Deck 15: Economic Regulation and Antitrust Policy

Question 1

Economic regulation aims to control the price, output, the entry of new firms, and the quality of service in industries in which monopoly appears inevitable or even desirable.

Answer 1

True

Question 2

The U.S. antitrust policy is focused primarily on market conduct.

Answer 2

False

Question 3

Horizontal mergers involve firms in different industries.

Answer 3

False

Question 4

When regulating a natural monopoly, the regulating agency should set price equal to marginal cost.​

Question 5

Regulation that intends to improve the quality of service provided by carpenters will tend to increase the price of their services.

Question 6

"Mere size is no offense" is an antitrust ruling based on the rule of reason.

Question 7

When a court uses a per se rule to interpret the Sherman Antitrust Act, its ruling is based on market conduct alone.

Question 8

Price fixing is illegal in the United States.

Question 9

Over time, the regulatory machinery may shift toward the special interests of producers, who, in effect, "capture" the regulating agency.

Question 10

The average cost curve for a natural monopoly is downward sloping where it intersects the market demand curve.

Question 11

Producers play a disproportionately large role in influencing public regulation because they have a strong interest in matters that affect their specialized source of income.

Question 12

The figure below shows the cost and revenue curves faced by a monopolist. If regulators allow the natural monopolist to earn only a normal profit, it will result in a greater consumer surplus than that under an unregulated monopoly.
​
Figure 15.4

Question 13

Under the rule of reason, no firm with a large market share can be found guilty of violating the Sherman Antitrust Act.

Question 14

Antitrust policy has no relationship with socially desirable market performance.

Question 15

In order to ensure allocative efficiency on the part of a natural monopoly, regulators would set price equal to marginal cost.

Question 16

Public utilities refer to government-owned or government-regulated monopolies.

Question 17

Price discrimination that substantially lessens competition is prohibited by the Clayton Act.

Question 18

The Clayton Act prohibits all horizontal mergers, regardless of their economic consequences.

Question 19

The requirement that New York City taxi drivers must own a medallion in order to operate a taxi in the city reduces competition and raises the fares that customers pay.

Question 20

The Sherman Antitrust Act makes it unlawful for firms to collude to restrain trade.

Question 21

For a natural monopolist, _____ throughout the range of market demand.​

A)average cost increases
B)there exist diseconomies of scale
C)average cost decreases
D)average cost remains constant
E)marginal cost exceeds average cost

Question 22

The Herfindahl index would be 5000 if there are only two firms in an industry with equal market shares.

Question 23

A natural monopoly exists when throughout the range of market demand:​

A)average cost is equal to marginal cost.
B)there exist diseconomies of scale.
C)there exist economies of scale.
D)average cost is constant.
E)marginal cost exceeds average cost.

Question 24

Technological change is decreasing competition in the market for media.​

Question 25

Industry A has four firms, each with a 25% market share, while Industry B has four firms, one firm with a 70% market share and the other three firms with a 10% market share each. According to the Herfindahl-Hirschman Index, Industry A is highly concentrated.

Question 26

A private firm that sustains a financial loss because of an antitrust violation may be able to recover three times the actual damages.

Question 27

The United States economy has experienced a decrease in competition over the last three decades.

Question 28

As concentration in an industry increases, the value of the Herfindahl index falls.

Question 29

The research of William Shepherd suggests that since World War II, the three main reasons for increased competition in U.S. industries are competition from imports, deregulation, and antitrust policy.

Question 30

In a(n) _____, throughout the range of market demand, marginal cost is less than average cost and pulls average cost downward.​

A)oligopoly market
B)perfectly competitive market
C)natural monopoly
D)duopoly
E)monopsony

Question 31

If there are only two firms in an industry, the value of the Herfindahl index must be 5,000.

Question 32

Conglomerate mergers involve more than two firms.

Question 33

Technological change has played a major role in increasing competition in recent years.

Question 34

One of the remedies used in the case of antitrust violations is the awarding of treble damages to the party that has been harmed.

Question 35

In its case against Microsoft, the government contended that Microsoft engaged in a pattern of predatory behavior to extend its monopoly power. This is an example of a ruling according to the principle of "per se illegality."

Question 36

The Herfindahl index is the sum of the squared market shares of the four largest firms in an industry.

Question 37

According to William Shepherd, the total assets of the firms in the United States have been declining mostly in response to increased imports.

Question 38

If the pre-merger Herfindahl index is less than 1,000, the Department of Justice is likely to challenge the merger.

Question 39

Which of the following is the best example of a natural monopoly?​

A)A company involved in gold mining in the Colorado Rocky Mountains​
B)A company involved in filmmaking in Hollywood
C)A company providing electrical service to homes in Seattle
D)Kodak producing film
E)IBM producing computers

Question 40

If the value of the Herfindahl index is 10,000, there must be exactly one firm in the industry.

