SOLVED

21) Refer to Figure 10-9. If the government regulates Erickson Power Company so that the firm can earn a normal profit, the price would be set at ________ and the output level is ________. A) P1, Q4 B) P2, Q3 C) P2, Q2 D) P3, Q2 22) Refer to Figure 10-9. What is the economically efficient output level and what is the price at that level? A) Q4, P1 B) Q3, P2 C) Q2, P2 D) Q2, P3 23) Refer to Figure 10-9. Why won’t regulators require that Erickson Power produce the economically efficient output level? A) because there is insufficient demand at that output level B) because at the economically efficient output level, the marginal cost of producing the last unit sold exceeds the consumers’ marginal value for that last unit C) because Erickson Power will earn zero profit D) because Erickson Power will sustain persistent losses and will not continue in business in the long run. 24) Economic efficiency requires that a natural monopoly’s price be A) equal to average total cost where it intersects the demand curve. B) equal to marginal cost where it intersects the demand curve. C) equal to average variable cost where it intersects the demand curve. D) equal to the lowest price the firm can charge and still make a normal profit. 25) In regulating a natural monopoly, the price strategy that ensures the highest possible output and zero profit is one that sets price A) equal to average total cost where it intersects the demand curve. B) equal to marginal cost where it intersects the demand curve. C) equal to average variable cost where it intersects the demand curve. D) corresponding to the demand curve where marginal revenue equals zero. 26) Refer to Figure 10-7. Following the entry of Verizon, the subscription price falls from PM to PC. What is the increase in consumer surplus as a result of this change? A) the area A + B + C B) the area B + C C) the area D + F D) the area B + C + D 27) Refer to Figure 10-7. What is the size of the deadweight loss prior to Verizon entering the market and what happens to this deadweight loss after Verizon does enter the market? A) The deadweight loss of area D is converted to consumer surplus. B) The deadweight loss of area C+D is converted to consumer surplus C) The deadweight loss of area D is converted to producer surplus. D) The total deadweight loss is the area D+F; D is converted to consumer surplus and F to producer surplus. 28) A product’s price approaches its marginal cost as market concentration increases. 29) A vertical merger is one that takes place between two companies producing different goods or services for one specific finished product. 30) Holding everything else constant, government approval of horizontal mergers is more likely to be granted if the “market” that firms are in are broadly defined rather than narrowly defined.