Tackle the Test: Free-Response Questions

1. Question

   
   

   1. Draw a correctly labeled graph showing a natural monopoly. On your graph, label the price and quantity the monopoly will choose if unregulated as P_U and Q_U.

      
      
   
   

   2. On the same graph, shade in and label consumer surplus and the firm’s profit in the absence of regulation.

      
      
   
   

   3. On the same graph, label the lowest price that regulators could expect the monopoly to maintain in the long run as P_R and the resulting quantity as Q_R.

      
      
   
   

   4. What happens to the size of consumer surplus when the firm is required to charge P_R rather than P_U? What happens to the firm’s profit?

      
      
   
   

   Rubric for FRQ 1 (10 points)

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   1 point: Correctly labeled axes (“Price, cost per unit” or “Dollars per unit” on the vertical axis, “Quantity” or “Q” on the horizontal axis)

   1 point: Downward-sloping ATC curve

   1 point: Downward-sloping MC curve below the ATC curve

   1 point: Unregulated quantity Q_U shown on the horizontal axis where MC = MR

   1 point: Unregulated price P_U found on a downward-sloping demand curve above Q_U and shown on the vertical axis

   1 point: Correct profit rectangle

   1 point: Consumer surplus triangle shown below the demand curve and above the price

   1 point: Regulated price and quantity P_R and Q_R shown on the appropriate axes, corresponding to where the demand curve crosses the average total cost curve

   1 point: Consumer surplus will increase

   1 point: Profit will decrease to zero

   Rubric for FRQ 1 (10 points)

   Page 769

   

   1 point: Correctly labeled axes (“Price, cost per unit” or “Dollars per unit” on the vertical axis, “Quantity” or “Q” on the horizontal axis)

   1 point: Downward-sloping ATC curve

   1 point: Downward-sloping MC curve below the ATC curve

   1 point: Unregulated quantity Q_U shown on the horizontal axis where MC = MR

   1 point: Unregulated price P_U found on a downward-sloping demand curve above Q_U and shown on the vertical axis

   1 point: Correct profit rectangle

   1 point: Consumer surplus triangle shown below the demand curve and above the price

   1 point: Regulated price and quantity P_R and Q_R shown on the appropriate axes, corresponding to where the demand curve crosses the average total cost curve

   1 point: Consumer surplus will increase

   1 point: Profit will decrease to zero

2. Question

   List and explain three different public policy approaches to monopoly. (6 points)

   Rubric for FRQ 2 (6 points)

   1 point: Antitrust policy

   1 point: Prohibit practices that create monopolies and break up existing monopolies.

   1 point: Public ownership

   1 point: Have the government operate the monopoly with the goal of efficiency rather than profit.

   1 point: Price regulation

   1 point: Restrict price to the lowest price that does not cause losses, which is the price at which the average total cost curve intersects the demand curve.