King: Economics Chapter 12 Instructions Answer the following questions and then press 'Submit' to get your score. Question 1 Suppose a country uses its resources in a Pareto-efficient way. Which of the following statements is true? a) There might be inefficiency in production. b) There might be inefficiency in consumption. c) It might be possible to make one person better off without making another person worse off. d) There might be considerable inequality of income among the country's citizens. Question 2 Which of the following statements is the correct definition of market failure? a) It means that a market economy will fail to secure economic efficiency. b) It means that a market economy will fail to secure Pareto-efficiency. c) It means that a market economy will fail to secure productive efficiency. d) It means that a market economy will fail to secure technical efficiency. Question 3 Suppose a firm is economically efficient. The firm uses two inputs, capital and labour, for which it has the marginal products MPK and MPL and for which it faces the prices PK and PL. Which of the following statements is false? a) The firm must be producing its output at the lowest possible cost. b) The firm must be technically efficient. c) The firm must use its resources in a way which means that its MPK/MPL equals PK/PL. d) All firms which use the same types of capital and labour must face the same prices for them. Question 4 Which of the following statements about productive efficiency is true?X It means that an economy is producing at a point on its production possibility frontier.Y It will arise if all firms face the same prices for any inputs that are used by more than one firm, and if all firms are economically efficient. a) Both X and Y b) X only c) Y only d) Neither X nor Y Question 5 Which of the following statements about consumption inefficiency is true?X It could arise even if an economy is producing at a point on its production possibility frontier.Y It could arise even if all consumers face the same prices for each product. a) Both X and Y b) X only c) Y only d) Neither X nor Y Question 6 Suppose the firms in a perfectly competitive industry merge to form a monopoly. Which of the following would not occur? a) A rise in total consumer plus producer surplus. b) A rise in producer surplus. c) A deadweight loss. d) A fall in consumer surplus. Question 7 Suppose a profit-making unregulated natural monopoly is brought under the control of regulator who requires it in future to follow a marginal cost pricing rule. Which of the following statements is false? a) The monopoly would move from making a profit to making a loss. b) The monopoly would reduce its output. c) The monopoly would now set its output where its MC curve intersects its AR curve. d) The monopolist's price would now equal its marginal cost. Question 8 Suppose the regulator in question 7 now tells the natural monopoly to follow an average cost pricing rule rather than a marginal cost pricing rule. Which of the following statements is true? a) The monopoly would move from making a loss to making a profit. b) The monopoly would increase its output. c) The monopoly would now set its output where its AC curve intersects its AR curve. d) The monopoly's price would be below its marginal cost. Question 9 Suppose at various times, the regulator of a natural monopoly switches its rules as shown in the following four statements. Which switch might not result in the firm making a lower loss or more profit? a) A switch from a marginal cost pricing rule to a two-part tariff. b) A switch from an average cost pricing rule to rate of return regulation. c) A switch from rate of return regulation to revenue cap regulation. d) A switch from revenue cap regulation to price cap regulation. Question 10 Which of the following statements about competition policy is false? a) One function of the UK's Office of Fair Trading is to try and help consumers. b) The Competition Commission may consider firms with large shares of a local market as well as firms with large shares of the UK market. c) The European Commission is allowed to control state aid to firms in the EU. d) Deregulation means ending regulation.
