Question

4. If cost-plus regulation is used to regulate a natural monopolist, then the monopolist is likely to

		a. cease production unless the government provides a subsidy.
		b. reduce costs through improved efficiency.
		c. reduce costs through reductions in quality.
		d. Inflate costs to increase maximum allowable profits.

5. Forcing a natural monopoly to provide a minimum amount of a good or service would likely cause the firm to

a. cease production unless the government provides a subsidy.

b. reduce costs through improved efficiency.

c. reduce costs through reductions in quality

d. Inflate costs to increase maximum allowable profits.

6. Regulation is appropriate if

a. market failure exists

b. market failure exists and the benefit of regulation outweighs the cost

c. the regulation improves total utility

d. regulation is costless

Answer 1

4. d. Inflate costs to increase maximum allowable profits.
(The monopolist will increase costs to increase the maximum profits it can make.)

5. c. reduce costs through reductions in quality
(When a monopolist is forced to provide a minimum amount then he will reduce costs by reducing the quality.)

6. b. market failure exists and the benefit of regulation outweighs the cost
(Regulation is appropriate under the existence of market failure and its benefits must outweigh its costs.)