Deck 26: Government and Product Markets: Antitrust and Regulation

Question 1

"Tying contracts" are

A) agreements between unions and businesses such that when a labor contract is signed, the union and the firm are bound by its terms.
B) selling to a retailer on the condition that the retailer not resell the product to another business.
C) selling to a retailer on the condition that the retailer not carry any rival products.
D) arrangements whereby the sale of one product is dependent on the purchase of some other product.

Answer 1

D

Question 2

The antitrust legislation that empowers the Federal Trade Commission to deal with false and deceptive acts or practices (such as false and deceptive advertising)is

A) the Clayton Act.
B) the Wheeler-Lea Act.
C) the Celler-Kefauver Antimerger Act.
D) the Robinson-Patman Act.
E) none of the above

Answer 2

B

Question 3

The antitrust legislation that declares illegal "unfair methods of competition in commerce" is

A) the Sherman Act.
B) the Clayton Act.
C) the Federal Trade Commission Act.
D) the Robinson-Patman Act.

Answer 3

C

Question 4

Antitrust law is legislation passed for the stated purpose of

A) reducing the profits of chain stores.
B) promoting U.S. banking practices in foreign countries.
C) controlling labor union practices in the states of New York, California, and Texas.
D) controlling monopoly power and preserving and promoting competition.
E) none of the above

Question 5

The Sherman Act of 1890 was passed with the intent of

A) establishing the Federal Trade Commission (FTC) to deal with "unfair methods of competition."
B) preventing monopolization and/or conspiracy in the restraint of trade.
C) spelling out the conditions under which mergers would be considered anti-competitive.
D) dealing with false and deceptive advertising.
E) declaring interlocking directorates illegal.

Question 6

The Robinson-Patman Act of 1936 prohibited

A) large retailers from selling at prices below those prices charged by small retailers.
B) large retailers from engaging in false and deceptive acts and practices.
C) suppliers from offering price discounts to large retailers unless they also offered discounts to all other retailers.
D) customers from seeking out the lowest-priced good from different retailers.
E) all of the above

Question 7

Which antitrust legislation made price discrimination illegal?

A) the Sherman Act
B) the Clayton Act
C) the Federal Trade Commission Act
D) the Robinson-Patman Act

Question 8

The Wheeler-Lea Act of 1938 empowered the Federal Trade Commission to

A) deal with anticompetitive mergers that occurred as a result of one company acquiring the physical assets of another company.
B) deal with false and deceptive advertising.
C) deal with unfair methods of competition and to determine which actions taken by businesses were too aggressive.
D) regulate the trucking and railroad industries.
E) decrease the failure rate of small businesses by protecting them from competition from large and growing chain stores.

Question 9

The Herfindahl index measures the

A) average market share of the firms in an industry.
B) total market share of the four largest domestic firms in an industry.
C) total market share of the four largest firms worldwide in an industry.
D) degree of concentration in an industry.
E) degree of competition among the four largest firms in an industry.

Question 10

The Robinson-Patman Act of 1936 was passed in an attempt to

A) strengthen unions' powers to deal with businesses during the Great Depression.
B) close the loophole that remained in the Clayton Act with respect to mergers.
C) decrease the failure rate of small businesses.
D) protect consumers from large retailers who were receiving price discounts from their suppliers but were not passing on the price savings to the consumers.
E) protect all U.S. businesses from foreign competition during the Great Depression.

Question 11

The Justice Department considers a Herfindahl index less than __________ to be representative of an unconcentrated (competitive)industry.

A) 1,000
B) 2,000
C) 1,500
D) 1,800

Question 12

An "interlocking directorate" is

A) an arrangement whereby the leaders of a union are also in the top management of the business with which the union is dealing.
B) selling to a retailer on the condition that the retailer not carry any rival products.
C) an arrangement whereby the sale of one product is dependent on the purchase of some other product.
D) an arrangement whereby the directors of one company sit on the board of directors of another company in the same industry.

