8 Econ questions 1 is open response need done in a word document. Over monopolistic industries.
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Professor C. Brown
Homework Assignment #4
This assignment is worth 20 points and is due on Thursday, May 2. Send as an email attachment
to firstname.lastname@example.org. Or, you can fax to 870-972-3417.
1. Answer the following questions based on the diagram above.
a. Does the diagram above describe a case of unsustainable natural monopoly?
b. Compute profits or losses under the marginal cost pricing option.
c. Write an equation describing a two-part tariff based on the assumption of three
hundred and fifty-two (352) customers. The two-part tariff will generate a
normal profit for Big Butte, assuming the fixed fee (F) is not exclusionary.
d. Based on the two-part tariff you derived in subpart (1) above, compute the
utility bill for a customer that used 300 kilowatt hours per month.
2. When will a firm decide to invest in research and development of a new innovation?
A. when the revenue share captured by the firm exceeds fixed costs
B. when the revenue share captured by the firm exceeds average fixed costs
C. when the revenue share captured by the firm less marginal costs exceeds fixed costs
D. when the revenue share captured by the firm less marginal costs exceeds average
3. Suppose a firm faces potential demand from two customer bases, H and L, with high and
low valuation of the firm’s product, respectively. If the product has network
externalities and all type H customers are currently purchasing the product, then the
price that can be charged to L consumers ________.
A. increases with the number of H consumers
B. decreases with the number of H consumers
C. is independent of the number of H consumers
D. cannot be determined because the price charged to H is not known
Antitrust authorities should pursue all cases in which firms price below marginal cost.
4. Which of the following statements most accurately describes the statement above?
A. This is necessarily true because the firm’s intent is to drive rivals and potential
entrants out of the market.
B. This is necessarily true because a firm that is pricing below marginal cost is engaging
in predatory pricing which is anticompetitive.
C. This is not necessarily true because the firm’s product may have network externalities
and it is only pricing in this manner to grow the customer base.
D. This is not necessarily true because the firm’s product may have network externalities
and it is only pricing in this manner because it is not currently the dominant firm in the
5. According to the Stigler/Peltzman theory of regulation, what is a key factor in
determining new regulation activities?
A. the amount of industry capture that has already taken place
B. the extent of existing regulation for which the industry must comply
C. the amount of political support that the legislator will receive from supporting the
D. the ratio of expended compliance costs paid by the industry annually to total industry
profit earned annually
6. Suppose the Environmental Protection Agency was led by a former lobbyist who, prior
to leading the EPA, mostly represented coal companies. Which theory of regulation
could this example validate?
A. capture theory
B. economic theory
C. iron triangle theory
D. normative analysis as a positive theory
A regional utility company has decreasing costs over all output ranges, and regulators have
passed a new rule that dictates the utility company must set a price equal to marginal cost.
7. Which of the following statements accurately describes the outcome of this policy?
A. Consumers will be made worse off due to an efficiency loss.
B. Consumers will be made better off because price is equal to marginal cost—the same
outcome as in perfect competition.
C. The firm will earn a normal profit in this market but will still be able to exercise
market power in the upstream wholesale power market.
D. The firm will be forced to take a loss equal or greater than its fixed costs, and if the
government subsidizes this loss, there will be a moral hazard problem.
8. Under which of the following conditions is a cost function said to be subadditive?
A. if the firm has economies of scale
B. if the firm has economies of scope
C. if the firm has network externalities
D. if the firm has vertically integrated with a supplier
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