Test IV Practice Problems

Test IV Practice Problems - Test IV Practice Problems Short...

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Test IV Practice Problems Short Answer 1. Describe how government is involved in creating a monopoly. Why might the government create one? Give an example. 2. What is the defining characteristic of a natural monopoly? Give an example of a natural monopoly. 3. In the market for "home heating" consumers typically have several options (e.g., electricity, heating fuel, nat- ural gas, propane, etc.) yet we often think of firms in this industry as behaving like monopolists. Using your understanding of monopoly, discuss the context in which your electricity provider is a monopolist. Is this characterization universally applicable? Carefully explain your answer. 4. There has been much discussion of deregulating electricity and natural gas delivery companies in the United States. Using your understanding of monopolies, discuss the likely effect of deregulation on prices in these two industries. 5. Explain how a profit-maximizing monopolist chooses its level of output and the price of its goods. 6. Graphically depict the deadweight loss caused by a monopoly. How is this similar to the deadweight loss from taxation? 7. What is the deadweight loss due to profit-maximizing monopoly pricing under the following conditions: The price charged for goods produced is $10. The intersection of the marginal revenue and marginal cost curves occurs where output is 100 units and marginal revenue is $5. The socially efficient level of production is 110 units. The demand curve is linear and downward sloping and the marginal cost curve is linear and upward sloping. 8. In many countries, the government chooses to "internalize" the monopoly by owning monopoly providers of goods and services. (In some cases these firms are "nationalized" and the government actually buys or confis- cates firms that operate in monopoly markets). What would be the advantages and disadvantages of such an approach to ensuring the "best interest of society" is promoted in these markets? Carefully explain your an- swer. 9. Let's assume that a monopolist decides to maximize revenue, rather than profit. How does this operating ob- jective change the size of the deadweight loss? If you are a "benevolent" manager of a monopoly firm and are interested in reducing the deadweight loss of monopoly, should you maximize profits or maximize revenue? Carefully explain your answer. 10. Why might economists prefer private ownership of monopolies over public ownership of monopolies? 11. One solution to the problems of marginal-cost pricing of a regulated monopolist is average cost pricing. In this model, the monopolist is allowed to price its production at average total cost. How does average-cost pri- cing differ from marginal-cost pricing? Does this solution maximize social well-being? 12.
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This note was uploaded on 05/01/2011 for the course ECON 2100 taught by Professor Darrinv.gulla during the Summer '08 term at Morehouse.

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Test IV Practice Problems - Test IV Practice Problems Short...

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