Question : 51) Rate of return regulation designed to allow a natural : 1241252

51) Rate of return regulation is designed to allow a natural monopoly to

A) make an economic profit.

B) make zero economic profit.

C) underestimate its average cost.

D) compete with any firm entering the market.

E) make zero normal profit.

52) When a regulatory agency uses rate of return regulation, the

A) agency is able to eliminate the deadweight loss.

B) firm’s managers have an incentive to inflate the firm’s costs.

C) regulated firm’s profit must be maximized for the market to be efficient.

D) regulated firm must receive a government subsidy.

E) the agency is using a form of marginal cost pricing.

53) Managers of a natural monopoly regulated using rate of return regulation have an incentive to

A) exaggerate the firm’s costs.

B) underestimate the firm’s costs.

C) minimize the monopoly’s deadweight loss.

D) make zero economic profit.

E) exaggerate the firm’s profit.

54) A natural monopoly

A) faces more competition after regulation.

B) might exaggerate its costs if it is regulated using rate of return regulation.

C) might falsely minimize its costs if it is regulated using rate of return regulation.

D) might falsely minimize its costs if it is regulated using a marginal cost pricing rule.

E) is allowed to maximize its profit under a marginal cost pricing rule.

55) One of the tendencies that is common among firms regulated using rate of return regulation is to

A) increase production to an inefficient level.

B) inflate the costs of production.

C) incur an economic loss.

D) understate the costs of production.

E) overstate their total revenue.

56) When regulated using rate of return regulation, who benefits from the practice of some natural monopolies to count sumptuous offices, free baseball tickets, golf excursions, and limousines as costs of production?

A) stockholders

B) managers of the monopoly

C) customers of the monopoly

D) regulators of the industry

E) None of the above answers is correct.

57) Price cap regulation is defined as regulation that

A) imposes a price ceiling on the regulated firm.

B) encourages firms to exaggerate costs to increase profits.

C) uses marginal cost pricing to ensure efficient output.

D) uses average cost pricing to ensure costs are covered.

E) is essentially the same as rate of return regulation.

58) Price cap regulation is regulation that

A) is a marginal cost pricing rule.

B) is an average cost pricing rule.

C) imposes a price ceiling on the regulated firm.

D) has the same incentive effects as does rate of return regulation.

E) is the same as allowing the firm to operate as if it was totally unregulated.

59) Price cap regulation

A) does not provide incentives to firms to minimize their costs because firms cannot change prices.

B) sets the maximum price these firms can charge.

C) gives firms the incentive to exaggerate their costs.

D) Both answers A and C are correct.

E) Both answers A and B are correct.

60) Price cap regulation involves

A) setting the monopoly’s price equal to its average total cost.

B) setting the monopoly’s price equal to its profit-maximizing price.

C) setting a maximum price the monopoly may charge.

D) assuming a natural monopoly will not charge a higher than profit-maximizing price.

E) setting the monopoly’s price equal to its marginal cost.