Deck 14: Limiting Market Power: Antitrust and Regulation

Question 1

Monopoly pricing reduces consumer surplus.

Answer 1

True

Question 2

Firms that coordinate economic activities to reduce competition is considered illegal per se.

Answer 2

True

Question 3

It is easy to discern the difference between vigorous competition and the exercise of monopoly power.

Answer 3

False

Question 4

Google's 88 percent market share of web search services makes it a monopolist.

Question 5

From 1992 to 2012, many industries have increased in concentration.

Question 6

Firms with monopoly power tend to be more efficient than competitive firms.

Question 7

Microsoft has been accused of violating an antitrust law pertaining to bundling .

Question 8

The antitrust laws are enforced by government agencies such as the Federal Trade Commission and the Department of Justice.

Question 9

Increasing concentration always means an industry has become effectively monopolized.

Question 10

Selling at a price that is only slightly above the firm's cost of production is called predatory pricing .

Question 11

Antitrust laws prohibit undesirable business practices by firms holding monopoly power.

Question 12

The goal of all regulation is the creation of perfectly competitive markets.

Question 13

An exclusive supply contract is a contract between a firm and its input suppliers that requires the suppliers to sell only to that firm, not anyone else.

Question 14

Market power allows firms to raise prices significantly above the competitive level.

Question 15

The concentration ratio of an industry is a measure that captures the share of the industry's total output that is produced by its four largest firms.

Question 16

Highly concentrated markets have a large number of price-taking firms.

Question 17

All large firms have monopoly power.

Question 18

A concentration ratio provides a better assessment of market power than the Herfindahl-Hirschman index does.

Question 19

The government used the Herfindahl-Hirschman index to determine if a proposed merger will lead to excessive concentration.

Question 20

In a market with only one firm (a pure monopoly), the Herfindahl-Hirschman Index (HHI)would equal 10,000.

Question 21

Economies of scope are present when a bank also sells insurance and provides brokerage services for stocks and bonds.

Question 22

Powers of many regulatory agencies are designed to protect public health and safety.

Question 23

The antitrust laws are sometimes used by companies to reduce competition in their markets rather than enhance it.

Question 24

Economists believe mergers can sometimes achieve greater efficiency than two companies that do not merge.

Question 25

The Sherman Act was the first established antitrust law.

Question 26

The concept of economies of scope describes the savings acquired from simultaneous production of different products.

Question 27

Many regulated industries are not pure monopolies.

Question 28

Economies of scale and scope encourage free competition.

Question 29

By definition, an industry with high concentration also is highly competitive.

Question 30

Prices that maximize the public interest will always allow reasonable profits for firms.

Question 31

Universal service may require making a service available in small communities where the limited scale of operations may make costs extremely high.

Question 32

Many industries are regulated in the United States, from railroads and electric utilities to cable TV.

Question 33

The "universal service" argument often requires that some products be sold at a loss while other products be sold at profits higher than normal.

Question 34

Regulation of industry is usually carried out by special government agencies that administer and interpret the law.

Question 35

Cross-subsidization implies that a loss from one product's sales will be made up by the profit from another product's sales.

Question 36

Regulation began in the United States in the 1950s.

Question 37

The Department of Justice and the Federal Trade Commission enforce antitrust laws.

Question 38

Economies of scale tend to create natural monopolies.

Question 39

Universal service means that one company provides service to all consumers, everywhere.

Question 40

If an industry consists of five firms each with a 20 percent market share, then the Herfindahl-Hirschman index would equal 1,600.

Question 41

Deregulation has dramatically decreased airline safety.

Question 42

Service to consumers of deregulated products has generally not diminished.

Question 43

In regulated industries, the optimal regulation is to set price such that MC=P.

Question 44

If a firm is a natural monopoly, society will benefit if it is broken into several small companies.

Question 45

In most industries, deregulation has led to lower prices.

Question 46

Deregulation of the airline and trucking industries was followed by the creation of many new firms.

Question 47

Airline deregulation led to the demise of many smaller airlines but large carriers were not materially affected.

Question 48

Economists ordinarily favor setting price equal to marginal cost when this option is feasible.

Question 49

Firms violating antitrust laws are likely to be sued by the federal government, but not by rival firms.

Question 50

Unrestrained monopolies are criticized because they restrict output and reduce innovation.

Question 51

One economically valid approach to regulation is simply to break all large firms into many smaller ones.

Question 52

Serious concern for deregulation began to appear in Congress in the 1970s.

Question 53

Beginning in the mid-1970s, Congress deregulated several industries including airlines and trucking.

Question 54

Regulated industries that exhibit economies of scale and marginal cost pricing will lead to losses.

Question 55

Monopoly rights give inventors and entrepreneurs incentives to innovate and create new products and services.

