Question

1. Suppose that a government regulator responsible for natural monopolies sets prices equal to marginal costs. As a result, a regulated natural monopoly will earn ______________ and produce ______________.

A economic losses; the allocatively efficient amount of output

B no economic profits; the allocatively efficient amount of output

C economic losses; less than the allocatively efficient amount of output

D no economic profits; less than the allocatively efficient amount of output

2. An unregulated natural monopoly will produce ______________ allocative efficiency.

A too much for

B too little for

C an amount equal to an amount that results in

D either too much or too little for

3. In the short run, ______________ of a common good is produced for allocative efficiency. In the long run, ______________ of a common good is produced for allocative efficiency.

A too little; too much

B too much; too much

C too little; too little

D too much; too little

4. Suppose there is a hog farm that produces an unpleasant smell. A family decides to build a house next to the farm. If bargaining is costless and the family has the right to fresh air, what could happen?

A The farm pays the family to move

B The farm could pay the family to continue to produce the odor.

C The farm stops producing the odor.

D All of the above

Answer 1

1) Option A

• Economic losses; The allocatively efficient amount of output
• Suppose that a government regulator responsible for natural monopolies sets prices equal to marginal costs. As a result, a regulated natural monopoly will earn Economic losses and produce allocatively efficient amount of output
• At MC=P allocative efficient
• Thus firm produces efficient amount of output
• MC < ATC ====> P<ATC ====> There will be loss for firm

2) Option B :- Too little for

• An unregulated natural monopoly will produce too little for allocative efficiency.
• There will be too little allocative efficiency produced for unregulated monopoly

3) Option B :- too much; too much

• In the short run, too much of a common good is produced for allocative efficiency. In the long run, too much of a common good is produced for allocative efficiency.

4) Option D :- all of the above

• Here If bargaining is costless and the family has the right to fresh air,
  • The farm will pay the family to move out
  • The farm could pay the family to continue to produce the odor.
  • The farm stops producing odor

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