Question 1

Which of the following best describes productive efficiency for an industry?

Accepted Answer

When the industry produces a given level of output at the lowest possible cost, with marginal cost equated across all firms.

Question 2

Allocative efficiency in a market is achieved when:

Accepted Answer

Price equals marginal cost.

Question 3

Suppose a competitive market is in equilibrium at price $P^*$ and quantity $Q^*$. If output increases above $Q^*$, what happens to total surplus?

Accepted Answer

Total surplus decreases because the cost of producing extra units exceeds their value to consumers.

Question 4

A monopolist is productively efficient but not allocatively efficient because:

Accepted Answer

It produces at the lowest point on its LRAC curve but sets price greater than marginal cost.

Question 5

Which of the following is a real-world example of a natural monopoly?

Accepted Answer

A local water utility company.

Question 6

If a natural monopoly is regulated to set price equal to marginal cost, what is the likely outcome?

Accepted Answer

The monopoly will suffer losses.

Question 7

Which pricing policy allows a natural monopoly to cover its costs while promoting allocative efficiency?

Accepted Answer

Two-part tariff.

Question 8

Market failure due to externalities occurs when:

Accepted Answer

Market transactions impose costs or benefits on parties not involved in the transaction.

Question 9

Which of the following statements about perfect competition is correct?

Accepted Answer

In long-run equilibrium, each firm produces at the lowest point on its LRAC curve.

Question 10

Suppose the government wants to regulate a natural monopoly using average-cost pricing. What is the likely result?

Accepted Answer

The firm will break even, but price will exceed marginal cost, so allocative efficiency is not achieved.

Question 11

Which of the following is NOT a method for regulating a natural monopoly?

Accepted Answer

Price ceiling set above the monopoly price.

Question 12

Which of the following reforms was introduced in the 2009 amendment to the Canadian Competition Act?

Accepted Answer

Allowing the Competition Tribunal to assign monetary penalties to companies abusing a dominant position.

Question 13

Why is it difficult to determine if monopolistic competition and oligopoly are productively efficient at the industry level?

Accepted Answer

Because all firms sell differentiated products and there is no single industry-wide price.

Question 14

Which of the following best describes the deadweight loss from monopoly?

Accepted Answer

It is the loss of total surplus due to output being restricted below the competitive level.

Question 15

A competitive market is allocatively efficient because:

Accepted Answer

It maximizes the sum of consumer and producer surplus.

Question 16

Which of the following is an example of a market failure?

Accepted Answer

A factory pollutes a river, imposing costs on downstream residents.

Question 17

Which of the following is a challenge for Canadian competition policy in the context of globalization?

Accepted Answer

Defining markets on an international rather than a national basis.

Question 18

Suppose a government-owned firm supplies electricity in a city. In Canada, this type of firm is called:

Accepted Answer

A Crown corporation.

Question 19

If a firm is producing inside the production possibilities boundary, it is:

Accepted Answer

Productively inefficient.

Question 20

Which of the following is a key feature of competition policy?

Accepted Answer

Prohibiting the acquisition and exercise of monopoly power by business firms.

Chapter 12 - Efficiency and Public Policy: Chapter 12 Study Notes

Study Guide - Practice Questions