Chapter 27: Q.7 (page 621)
Do you think that the regulation described in Problem 27-6 is more likely an example of the capture hypothesis or the share-the-gains, share-the-pains theory? Why?
Consumer benefits must be considered by central authority, according to the share-the-gains, share-the-pains theory.
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Why do you suppose that the U.S. Transportation Department has been considering new regulations mandating that states construct parking facilities for trucks?
The table below depicts the cost and demand structure a natural monopoly faces.
a. Calculate total revenues, marginal revenue, and marginal cost at each output level. If this firm is allowed to operate as a monopolist, what will be the quantity produced and the price charged by the firm? What will be the amount of monopoly profit? [Hint: Recall that marginal revenue equals the change in total revenues from each additional unit and that marginal cost equals the change in total costs from each additional unit.]
b. If regulators require the firm to practice marginal cost pricing, what quantity will it produce, and what price will it charge? What is the firm's profit under this regulatory framework? [Hint: Recall that average total cost equals total cost divided by quantity and that profits equal .
c. If regulators require the firm to practice average cost pricing, what quantity will it produce, and what price will it charge? What is the firm's profit under this regulatory framework?
Consider panel (b) of Figure 27-2. The quantity Q1 is units, the price P1 is per unit, the average cost AC1 is per unit, and the vertical distance to point C is per unit. What is the dollar amount of the losses earned by this natural monopolist when its price is equal to its marginal cost of producing Q1 units?
An years past, firms around the world have secretly engaged in collusive agreements to restrain production and push prices above competitive levels.
Evidence compiled by government officials investigating such agreements has revealed that conspiring firms often utilize similar methods of establishing and enforcing collusive restraints of trade. Most agreements, for instance, assign to each firm an allowed market share, a permitted region of operations, or an approved set of customers. In addition, participating firms commonly are required to exchange sales information so that they can monitor adherence to their agreements to restrain trade. In this chapter, you will learn why firms that typically utilize these techniques to formulate and maintain collusive agreements engage in secret conspiracies: Such agreements are illegal under U.S. antitrust laws.
Recognize the practical difficulties in regulating the prices charged by natural monopolies
A firm that sells both Internet-security software and computer antivirus software will sell the antivirus software as a stand-alone product. It will only sell the Internet-security software to consumers in a combined package that also includes the antivirus software. What is this business practice called?
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