Question 13

The antitrust act that says,"Every contract,combination in the form of trust or otherwise,or conspiracy,in restraint of trade or commerce among the several states,or with foreign nations,is hereby declared to be illegal" is the

A) Sherman Act.
B) Clayton Act.
C) Federal Trade Commission Act.
D) Robinson-Patman Act.

Question 14

Which of the following statements is false?

A) The way a market is defined can have much to say about whether a firm is viewed as a monopoly or not.
B) In 1945, a court ruled that Alcoa was a monopoly.
C) In the Dupont case in 1956, the market relevant to Dupont was ruled to be the cellophane market rather than the flexible wrapping materials market.
D) The government eventually dropped its 1969 suit against IBM.

Question 15

The Cellar-Kefauver Antimerger Act of 1950 was designed to

A) prevent one company from acquiring another company's stock if the acquisition reduces competition.
B) prevent one company from acquiring another company's physical assets if the acquisition reduces competition.
C) require that pending mergers be reported in advance to the Federal Trade Commission and the Justice Department.
D) prevent price discrimination, exclusive dealing, and tying contracts.
E) prevent interlocking directorates.

Question 16

The Federal Trade Commission Act of 1914 declared illegal

A) interlocking directorates.
B) anticompetitive mergers that occurred as a result of one company acquiring the physical assets of another company.
C) unfair or overly aggressive methods of competition.
D) price discounting of goods supplied to large sellers.

Question 17

A firm defending itself in an antitrust suit would prefer the market it operates in to be defined _____________,which ______________ the firm's market share compared to what it might be judged otherwise.

A) narrowly; raises
B) narrowly; lowers
C) broadly; raises
D) broadly; lowers

Question 18

Suppose an industry consists of five equal-sized firms.Two of the firms plan to merge.The merger ______________ raise anti-trust concerns at the Justice Department given that the Herfindahl index before the merger was _____________ and the merger would cause the Herfindahl index to rise by __________.

A) would; between 1,000 and 1,800; more than 100
B) would; greater than 1,800; more than 100
C) would not; less than 1,000; less than 300
D) would not; between 1,000 and 1,800; less than 100

Question 19

Which antitrust legislation was passed in an attempt to decrease the failure rate of small businesses by protecting them from competition from large and growing chain stores?

A) the Sherman Act.
B) the Clayton Act.
C) the Federal Trade Commission Act.
D) the Robinson-Patman Act.
E) none of the above

Question 20

"Exclusive dealing" is

A) a situation in which sellers provide only high-quality, name-brand goods.
B) selling to a retailer on the condition that the retailer not resell the product to another business.
C) selling to a retailer on the condition that the retailer not carry any rival products.
D) when a union's leadership deals only with the firm's managers and vice versa, so that individual workers cannot "cut their own deal."

Question 21

Natural monopoly exists when

A) one firm can supply the entire output demanded at lower cost than two or more firms can.
B) one firm can supply the entire output demanded at higher cost than two or more firms can.
C) one firm can supply the entire output demanded at the same cost as two or more firms.
D) one firm controls all of the rights to a scarce resource.

Question 22

What is the maximum value of the Herfindahl index?

A) 10
B) 100
C) 1,000
D) 10,000
E) There is no maximum value of the Herfindahl index.

Question 23

Exhibit 26-1

Refer to Exhibit 26-1.What price is charged if marginal-cost price regulation is imposed on the natural monopoly firm?

A) P1
B) P2
C) P3
D) a price below P2 and above P1

Question 24

Which of the following lends support to the capture theory of regulation?

A) Persons who have been in the industry will be asked to help regulate the industry.
B) There will be more people from the regulated industry at a regulatory hearing than people from the general public.
C) It is in the best interest of an industry that is being regulated to have its personnel develop social relationships with members of the regulatory agency.
D) all of the above

Question 25

One of the criticisms of average cost regulated pricing of a natural monopoly is that the firm

A) has no incentive to hold costs down.
B) must bear losses continually.
C) will retain positive economic profits.
D) produces more output than is resource-allocative efficient.

Question 26

What is the Herfindahl index of a monopoly?

