What is the average cost pricing rule? Why is it not an efficient way of regulating monopoly?
What will be an ideal response?
An average cost pricing rule requires that the firm set its price equal to its average total cost and produce the quantity at which the LRAC curve intersects the demand curve. This pricing rule leads to an inefficient quantity of output. Allocative efficiency requires that the quantity produced be the amount for which the marginal social benefit, shown on the demand curve, equal marginal social cost, which is shown on the marginal cost curve. Efficiency requires that P = MC. When a natural monopoly is regulated using an average cost pricing rule, P = LRAC and at the quantity produced LRAC > MC. Combining these results shows that P > MC, which means that the firm is producing an inefficient amount of output.
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The figure above shows the relationship between distance sprinted and recovery time. The curve becomes steeper because as the distance sprinted increases,
A) the extra recovery time needed from sprinting another 100 yards increases. B) the extra recovery time needed from sprinting another 100 yards decreases. C) the recovery time increases. D) the recovery time decreases. E) the relationship between distance sprinted and recovery time becomes more inverse.
A lawyer quits his job at a top legal firm where he was making $100,000 per year. He was just informed that his late aunt has bequeathed to him $1 million in cash. He decides to use all of the money to open and run his own hardware store
Assume at the end of the first year of business that his accountant has informed him that he earned a $90,000 accounting profit. Why would an economist not be quite as impressed? Explain.
Market prices are
a. conveyors of information. b. determined by the interactions of supply and demand in voluntary exchange. c. indicators of the relative scarcity of resources and products. d. all of the above.
Holding other factors constant, if oil prices rise relative to the prices of other products, then the real wages of oil workers will ________ and employment of oil workers will ________.
A. decrease; not change B. decrease; increase C. increase; increase D. increase; decrease