What is the pricing rule that achieves an efficient outcome for a regulated monopoly? What is the problem with this rule?
What will be an ideal response?
Regulating the actions of a natural monopoly to achieve an efficient outcome implies setting the level of output at the quantity where MB = MC, and the monopoly must set its price equal to marginal cost. This type of regulation is called the marginal cost pricing rule. A marginal cost pricing rule maximizes total surplus. However, when the monopoly price equals marginal cost, average total cost exceeds price and the monopoly incurs an economic loss. A monopoly that is required to use a marginal cost pricing rule will not stay in business because it is not covering its costs. Two possible ways of enabling the firm to cover its costs are by price discrimination and by using a two-part price (called a two-part tariff). The government might also grant the firm a subsidy. But this subsidy must be raised through imposing taxes on other economic activity, which creates deadweight loss and prevents efficient resource allocation in the markets affected by the tax.
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If the government wishes to promote a higher rate of growth of real GDP, a supply-side economist would argue the appropriate policy is
A) engaging in expansionary fiscal policy by lowering marginal tax rates. B) engaging in expansionary fiscal policy of increasing government spending. C) lowering marginal tax rates on people and raising them on corporations. D) leaving the economy alone and letting the natural forces bring it into a long-run equilibrium.
When the supply and demand of currencies in the foreign exchange market determines their relative values, this is known as
A. fixed exchange rates. B. flexible exchange rates. C. appreciation. D. depreciation.
Keynes argued that during an economic downturn, the government should ________.
A. increase spending and increase taxes B. increase spending and reduce taxes C. decrease spending and reduce taxes D. do nothing and wait for the economy to recover on its own
What are the primary determinants of agricultural labor productivity?
What will be an ideal response?