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Micromania’s City Council has been discussing policy options regarding the local taxi

  Micromania’s City Council has been discussing policy options regarding the local taxi
                            company.  Citizens have complained that it is a natural monopoly and that its fees are
                            inappropriate.  Which of the following would allow the company to stay in business
                            while guaranteeing a “reasonable” taxi price for citizens?

a.average cost pricing

b.marginal cost pricing

c.laissez-faire pricing

d.countervailing pricing

e.contestable pricing

2.              Which of the following is not consistent with a goal of reducing the power of firms in the

a.shortening patent life

b.creative destruction theory

c.countervailing power theory

d.Schumpeter’s economies of scale argument

e.antitrust policy

3.              A contestable market is one in which prices are moderated by the

a.need to build an empire

b.desire to maximize output

c.noncompetitive nature of the market

d.threat of potential entry

e.regulations imposed by government

4.              The reason that antitrust laws exist and are enforced is because most economists and
                            politicians believe that

a.every industry should be perfectly competitive

b.monopolies do not maximize shareholder value in the long run

c.the price and quantity combinations delivered in a perfectly competitive market are
both socially desirable and most efficient

d.monopolies use their market power to create economies of scale

e.small firms are the backbone of American society

5.              The consensus among economists who consider monopoly and oligopoly to be both
                            inevitable and undesirable is, when confronted with a monopolized industry, to

a.look the other way

b.allow government regulation of the industry

c.withhold patent privileges

d.engage in a laissez-faire strategy

e.purchase controlling stock in the monopoly

6.              Those economists who do not believe there is anything inherently wrong with
                            monopolies advocate a policy of


b.marginal cost pricing


d.patent control


7.              Governments often choose to regulate monopolies, rather than break them up into
                            smaller firms, because monopolies often are

a.entitled to economic profits

b.very big and politically powerful

c.more efficient producers

d.providing useful goods and services that would not otherwise be provided

e.heavily subsidized

8.              Some economists who consider monopoly to be both inevitable and bad are inclined
                            toward a policy of ___________ if regulation of the monopoly seems ineffectual.

a.contestable market

b.price controls

c.countervailing power

d.creative destruction


9.              Arguments in favor of a laissez-faire policy concerning government’s role in the
                            economy include the

a.need for price controls

b.possibility of creative destruction

c.gains from trade

d.contestable nature of markets

e.lack of countervailing power among the economic blocs in the economy

10.              Paul and Maggie advertise for a babysitter. Jenny is the only one who answers the ad and
                            she’s hired. She asks for $7 per hour and gets it. She occasionally thinks of raising the
                            rate to $10 but is afraid that Paul and Maggie will decide to advertise again. This tale is
                            analogous to

a.monopolistic competitive pricing

b.the idea of nationalization

c.contestable markets


e.creative destruction

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