A function of government is to regulate "natural monopolies." Explain what is a natural monopoly and why it requires government regulation
What will be an ideal response?
Natural monopolies occur when there are large cost economies of scale such that one producer can operate in the declining range of average cost while meeting the entire market demand for a product. In these situations it is more economical to have only one producer of the product, since production costs will be lower and the product can be profitably sold at lower prices than if there were several or more producers. Thus, the economy would benefit from having only one producer, but this would permit the producer to earn monopoly profits from lack of competition. Therefore, government should permit only one producer but regulate its operations, including selling prices, so that it doesn't exploit its monopoly position.
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Appendix: In comparing rules for serving a queue, last-come first-served has all of the following effects except
a. reduces the waiting time b. causes few customers to arrive and depart more than once c. increases the side payments among those yet to be served d. hastens the adoption of a lottery system for deciding who should get the tickets
If a 25% change in price results in a 40% change in quantity supplied, then the price elasticity of supply is about
a. 0.63, and supply is elastic. b. 0.63, and supply is inelastic. c. 1.60, and supply is elastic. d. 1.60, and supply is inelastic.
According to one survey 76 percent of Americans said they were not saving enough for retirement. This example of inconsistency over time
a. is rational behavior. b. likely occurs because saving requires a sacrifice in the present for a reward in the distant future. c. likely occurs because Americans don't care about retirement. d. definitely would not happen if Americans earned a greater return on their investments.
According to new growth theory
A) physical capital is nonexcludable. B) knowledge capital is subject to increasing returns. C) knowledge capital is rival and excludable. D) knowledge capital is excludable.