Explain the difference between price cap regulation in a natural monopoly and the effect of a price ceiling in a competitive market
What will be an ideal response?
In regulating a natural monopoly, a price cap regulation is a price ceiling in which a rule specifies the highest price that the firm is allowed to charge. A price cap lowers the price and increases output. This type of regulation gives a firm an incentive to operate efficiently and to keep its costs under control. In a competitive market, a price ceiling establishes the highest price that all firms in the market are allowed to charge. But the major issue is that in a competitive market, the competitive equilibrium already is efficient. And, to be effective, the price ceiling needs to be below the market equilibrium price. A shortage of the good occurs because firms are willing to supply less output than they would produce in the absence of the price ceiling. As a result, inefficiency is created.
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If the AVC is $12, the AFC is $4, the AR is $20, and output is 6,000 units, the total profit is
a. $72,000. b. $48,000. c. $24,000. d. negative $96,000.
According to Keynes, why might deflation create problems for an economy?
A. People would drop out of unions because unions would become ineffective at keeping wages of members high. B. Consumers might expect prices to fall further and cut back consumption now. C. In expectation of increased spending, too many entrepreneurs would begin businesses and most would fail. D. Producers might increase production to take advantage of falling input prices.
Which one of the following is not an automatic stabilizer?
A. Unemployment compensation B. Personal savings C. Personal income and Social Security taxes D. Public works programs
One difference between the short run and the long run is that perfectly competitive firms:
A. always earn positive economic profit in the short run, but never in the long run. B. can earn positive, negative, or zero economic profit in the short run, but will earn zero economic profit in the long run. C. earn zero economic profit in the short run, but will earn positive economic profit in the long run. D. always earn more economic profit in the long run.