A) 10
B) 100
C) 1,000
D) 10,000

Question 27

Which of the following is an example of government regulation of a natural monopoly distorting incentives?

A) A natural monopoly is held to average-cost pricing; therefore, it has little incentive to hold costs down.
B) A natural monopoly is protected from competitors; therefore, it is rude to its customers.
C) A natural monopoly is protected from competitors; therefore, it doesn't care much about the quality of the product it sells.
D) a and c
E) a, b, and c

Question 28

If average total costs for a natural monopoly are declining where they intersect the demand curve,and government regulators set the price equal to marginal cost,then the firm will

A) likely earn a profit.
B) likely break even.
C) likely suffer a loss.
D) surely go out of business.
E) There is not enough information to answer this question.

Question 29

Which of the following is usually considered a natural monopoly?

A) a major car manufacturer
B) a car stereo installer
C) overnight mail services
D) state universities
E) none of the above

Question 30

The Justice Department considers a Herfindahl index that is ____________________________ to be representative of a moderately concentrated industry.

A) less than 1,000
B) between 1,000 and 1,800
C) greater than 1,800
D) greater than 2,000

Question 31

The public interest theory of regulation holds that

A) regulators are seeking to do and will do through regulation what is in the best interest of the public.
B) over time, natural monopolies will wither away.
C) regulators are uninformed on specific matters that relate to regulation and therefore are often swayed by false information.
D) natural monopolies manipulate the public into buying particular products.

Question 32

Exhibit 26-1

Refer to Exhibit 26- 1.If average-cost pricing is imposed on the natural monopoly firm,what price is charged?

A) P1
B) P2
C) P3
D) any of the three prices

Question 33

Exhibit 26-1

Refer to Exhibit 26-1.Which of the following statements is false?

A) If marginal-cost pricing is imposed on the natural monopoly firm, the firm takes a loss.
B) If average-cost pricing is imposed on the natural monopoly firm, the firm earns zero economic profits.
C) If the natural monopoly firm produces Q3 units of output and charges P3 per unit, the firm earns zero economic profits.
D) a and b
E) a, b, and c

Question 34

Which of the following is not a realistic scenario faced by government regulators of a natural monopoly?

A) The monopolist may have an incentive to prevent the regulators from learning the true costs of production.
B) The monopolist may want to give the regulators information on the costs of production but may not have it to give.
C) The regulators may not care whether the monopolist gives them the true costs of production.
D) Any cost information that is given to the regulators may be outdated by the time the regulators act on it.
E) All of the above are realistic.

Question 35

If government regulators want a natural monopolist to earn only zero economic profits,then they will set a price

A) equal to average total cost (ATC).
B) equal to marginal cost.
C) such that marginal revenue equals marginal cost.
D) none of the above

Question 36

If government regulators guarantee that a natural monopoly will earn normal profits,then

A) the monopolist has little or no incentive to hold down its costs.
B) the monopolist has a sharp incentive to hold down its costs so as to increase profits.
C) the monopolist will probably try its best to maintain its costs at the current level.
D) it is impossible to determine the monopolist's incentives regarding costs before the firm actually incurs some changes in its costs.

Question 37

"Regulatory lag" refers to the period between the time when

A) the natural monopolist's costs change and the time the regulatory agency adjusts the monopolist's prices.
B) the natural monopolist changes its prices and the time when the regulatory agency rules on that change.
C) the regulatory agency decides to regulate a firm and the time it actually accomplishes the task.
D) a firm is initially regulated by an agency and the time the firm "captures" that agency.
E) the regulatory agency decides to deregulate a firm and the time it actually accomplishes the task.

Question 38

The Justice Department considers a Herfindahl index ____________________________ to be representative of a concentrated industry.

A) less than 1,000
B) between 1,000 and 1,800
C) greater than 1,800
D) greater than 10,000

Question 39

Which of the following is not a way that natural monopolies are regulated?

A) Government regulators determine the price of the product.
B) Government regulators determine an acceptable profit.
C) Government regulators determine an acceptable output.
D) Government regulators determine which patents the monopoly can retain.

