Which of the following correctly completes the statement: \"according to standar

Question

Which of the following correctly completes the statement: "according to standard economic theory, the effect of a price control set by government below the unregulated price but above (or equal to) the average total cost for firms is to:

1: reduce quantity supplied in a competitive market, but increase quantity supplied in a natural monopoly market.

2: reduce quantity supplied in both a competitive market and in a natural monopoly market.

3: increase quantity supplied in both a competitive market and in a natural monopoly market.

Explanation / Answer

When the government sets a price ceiling for a good in a competitive market, the government is trying to make the good more affordable for consumers. A price ceiling will decrease the price from the equilibrium price, so the quantity produced by perfect competitors will increase.

On the other hand, an unregulated monopoly tends to raise price and reduce output, so the government intervenes. The government lowers the price from what the monopoly tends to set and encourages the monopoly to produce more output.

3) increase quantity supplied in both a competitive market and in a natural monopoly market.

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