Question 56

Bottlenecks may force competitors to offer services within the same network.

Question 57

Regulating firms so that they always receive a guaranteed profit rate will lead to greatest efficiency.

Question 58

Regulatory agencies always protect consumers by forcing regulated firms to sell at the lowest possible price.

Question 59

The most important advantages of bigness will be found in industries that show increasing returns to scale.

Question 60

Deregulation has led to higher prices.

Question 61

What does the Herfindahl-Hirschman Index value near zero imply about the market?

A)Monopoly
B)Perfect competition
C)Monopolistic competition
D)Oligopoly

Question 62

Which statement about market power is incorrect?

A)It can lead to price increases that exploit consumers.
B)It can lead to resource misallocation.
C)It can lead to inefficient production and the lack of innovation.
D)Monopoly power can lead to decreases in producer surplus.

Question 63

Policies that preclude the deliberate creation of monopoly and undesirable practices are called

A)antitrust policies.
B)antimonopoly policies.
C)anticompetitive policies.
D)socialism.

Question 64

Government agencies may fail to identify anticompetitive behavior if

A)competitors have been forced out of business due to inefficient production and the inability to keep prices low.
B)dominant firms raise prices to keep rivals competitive.
C)cartel members decide to disinherit a member firm.
D)Wall Street supports lower prices.

Question 65

The Clayton Act prohibits "all contracts, combinations and conspiracies in restraint of trade."

Question 66

The four-firm concentration ratio for an industry is

A)the number of firms in the industry, divided by four.
B)the share of industry output sold by the four largest firms in the industry.
C)the percentage of total industry profits claimed by the four largest firms.
D)the share of industry output sold by the fourth largest firm in the industry.

Question 67

Price discrimination by a firm is

A)illegal under all circumstances.
B)legal if the firm can show that the difference in the prices charged customers is justified by a difference in the costs of serving them.
C)legal if the firm can show that the demand for its good is relatively elastic.
D)legal under all circumstances.

Question 68

The share of industry output sold by the top four steel producers in the country are 19 percent, 15 percent, 12 percent, and 9 percent, respectively. The four-firm concentration ratio for the steel industry is

A)0.19.
B)0.55.
C)0.138.
D)0.65.

Question 69

____ occur(s)when an X percent increase in input use raises output by more than X percent, so that the more the firm produces, the lower its per-unit costs become.

A)Economies of scope
B)Scale economies
C)Product differentiation
D)Perfect competition

Question 70

Archer Daniels Midland (ADM)was convicted for this anticompetitive practice in the lysine market.

A)Price fixing
B)Predatory pricing
C)Bundling
D)Exclusive supply contracts

Question 71

If the automobile industry has become highly concentrated and cartelized. To maintain profits, firms may

A)allow newcomers to favorably enter the market.
B)become price takers.
C)prevent entry.
D)lower prices to raise revenues.

Question 72

Under a tying contract,

A)the price a buyer must pay for a good is tied to the size of his or her purchase.
B)a customer agrees as a condition of buying a good to purchase one or more additional goods from the same seller.
C)a firm agrees to allow members of its competitors' boards of directors to sit on its board.
D)a firm agrees to pay an intermediary for having arranged a business deal for the firm.

Question 73

Which of the following is a valid effect of monopoly power?

A)Desirable effects on the distribution of wealth
B)Efficient resource allocation
C)Fostering of innovation
D)Obstacle to efficiency

Question 74

The Herfindahl-Hirschman Index measures

A)concentration in the industry.
B)industrial average output.
C)economies of scale.
D)consumer confidence.

Question 75

Which of the following events would increase the four-firm concentration ratio in a milk industry with six firms?

A)The two largest milk producers merge.
B)The largest milk producer buys an ice cream-making plant.
C)The largest milk producer lures customers away from the second largest producer.
D)The four largest milk producers collusively fix prices.

Question 76

If the four-firm concentration ratio in an industry increases, the industry

A)must have become more competitive.
B)must have become a monopoly.
C)must have become less competitive, although not necessarily a monopoly.
D)may or may not have become less competitive.

Question 77

Which of the following acts prohibits directors of one company from sitting on the board of a competitor?

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

Question 78

Modern antitrust policy began in response to

A)abuses of market power in the oil industry.
B)the inability of railroads to compete effectively with the new trucking industry.
C)the charge that the rights of big business were not adequately protected.
D)attempts by business leaders to pack Congress with corrupt legislators.

Question 79

What is defined as the ability of a firm to earn high profits by raising and keeping the prices of its products substantially above the levels at which those products would be priced in competitive markets?

A)Economies of scope
B)Tacit collusion
C)Monopoly power
D)Perfect competition

Question 80

Major firms charged with predatory pricing defend by saying that their prices are low because of superior efficiency.