Question

True or false
1) Entry of new firms into a perfectly competitive market lowers the profits of the existing firms.
2) The airline and trucking industries are two examples of industries that were regulated because
they were natural monopolies.
3) One way that government can encourage the production of goods or services that have
external benefits is to subsidize the good or service.
4) Because of free riders, a private, unregulated market would not produce the efficient quantity
of a public good.

Answer 1

1)True, existing firm will earn higher profits for a while, whichattract new firms enter into market. New firm entering process will start lower profit of existing products because of homogenous product in market.

2)false,natural monopoly means is a type of monopoly that exists due to the very high start-up costs or fixed cost forconducting a business in a specific industry. Like pipelines for gas or water supply etc

3)True, Government provide grants and subsidies to producers of service and goods that generate external benefits will reduce production cost and also encourage more supply.

This encourage the supply of merit goods such as education healthcare, and social housing

4)True, a public good follow two features

1. Non-excludability – can’t stop You anyone from consuming good
2. Non-rivalry – benefiting from serviceor goods does not reduce the amount available to others.

According to policy starting 4 subpart is done

Answer 2

1)

Since the firm is perfectly competitive firm and profit-maximizing condition are

P=MC

There are large number of firms and buyers and there is free entry and exit. The firm is price taker and industry is price maker. So when more firms enter in the industry. Hence the supply increases and so the price decrease. Hence profit will also decrease.

Hence the statement is true.

2.

Since airline and trucking are not under the control of one person or organisation. Hence these are not the example of natural monopoly.

Hence the airline and trucking industries are two examples of industries that were regulated because they were natural monopolies.

Hence the given statement is false.

3)

Since subsidy decreases the cost of production and positive externality create benefits to many people. Hence there is one way that government can encourage the production of goods or services that have external benefits is to subsidize the good or service.

Hence the given statement is true.

4) Because of free riders, a private, unregulated market would not produce the efficient quantity of a public good.

Since private good is excludable and rival in nature and public good is non-rival and non-excludable in nature.

Hence due to free riders, a private, unregulated market would not produce the efficient quantity of a public good.

Hence the given statement is true.