Question

If the correct amount of pollution is being produced now, which of the following is true?                The average cost of pollution:

a.  is exactly equal to the average cost of the pollution reduction.

b.  can be greater than, equal to, or less than the costs of pollution reduction.

c.  reduction is greater than the cost of the pollution at all levels of pollution.

d.  reduction is less than the cost of the pollution at all levels of pollution.

A public utilities regulator sets prices equal to average costs.  As a result, the regulated natural monopoly will produce ______________.

1. the allocatively efficient amount of output.
2. less than the allocatively efficient amount of output.
3. more than the allocatively efficient amount of output.
4. either the allocatively efficient amount of output or more than that amount.
5. either the allocatively efficient amount of output or less than that amount.

A perfectly competitive industry in long run equilibrium.  A decrease in the demand for its product will cause the market price in the long run to be _________ if the industry is decreasing cost industry rather than a constant cost industry and the market quantity to be ___________ in the decreasing cost industry than in the constant cost industry.

1. higher; lower
2. lower; higher
3. higher; higher
4. lower; lower
5. we cannot tell about changes in both prices and quantities.

Answer 1

1. ANswer: If it is called that the correct amount of pollution is produced. Then, we can say that the average cost of pollution reduction is less than or equal to the average cost of pollution. Thus answer will be (a) the average cost of pollution reduction is exactly equal to the average cost of pollution.

2. Answer: We know that a monopoly producer always produce less than the efficient level of output because he is the single producer for a commodity and he will charge a higher price to earn the supernormal profit. Under such Natural monopoly the allocatively efficient output will be that output which is produced at MC (Marginal Cost). Because, Pareto optimal condition established at that point where price is equal to MC and output produced at that point can be considered as Optimal output. If the Producer produced at Average cost then the output will just fulfill the demand. That output is the efficient output. Hence, if A public utility regulator sets price equal to the average costs. Then the monopoly producer will be compelled to produce the output at that AC level. Thus the answer will be (e) Either the allocatively efficient level of output or less than that.

3. Answer:

The answer for this question is

We cannot tell about the changes in both prices and quantities.