Describe the main problem with rate of return regulation and name an alternative regulatory scheme that has been devised to deal with that problem
What will be an ideal response?
The main problem with rate of return regulation is that a firm might be inclined to inflate its costs, because its price is set at a level that permits the firm to recoup all its costs. Therefore, the firm might incur unnecessary costs that serve the interests of its managers, such as lavish offices, company cars, travel, entertainment, etc. The alternative regulation scheme is price cap regulation. With price cap regulation, the regulating agency sets the maximum price the company can charge. The company is allowed to charge any price below the cap and can keep all (or some) of any economic profit it can make.
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Table 5.1National Income Accounts (dollar figures are in billions)Expenditures for consumer goods and services$4,565Exports$740Government purchases of goods and services$1,465Social Security taxes$510Net investment$225Indirect business taxes$520Imports$825Gross investment$865Corporate income taxes$185Personal income taxes$750Corporate retained earnings$45Net foreign factor income$20Government transfer payments to households$690Net interest payments to households$0On the basis of Table 5.1, gross domestic product is
A. $7,635 billion. B. $7,720 billion. C. $6,980 billion. D. $6,810 billion.
Antitrust laws are enforced by:
A. the Department of Commerce. B. the Federal Trade Commission. C. the Federal Reserve. D. the Department of Labor.