 |  Principles of Microeconomics, 1st Canadian Edition Robert H. Frank,
Cornell University
Ben S. Bernanke,
Princeton University
Lars Osberg,
Dalhousie University
Melvin Cross,
Dalhousie University
Brian MacLean,
Laurentian University
The Economics of Public Policy
Sample Exam Questions| 1. | Explain whether the following statements are true or false. Illustrate where indicated. Note: there are no marks for stating true or false; the marks are awarded for the explanation and the illustration only.
Using cost-plus regulation with privately held natural monopolies creates an incentive for the firm to minimize its costs. General physicians create their own demand.
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| | 2. | A natural monopoly will make negative profits if it uses marginal cost pricing, but will break even if it uses average cost pricing. Draw a graph of a natural monopoly showing why this statement is correct.
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| | 3. | Answer the following questions with respect to the following graph of a natural monopoly.
 <![CDATA[<a onClick="window.open('/olcweb/cgi/pluginpop.cgi?it=gif::::/sites/dl/free/0070889740/39505/ch14_sampleexam01_350_215.gif','popWin', 'width=366,height=231,resizable,scrollbars');" href="#"><img valign="absmiddle" height="16" width="16" border="0" src="/olcweb/styles/shared/linkicons/image.gif"> (50.0K)</a>]]>If this monopoly is unregulated, what price will it charge and what quantity will it sell? What will be its profits? If this monopoly is regulated using average cost pricing, what price will it charge and what quantity will it sell? What will be its profits? If this monopoly is regulated using marginal cost pricing, what price will it charge and what quantity will it sell? What will be its profits? Compare the economic surplus created in each of the situations above. Which kind of pricing is superior as far as society is concerned?
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