pollution reduction refers to:
- A.
Material recycling.
- B.
Standards on the methods used to reduce pollution.
- C.
The use of tradable permits.
- D.
Gradual development of standards through close monitoring of environmental changes.
Correct Answer
B. Standards on the methods used to reduce pollution.Explanation
The command-and-control strategy for pollution reduction refers to the implementation of specific standards and regulations on the methods used to reduce pollution. This approach involves setting strict guidelines and requirements that industries and individuals must follow in order to reduce their pollution emissions. It is a top-down approach where the government or regulatory authority dictates the specific methods and technologies that must be used to achieve pollution reduction. This strategy aims to ensure compliance and enforceability by providing clear guidelines and penalties for non-compliance. Material recycling, the use of tradable permits, and the gradual development of standards through close monitoring of environmental changes are not specifically related to the command-and-control strategy for pollution reduction.Rate this question:
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- 20.
Individual farmers cannot influence market prices because:
- A.
They are price makers.
- B.
They face downward-sloping demand curves for the firm.
- C.
They have no market power.
- D.
All of the above.
Correct Answer
C. They have no market power.Explanation
Individual farmers cannot influence market prices because they have no market power. Market power refers to the ability of a firm or individual to affect the price or quantity of a product in the market. In this case, farmers are price takers, meaning they must accept the prevailing market price for their products. They do not have the ability to set or influence prices due to the large number of farmers in the market and the homogeneous nature of agricultural products. Therefore, the correct answer is that individual farmers have no market power.Rate this question:
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- 21.
Individual farmers maximize profit by producing the level of output where:
- A.
Marginal cost equals average cost
- B.
Marginal cost equals price.
- C.
Marginal cost equals zero.
- D.
Average cost equals zero.
Correct Answer
B. Marginal cost equals price.Explanation
Individual farmers maximize profit by producing the level of output where marginal cost equals price. This means that the additional cost of producing one more unit of output is equal to the price at which they can sell that unit. At this level of output, the farmer is able to maximize their profit because any additional units would cost more to produce than they would generate in revenue.Rate this question:
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- 22.
Given the typical price elasticity of demand for food, a more abundant harvest than usual should, ceteris paribus, lead to:
- A.
Lower prices but higher total revenues
- B.
Lower prices and lower total revenues
- C.
Higher prices but lower total revenues.
- D.
Higher prices and higher total revenues.
Correct Answer
B. Lower prices and lower total revenuesExplanation
A more abundant harvest than usual would result in a higher supply of food in the market. According to the law of supply and demand, an increase in supply would lead to a decrease in prices. As a result, lower prices would be expected. Additionally, since the demand for food is typically inelastic (not highly responsive to price changes), the decrease in prices may not significantly increase the quantity demanded. Therefore, total revenues may decrease as a result of lower prices and relatively stable demand.Rate this question:
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- 23.
Response lags:
- A.
Reduce short-term price instability.
- B.
Increase short-term price instability.
- C.
Slow the long-tern downward trend in farm prices
- D.
Increase the long-tern downward trend in farm prices.
Correct Answer
B. Increase short-term price instability.Explanation
Increasing short-term price instability means that prices for farm products will fluctuate more frequently and by larger amounts in the short term. This can have negative effects on farmers as it makes it difficult for them to plan and make decisions about their production and investment. It can also lead to market uncertainty and volatility, which can be detrimental to both producers and consumers. Overall, increasing short-term price instability is not desirable for the agricultural industry.Rate this question:
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- 24.
Farm price-support programs most often take the form of price:
- A.
Ceilings which cause shortages.
- B.
Ceilings which cause surpluses
- C.
Floors which cause shortages
- D.
Floors which cause surpluses.
Correct Answer
D. Floors which cause surpluses.Explanation
Farm price-support programs typically involve setting a minimum price, or a floor, for agricultural products. This floor price is usually higher than the market equilibrium price, which leads to an oversupply of agricultural goods. As a result, there is a surplus of these products, as farmers are incentivized to produce more due to the guaranteed minimum price. Therefore, the correct answer is "Floors which cause surpluses."Rate this question:
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- 25.
The result of maintaining above-equilibrium market prices for agricultural products is:
- A.
Shortages of agricultural products
- B.
More resources devoted to agriculture than is optimal.
- C.
Redistribution of income from farmers to consumers.
- D.
All of the above.
Correct Answer
B. More resources devoted to agriculture than is optimal.Explanation
Maintaining above-equilibrium market prices for agricultural products leads to more resources being devoted to agriculture than is optimal. When prices are artificially inflated, farmers are incentivized to produce more, leading to an overallocation of resources towards agriculture. This can result in inefficiencies in resource allocation and potentially harm other sectors of the economy.Rate this question:
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- 26.
The impact of price supports is to:
- A.
Raise the market price.
- B.
Shift the demand curve facing each farmer upward.
- C.
Increase the output of farmers.
- D.
All of the above.
Correct Answer
D. All of the above.Explanation
Price supports are policies implemented by the government to maintain a minimum price for certain goods or services. These supports aim to raise the market price by ensuring that it does not fall below a certain level. By doing so, they provide economic stability to farmers and encourage them to increase their output. Additionally, when the market price is raised, the demand curve facing each farmer shifts upward as consumers are willing to pay more for the goods. Therefore, all of the given options - raising the market price, shifting the demand curve facing each farmer upward, and increasing the output of farmers - are correct explanations of the impact of price supports.Rate this question:
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- 27.
Supply restrictions in the farming industry occur in the form of:
- A.
Acreage set-asides.
- B.
Marketing orders.
- C.
Import quotas.
- D.
All of the above.
Correct Answer
D. All of the above.Explanation
Supply restrictions in the farming industry can occur in different forms. Acreage set-asides refer to the practice of farmers being required to leave a certain percentage of their land uncultivated in order to control supply. Marketing orders involve regulations that dictate how certain agricultural products can be marketed and sold. Import quotas, on the other hand, limit the amount of agricultural products that can be imported into a country. Therefore, all of the options mentioned (acreage set-asides, marketing orders, import quotas) are correct explanations of supply restrictions in the farming industry.Rate this question:
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