Page 801 - Krugmans Economics for AP Text Book_Neat

2. The FYI in this module discusses the possibility that regulators would choose average cost pricing over marginal cost
set prices for wind energy on the basis of average total cost. pricing in the market for wind energy.
Explain why policymakers who don’t want to pay subsidies

Tackle the Test: Multiple-Choice Questions
1. The Sherman Antitrust Act of 1890 sought to do which of the For questions 4 and 5, refer to the graph provided.
following?
Price,
a. break up existing monopolies
cost per
b. prevent the creation of new monopolies unit Section 14 Market Failure and the Role of Government
c. stop monopoly behavior engaged in by trusts
d. respond to the increasing power of trusts in the economy P 1
e. all of the above P 2
2. A natural monopoly exists when, over the relevant range,
P
increasing the output level results in a lower 3 ATC
P 4
a. total cost. P 5 MC
b. average total cost.
c. average variable cost. MR D
d. average fixed cost. Q 1 Q 2 Q 3 Q 4 Quantity
e. marginal cost.
4. Without government intervention, a monopolist will
3. Which of the following is the most common policy approach to
produce and charge .
a natural monopoly?
a. Q 3 , P 3
a. public ownership
b. Q 2 , P 4
b. price regulation
c. Q 2 , P 1
c. quantity regulation
d. Q 1 , P 3
d. quality regulation
e. Q 1 , P 2
e. a breakup of the monopoly into smaller firms
5. The lowest regulated price the government could expect this
monopolist to maintain in the long run is
a. P 1 .
b. P 2 .
c. P 3 .
d. P 4 .
e. P 5 .

Tackle the Test: Free-Response Questions
1. a. Draw a correctly labeled graph showing a natural monopoly. c. On the same graph, label the lowest price that regulators
On your graph, label the price and quantity the monopoly could expect the monopoly to maintain in the long run as
will choose if unregulated as P U and Q U . P R and the resulting quantity as Q R .
b. On the same graph, shade in and label consumer surplus d. What happens to the size of consumer surplus when the
and the firm’s profit in the absence of regulation. firm is required to charge P R rather than P U ? What happens
to the firm’s profit?

module 77 Public Policy to Promote Competition 759