Question 40

If government regulators guarantee a natural monopolist that it will earn normal profits,then the monopolist will

A) achieve resource-allocative efficiency.
B) charge a price above average total cost.
C) produce a quantity of output at which marginal revenue equals price.
D) none of the above

Question 41

Exhibit 26-2

Refer to Exhibit 26-2.The four-firm concentration ratio in Year 5 was

A) 90 percent.
B) 95 percent.
C) 70 percent.
D) 80 percent.
E) This cannot be determined from the given data.

Question 42

Exhibit 26-2

Refer to Exhibit 26-2.The four-firm concentration ratio in Year 2 was

A) 90 percent.
B) 95 percent.
C) 70 percent.
D) 100 percent.
E) This cannot be determined from the given data.

Question 43

Exhibit 26-2

Refer to Exhibit 26-2.The industry's Herfindahl index in Year 3 was

A) 3,250.
B) 2,250.
C) 2,000.
D) 5,250.
E) 1,250.

Question 44

Exhibit 26-2

Refer to Exhibit 26-2.The four-firm concentration ratio in Year 4 was

A) 95 percent.
B) 90 percent.
C) 80 percent.
D) 70 percent.
E) This cannot be determined from the given data.

Question 45

Exhibit 26-2

Refer to Exhibit 26-2.The four-firm concentration ratio in Year 3 was

A) 90 percent.
B) 95 percent.
C) 70 percent.
D) 100 percent.
E) This cannot be determined from the given data.

Question 46

Empirical research has shown that immediately upon deregulation of the airline industry,

A) airlines spent less time and money on aircraft maintenance.
B) airline safety decreased.
C) airline fares decreased.
D) all of the above

Question 47

The primary intent of antitrust legislation is to

A) ensure that product safety standards are met.
B) eliminate positive economic profits.
C) eliminate price discrimination.
D) control monopoly power and preserve and promote competition.
E) all of the above

Question 48

If there are six firms in an industry and the market shares of the firms are 30 percent,25 percent,20 percent,11 percent,10 percent and 4 percent,the Herfindahl index is

A) 2,162.
B) 2,046.
C) 8,600.
D) 10,000.
E) 86.

Question 49

Exhibit 26-2

Refer to Exhibit 26-2.The four-firm concentration ratio in Year 1 was

A) 90 percent.
B) 95 percent.
C) 70 percent.
D) 100 percent.
E) This cannot be determined from the given data.

Question 50

The Clayton Act of 1914

A) made conspiracy in the restraint of trade illegal.
B) made price discrimination, exclusive dealing, tying contracts, and the acquisition of competing companies' stock illegal when they "substantially lessen competition or tend to create a monopoly."
C) declared "unfair methods of competition in commerce" illegal.
D) attempted to decrease the failure rate of small businesses by protecting them from the competition of large and growing chain stores.
E) banned anticompetitive mergers that occurred as a result of one company acquiring the physical assets of another company.

Question 51

The Clayton Act of 1914

A) made interlocking directorates illegal.
B) set up the Federal Trade Commission (FTC) to deal with "unfair methods of competition."
C) made monopolization of trade a misdemeanor.
D) prohibited suppliers from offering special discounts to large chain stores without offering them to everyone else.
E) empowered the FTC to deal with false and deceptive acts or practices.

Question 52

Exhibit 26-2

Refer to Exhibit 26-2.The industry's Herfindahl index in Year 4 was

A) 2,000.
B) 2,050.
C) 2,150.
D) 3,150.
E) 1,000.

Question 53

The Herfindahl index is obtained by

A) adding the squares of the market shares of each firm in the industry.
B) adding the market shares of the largest four firms in the industry.
C) finding the difference between the squares of the market shares of each firm in the industry.
D) finding the difference between the market shares of each firm in the industry.
E) none of the above

Question 54

Exhibit 26-2

Refer to Exhibit 26-2.The industry's Herfindahl index in Year 5 was

A) 2,000.
B) 3,000.
C) 4,000.
D) 1,000.
E) 5,000.

