Deck 21: Understanding the Business Environment: the Economics of Regulation

Question 1

In parts of Eastern Europe,companies maintain special guards to protect payday funds,to help move products to market,and to enforce immediate payment for products sold to retailers.All of these features indicate:

A)that property rights are respected and transaction costs are low.
B)that property rights are weak and transaction costs are low.
C)that property rights are weak and transaction costs are high.
D)that property rights are respected and transaction costs are high

Answer 1

C

Question 2

Explain how Coase's theorem is implemented by the Environmental Protection Agency (EPA).

Answer 2

According to Ronald Coase,externalities can be mitigated by providing property rights to the agents.If the rights to pollution are given to industries,and if they are allowed to trade these rights,then those who need the rights will pay for them.This basic idea was implemented by the EPA.In 1995,it set a cap on the number of tons of sulfur dioxide allowed into the air.The government issued to the 110 dirtiest power plants tradable certificates that matched their share of the cap.If companies cut their emissions below their caps,they could sell the excess to other companies that had not made the necessary cuts.Total trading amounted to $3 billion in 2003 and reduced emissions 30% nationwide.

Question 3

Between 1971 and 1991,more than _________ federal lawsuits were filed.

A)10 million
B)6 million
C)3 million
D)4 million

Answer 3

D

Question 4

The case study in the chapter uses World Motors Corporation (WM).This company,headquartered in Atlanta,is faced with two major regulatory thrusts.One,emission standards,places WM at a competitive disadvantage as its major competitor has an efficient patented emission control device.The second,miles-per-gallon standards,finds WM in the same position as its competitors.Where would WM put its lobbying effort,assuming that conservation groups are currently lobbying strongly for higher emission standards?

Question 5

Most governments enforce patents,copyrights,and trademarks.While these are clear restrictions on free trade,it is believed that inventors and investors:

A)generally oppose these restrictions as they encourage monopolistic competition.
B)favor these restrictions since they promote inventive activities.
C)prefer high tax rates to patents.
D)prefer low prices to patents.

Question 6

Alternative Dispute Resolution (ADR)is used by many companies to:

A)eliminate the need for a court system.
B)solve problems associated with the distribution of public goods.
C)reduce government intervention in international trade.
D)reduce the high cost of commercial litigation.

Question 7

The transaction costs of writing and enforcing contracts are higher in:

A)countries with poorly enforced property rights.
B)countries with stringent trade restrictions.
C)all countries with good court systems.
D)countries without political risks of property confiscation.

Question 8

In some industries,pollution rights are sold from one company that does not need them to another that does.In recent years,conservation groups have purchased pollution rights so they cannot be exercised.Companies in need of pollution rights will find that:

A)the supply of pollution rights has increased.
B)the prices of pollution rights have fallen.
C)the relative costs of pollution control equipment has gone up.
D)the prices of pollution rights have gone up.

Question 9

In the 1980s,"voluntary restrictions" on automobile imports raised the prices of Japanese cars by $1,000,of European cars by $2,000,and of American cars by $500.During the period following these restrictions,both Japanese and European automakers opened parts and assembly plants in the US.Why did this happen? How is it related to regulation?

Question 10

In developed countries,the enforcement of contracts and the adjudication of contract disputes through the court system:

A)reduces the volume of international trade.
B)lowers the comparative advantage enjoyed by producers.
C)is an important way to reduce transaction costs.
D)weakens the system of property rights.

Question 11

A jury ordered McDonald's to pay $2.7 million to Stella Liebeck,a drive-through customer who burned herself with hot coffee after placing the cup between her legs to remove the top and add cream.She claimed that the coffee was too hot.This tells us that our legal system can:

A)promote efficiency by making property rights secure.
B)promote efficiency by lowering transaction costs.
C)lower costs by creating incentives to litigate frivolous suits.
D)raise costs by creating incentives to litigate frivolous suits.

Question 12

Information asymmetries between producers or consumers along with the problems of externalities can:

A)cause market failure.
B)always be solved by alternative dispute resolution (ADR)mechanisms.
C)improve free trade.
D)restrict the use of property rights in a market economy.

Question 13

Which of the following regulatory procedures transfers wealth from the initial landowners whose property is restricted to those landowners whose land has no restrictions?

A)Tax on agricultural income
B)Import quota
C)Zoning restrictions
D)Price ceiling

Question 14

Draw a profit/price trade-off curve that results from moving from a competitive to a monopoly industry organization.Show the equilibrium position for the regulator with a political support function (PS curve).What can we say about prices and profits of the regulated industry if it started as a monopoly?

Question 15

The idea that resource allocation can remain efficient,even in the presence of externalities,as long as property rights are clearly assigned and transaction costs are low is referred to as the:

A)law of demand.
B)Black/Schloes formula.
C)Coase Theorem.
D)law of diminishing returns.

Question 16

Describe the lemons problem.

Question 17

Draw a profit/price trade-off curve that is the result of moving from a competitive to a monopoly industry organization.Show the equilibrium position for the regulator with a political support function (PS curve).What can we say about prices and profits of the regulated industry if it started as a competitive industry?

Question 18

Which of the following results in the transfer of wealth from consumers to producers?

A)Provision of efficiency wages
B)Licensing of doctors and dentists
C)Provision of compensating wage differentials
D)Internalization of externalities

Question 19

In 2003,conservation groups paid western cattlemen to move their herds away from wild buffalo herds so that the buffalo would have more feed and not have to compete with the cattle.What has this got to do with regulation and the Coase Theorem?

