Question

1. Why would the government allow a monopoly to exist?

a. It always charges a lower price than a competitive firm.

b. It always more efficient than a competitive firm.

c. It may have economies of scale that allow it to produce at a lower cost than a smaller firm.

d. It always improves total social utility.

2. The average cost curve for a natural monopoly

a. falls as output increases.

b. rises as output increases.

c. stays the same as output increases.

d. is u-shaped.

3. At what point would the government need to subsidize a price-regulated monopoly in order to keep it from exiting the market in the long run?

		a. Price < AC
		b. Price < MC
		c. MR < MC
		d. ATC > MC

Answer 1

1. c. It may have economies of scale that allow it to produce at a lower cost than a smaller firm.
(Government allows monopolies to exist because they may produce at a lower cost than a smaller firm due to economies of scale.)

2. a. falls as output increases.
(The AC curve for a natural monopoly is downward sloping which shows AC falls with increase in output.)

3. a. Price < AC
(When P < AC in long run the monopolist will incur losses and thus exit so government will provide subsidy to it so that price it receives increases and it continues to operate.)