Explain the difference between price cap regulation in a natural monopoly and the effect of a price ceiling in a competitive market
What will be an ideal response?
In regulating a natural monopoly, a price cap regulation is a price ceiling in which a rule specifies the highest price that the firm is allowed to charge. A price cap lowers the price and increases output. This type of regulation gives a firm an incentive to operate efficiently and to keep its costs under control. In a competitive market, a price ceiling establishes the highest price that all firms in the market are allowed to charge. But the major issue is that in a competitive market, the competitive equilibrium already is efficient. And, to be effective, the price ceiling needs to be below the market equilibrium price. A shortage of the good occurs because firms are willing to supply less output than they would produce in the absence of the price ceiling. As a result, inefficiency is created.
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The fiscal and monetary policy alternative to fine-tuning is
A) abandonment of both fiscal and monetary policy. B) abandonment of fiscal policy in favor of exclusive reliance on monetary policy. C) budgets established for the long term and a steady growth rate for the money stock. D) price and wage controls. E) redistribution of income in favor of those with a higher propensity to spend.
Changing the units of measurement, e.g. measuring testscores in 100s, will do all of the following EXCEPT for changing the
A) residuals B) numerical value of the slope estimate C) interpretation of the effect that a change in X has on the change in Y D) numerical value of the intercept