Question 20

In developed countries,if property rights are enforced and contracts in trade are legally respected,it is usually assumed that:

A)output will begin to fall.
B)investment will be encouraged.
C)transaction costs will be zero.
D)government intervention will be unnecessary.

Question 21

State and federal regulators retain the authority to set or approve public utilities' prices.An important prerequisite for this role is to know the utility's:

A)price elasticity of supply.
B)true cost function.
C)income elasticity of demand.
D)price in other economies.

Question 22

The problem generally associated with public goods is:

A)self-selection.
B)adverse selection.
C)moral hazard.
D)free-riding.

Question 23

The economic theory of regulation treats politicians as:

A)public-spirited individuals who work for public welfare.
B)corrupt individuals who sell contracts to the highest bidders.
C)self-interested individuals who benefit themselves by supplying legislation.
D)people who only represent the minority segment of the population.

Question 24

The 1890 Sherman Act was legislated by the:

A)Securities and Exchange Board (SEC).
B)Environment Protection Agency (EPA).
C)Food and Drug Administration (FDA).
D)Federal Trade Commission (FTC).

Question 25

Which of the following regulatory procedures transfers wealth from consumers to producers?

A)Import quotas and tariffs
B)Efficiency wages
C)Transaction costs
D)Deadweight loss

Question 26

A monopolist sets prices above the competitive price and output below the competitive output level.Some customers are willing to pay more than marginal cost,yet do not receive the product.Thus:

A)not all gains from trade are exhausted.
B)all gains from trade are exhausted.
C)it is clear that monopolists do not maximize profits.
D)it is clear that monopolists experience decreasing returns to scale.

Question 27

Which of the following is true in a regulatory environment?

A)The number of consumers is large,and their individual payoffs from successful lobbying are also large.
B)The number of consumers is large,and their individual payoffs from successful lobbying are small.
C)The demand for regulation is perfectly inelastic.
D)The supply of regulation is usually tied to another industry's success.

Question 28

Which of these is true of political coalitions?

A)Political coalitions are similar to the coalitions formed between oligopolistic firms.
B)Political coalitions are synonymous to political regulations.
C)Members of a political coalition are usually risk lovers.
D)Members of a political coalition are usually risk-averse.

Question 29

As a firm moves from a competitive industry to a monopoly:

A)its profits fall.
B)average revenue falls and profits rise.
C)marginal costs rise and profits fall.
D)its profits rise.

Question 30

A person buys a used 1998 Honda Civic and finds that there is a problem in the drive train so that the whole set of axles must be replaced.However,the state has a law that protects the buyer from these kinds of discoveries for 30 days post purchase.These lemon laws attempt to correct the problem of:

A)monopoly power.
B)adverse selection.
C)resource over-utilization.
D)arbitrage.

Question 31

Which of these will hold true for an unregulated,competitive industry?

A)The market price will be higher than the marginal cost of production.
B)The marginal cost will be higher than the average cost of production.
C)The marginal cost of production will be equal to the market price.
D)The market price will be lower than the marginal cost of production.

Question 32

For a politician or a regulator of an industry,there is a clear trade-off between:

A)inflation and investment.
B)profits and costs of the regulated company.
C)prices charged to consumers and profits earned by producers.
D)resource utilization and the generation of externalities.

Question 33

Many people believe that the supply and demand for regulation in an industry often results in the creation of a powerful coalition group controlling the regulatory body.That powerful group often comprises of executives from the same industry that is supposed to be regulated.This is called:

A)capturing.
B)adverse selection.
C)internalization of externalities.
D)free-riding.

Question 34

In the case of completely unorganized and ill-informed consumers,the political support function:

A)becomes horizontal.
B)bends forward.
C)becomes vertical.
D)bends backward.

Question 35

Special interest groups,in the theory of regulation,may be defined as:

A)public-spirited individuals who will benefit from regulation.
B)self-interested individuals who benefit from regulation.
C)self-interested individuals who will suffer from regulation.
D)public-spirited individuals who will suffer from regulation.

Question 36

Public goods:

A)are goods for a few,by a few,and of a few.
B)are goods whose consumption imposes a deadweight loss on the entire society.
C)are goods whose consumption by one reduces the amount available to others.
D)are goods whose consumption by one does not diminish the amount available to others.

Question 37

In some industries,pollution rights are sold from one company that does not need them to another that does.In recent years,conservation groups have purchased pollution rights so that they cannot be traded.Companies in need of pollution rights will find that:

A)the supply of pollution rights has increased.
B)the prices of pollution rights have fallen.
C)the relative costs of pollution control equipment have gone up.
D)the supply of pollution rights has declined.

Question 38

In the U.S.,combined wealth losses by firms from litigation have been estimated to be___________ per lawsuit.

A)$200 million
B)$20 billion
C)$2 billion
D)$21 million

Question 39

A firm can reduce its expected legal costs by negotiating an advance pricing agreement (APA)with the IRS.However,filing an APA can expose the firm to considerable risk by giving the government access to its sensitive cost-related information.This is an example of the _____ that arise due to regulation.:

A)information asymmetries
B)opportunity costs
C)positive externalities
D)legal costs

Question 40

The Occupational Safety and Health Administration (OSHA)is charged with enforcing workplace safety regulations in the United States.Employees are not allowed to waive these safety rights or to trade them off for higher salaries.That means the safety standards are:

A)uniform globally.
B)inalienable.
C)negotiable.
D)transferable.