Question 55

Exhibit 26-2

Refer to Exhibit 26-2.The industry's Herfindahl index in Year 2 was

A) 3,400.
B) 3,500.
C) 3,600.
D) 4,400.
E) 4,500.

Question 56

The Sherman Act of 1890

A) made interlocking directorates illegal.
B) set up the Federal Trade Commission (FTC) to deal with "unfair methods of competition."
C) made monopolization of trade a misdemeanor.
D) prohibited suppliers from offering special discounts to large chain stores without offering them to everyone else.
E) empowered the FTC to deal with false and deceptive acts or practices.

Question 57

The Sherman Act of 1890

A) made conspiracy in the restraint of trade illegal.
B) made price discrimination, exclusive dealing, tying contracts, and the acquisition of competing companies' stock illegal when they "substantially lessen competition or tend to create a monopoly."
C) declared "unfair methods of competition in commerce" illegal.
D) attempted to decrease the failure rate of small businesses by protecting them from the competition of large and growing chain stores.
E) banned anticompetitive mergers that occurred as a result of one company acquiring the physical assets of another company.

Question 58

Evidence pertaining to the airline industry suggests that

A) since the airlines have become deregulated, airline fares have increased steadily.
B) under regulation the airlines' fares were low, which indicates that the regulators were doing a good job setting prices.
C) airline fares are no higher and no lower than they were when the industry was regulated.
D) deregulation of the airline industry has brought significant price reductions.

Question 59

If there are five firms in an industry and the market shares of the firms are 35 percent,25 percent,20 percent,16 percent and 4 percent. The four-firm concentration ratio for this industry is __________________ percent and the Herfindahl Index is ________________.

A) 90; 3,300
B) 96; 2,506
C) 96; 2,522.
D) 86; 9,216
E) This cannot be determined from the data given.

Question 60

Exhibit 26-2

Refer to Exhibit 26-2.The industry's Herfindahl index in Year 1 was

A) 2,012.5.
B) 2,222.5.
C) 2,312.5.
D) 2,412.5.
E) 2,512.5.

Question 61

If natural monopolies are regulated to produce where there is resource-allocative efficiency,they produce where

A) price equals average total cost.
B) marginal revenue equals marginal cost.
C) price equals marginal cost.
D) marginal revenue equals average total cost.

Question 62

The Celler-Kefauver Antimerger Act of 1950

A) made interlocking directorates illegal.
B) banned anticompetitive mergers that occurred as a result of one company acquiring the physical assets of another company.
C) attempted to decrease the failure rate of small businesses by protecting them from the competition of large and growing chain stores.
D) both a and b
E) all of the above

Question 63

The Wheeler-Lea Act of 1938

A) made interlocking directorates illegal.
B) set up the Federal Trade Commission (FTC) to deal with "unfair methods of competition."
C) made monopolization of trade a misdemeanor.
D) prohibited suppliers from offering special discounts to large chain stores without offering them to everyone else.
E) empowered the FTC to deal with false and deceptive acts or practices.

Question 64

The Robinson-Patman Act of 1936

A) made conspiracy in the restraint of trade illegal.
B) made price discrimination, exclusive dealing, tying contracts, and the acquisition of competing companies' stock illegal when they "substantially lessen competition or tend to create a monopoly."
C) declared "unfair methods of competition in commerce" illegal.
D) attempted to decrease the failure rate of small businesses by protecting them from the competition of large and growing chain stores.
E) banned anticompetitive mergers that occurred as a result of one company acquiring the physical assets of another company.

Question 65

The public interest theory of regulation holds that

A) regulators are seeking to do and will do through regulation what is in the best interest of the public or society at large.
B) even though regulators seek to do what is in the best interest of the public at large, through regulation they end up doing what is in the best interest of the special interests of the industry that is being regulated.
C) even though regulators seek to do what is in the best interest of special interests of the industry that is being regulated, through regulation they end up doing what is in the best interest of the public at large.
D) regulators are seeking to do and will do through regulation what is in the best interest of the special interests of the industry that is being regulated.

