Economics Government Policies

Topics: Economics, Externality, Regulation Pages: 3 (685 words) Published: September 12, 2013
MT445- 02: Managerial Economics
Unit 7 Project
Professor Hernan Verlarde

Chapter 15

2. (Government Regulation) What three types of government policies are used to alter or control firm behavior?

Determine which type of regulation is used for each of the following:

a. Preventing a merger that the government believes would lessen competition

b. The activities of the Food and Drug Administration

c. Regulation of fares charged by a municipal bus company

d. Occupational safety and health regulations that affect working conditions

Answer

There are three types of government regulations used to alter or control firm behavior. Social regulation aimed at improving health and safety. Economic regulation of a natural monopoly and antitrust policy used to prevent a monopoly and foster competition.

a. Antitrust policy

b. Social regulation

c. Economic Regulation

d. Social regulation

10. (Regulating Natural Monopolies) The following graph represents a natural monopoly.

a. Why is this firm considered a natural monopoly?

b. If the firm is unregulated, what price and output would maximize its profit? What would be its profit or loss?

c. If a regulatory commission establishes a price with the goal of achieving allocative efficiency, what would be the price and output? What would be the firm’s profit or loss?

d. If a regulatory commission establishes a price with the goal of allowing the firm a “fair return,” what would be the price and output? What would be the firm’s profit or loss?

e. Which one of the prices in parts b, c, and d maximizes consumer surplus? What problem, if any, occurs at this price?

Answer

a.) It is considered a natural monopoly due to the long-run average cost curve that slopes downward over the range of market demand. b.) The profit is maximized at point i where the log range average cost intersects with demand. The profit would be the area of b:e and i:j c.) The price is h and the...
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