Question 66

What is the Herfindahl index of an industry made up of four equal-sized firms?

A) 1,667
B) 2,500
C) 2,250
D) 125
E) This cannot be determined without further information.

Question 67

The natural monopolist might have an incentive to let costs increase under

A) price regulation.
B) profit regulation.
C) output regulation.
D) a and b

Question 68

The Federal Trade Commission Act of 1914

A) made interlocking directorates illegal.
B) set up the Federal Trade Commission (FTC) to deal with "unfair methods of competition."
C) made monopolization of trade a misdemeanor.
D) prohibited suppliers from offering special discounts to large chain stores without offering them to everyone else.
E) empowered the FTC to deal with false and deceptive acts or practices.

Question 69

The natural monopolist might have an incentive to go out of business under

A) price regulation.
B) profit regulation.
C) output regulation.
D) average-cost pricing.
E) b and d

Question 70

Which of the following was declared illegal by the Sherman Act of 1890?

A) a conspiracy in restraint of trade
B) price discrimination
C) tying contracts
D) interlocking directorates

Question 71

The capture theory of regulation holds that

A) regardless of the motive for the initial regulation and the establishment of the regulatory agency, eventually the special interests of the industry that is being regulated will be "captured" (controlled) by the regulatory agency.
B) regardless of the motive for the initial regulation and the establishment of the regulatory agency, eventually the regulatory agency will be "captured" (controlled) by the special interests of the industry that is being regulated.
C) whether or not the special interests of the industry that is being regulated will be "captured" (controlled) by the regulatory agency depends on the motive for the initial regulation and the establishment of the regulatory agency.
D) whether or not the regulatory agency will be "captured" (controlled) by the special interests of the industry depends on the motive for the initial regulation and the establishment of the regulatory agency.

Question 72

If natural monopolies are regulated to produce where there is a normal profit,they produce where

A) price equals average total cost.
B) marginal revenue equals marginal cost.
C) price equals marginal cost.
D) marginal revenue equals average total cost.

Question 73

The Herfindahl index

A) measures the degree of concentration in an industry.
B) is the square of the sum of the market shares of each firm in the industry.
C) is not subject to any of the criticisms of the concentration ratios.
D) a and b
E) all of the above

Question 74

The Robinson-Patman Act of 1936

A) made interlocking directorates illegal.
B) set up the Federal Trade Commission (FTC) to deal with "unfair methods of competition."
C) made monopolization of trade a misdemeanor.
D) prohibited suppliers from offering special discounts to large chain stores without offering them to everyone else.
E) empowered the FTC to deal with false and deceptive acts or practices.

Question 75

If an industry consists of 20 firms holding equal market shares,the Herfindahl index is

A) 500.
B) 400.
C) 1,800.
D) 2,500.
E) This cannot be determined without further information.

Question 76

The Federal Trade Commission Act of 1914

A) made conspiracy in the restraint of trade illegal.
B) made price discrimination, exclusive dealing, tying contracts, and the acquisition of competing companies' stock illegal when they "substantially lessen competition or tend to create a monopoly."
C) declared "unfair methods of competition in commerce" illegal.
D) attempted to decrease the failure rate of small businesses by protecting them from the competition of large and growing chain stores.
E) banned anticompetitive mergers that occurred as a result of one company acquiring the physical assets of another company.

Question 77

Exhibit 26-3

Refer to Exhibit 26-3.The four-firm concentration ratio for this industry is

A) 46 percent.
B) 49 percent.
C) 54 percent.
D) 696 percent.
E) This cannot be determined without further information.

Question 78

The natural monopolist might have an incentive to decrease cost under

A) price regulation.
B) profit regulation.
C) output regulation.
D) a and b

Question 79

What is the Herfindahl index of an industry made up of ten equal-sized firms?

A) 1,800
B) 10,000
C) 100
D) 1,000

Question 80

If the four-firm concentration ratio is 100 percent,this means that the

A) top four firms each hold 5 percent of the market share.
B) industry consists of no more than four firms.
C) top four firms necessarily each hold a 25 percent market share.
D) none of the above