Question 41

The figure below shows the cost and revenue curves for a natural monopolist. Suppose the monopolist was originally producing at a profit-maximizing output level. If regulators set price equal to marginal cost, the price will change from: ​
Figure 15.1
​

A)$24 to $18, and quantity will increase from 5 units to 8 units.
B)$14 to $20, and quantity will increase from 5 units to 8 units.
C)$24 to $18, and quantity will remain unchanged.
D)$18 to $14, and quantity will increase from 5 units to 8 units.
E)$24 to $22, and quantity will increase from 5 units to 10 units.

Question 42

The rail system in Metropolis is a natural monopoly. Which of the following is likely to be true if the government regulates the system by setting a competitive price?​

A)Price and output will be higher in a regulated monopoly than in an unregulated monopoly.
B)Price and output will be lower in a regulated monopoly than in an unregulated monopoly.
C)Price will be lower and output will be higher in a regulated monopoly than in an unregulated monopoly.
D)Price will be higher and output will be lower in a regulated monopoly than in an unregulated monopoly.
E)Profit will be lower in a regulated monopoly than in an unregulated monopoly, but there will be no change in output.

Question 43

The figure below shows the cost and revenue curves of a natural monopolist. The welfare loss that occurs if the monopoly is unregulated is shown by the area _____. ​
Figure 15.2​

A)cef
B)abc
C)adf
D)dfeg
E)bcfd

Question 44

If a natural monopolist switches to marginal cost pricing from charging a profit-maximizing price, there will be a(n):​

A)decrease in the demand for the monopolist's product.
B)increase in the price charged by the monopolist.
C)fall in consumer surplus.
D)increase in economic profit.
E)increase in the level of output produced by the monopolist.

Question 45

If a firm has a downward-sloping long-run average cost curve over the entire range of market demand, it is a _____.​

A)local monopoly​
B)firm in a perfectly competitive market
C)firm in a monopsony market
D)firm in an oligopoly market
E)natural monopoly

Question 46

Suppose the local government is considering using marginal cost pricing to set rates for a cable TV company. Which of the following arguments supports marginal cost pricing?​

A)Marginal cost pricing gives the monopoly an economic profit and a reason to stay in business.
B)Marginal cost pricing gives the firm a normal economic profit and a reason to stay in business.
C)Marginal cost pricing results in allocative efficiency.
D)Unlike firms adopting average cost pricing, firms using marginal cost pricing do not require subsidies, which can be costly.
E)Unlike average cost pricing, marginal cost pricing enables monopolies to stay in business in the long run.

Question 47

Figure 15.2 shows the cost and revenue curves of a monopolist. The consumer surplus that results if the monopoly is regulated and it charges a price equal to MC is shown by the _____. ​
Figure 15.2​

A)triangular area abc
B)triangular area adf
C)triangular area cef
D)rectangular area dfeg
E)rectangular area bcfd

Question 48

In order to maximize profit, an unregulated monopolist:​

A)produces the level of output at which marginal cost equals marginal revenue.
B)produces the level of output at which marginal cost exceeds marginal revenue.
C)charges a price that is equal to its marginal cost of production.
D)charges a price that is equal to its average cost of production.
E)produces the level of output at which marginal cost is less than marginal revenue.

Question 49

If a regulator sets the price in a natural monopoly equal to the monopolist's marginal cost, the monopolist will _____.​

A)experience a loss
B)earn an economic profit
C)earn zero economic profit
D)shut down in the short run
E)face a horizontal demand curve

Question 50

Figure 15.2 shows the cost and revenue curves for a monopolist. The increase in consumer surplus when price is set equal to marginal cost rather than at the profit-maximizing level is shown by area _____. ​
Figure 15.2
​

A)abc
B)adf
C)cef
D)dfeg
E)bcfd

Question 51

In which of the following ways can the government increase social welfare in an unregulated monopoly?​

A)By allowing the monopolist to maximize profit
B)By forcing the monopolist to lower the price and expand output
C)By forcing the monopolist to shut down operations
D)By providing tax exemptions to the monopolist
E)By increasing corporate tax rates

Question 52

Watt Power and Light, an electric company, is an example of a natural monopoly. It will suffer an economic loss:​

A)irrespective of the output it produces because marginal cost is always less than average cost.
B)irrespective of the price it charges because average cost is always less than marginal cost.
C)if regulators insist that it produce where price equals marginal cost because marginal cost is less than average cost.
D)if regulators insist that it produce where price equals marginal cost because average cost is always less than marginal cost.
E)if regulators insist that it produce where price equals average cost because average cost is always less than marginal cost.

Question 53

Most local phone companies:​

A)face a vertical demand curve.
B)operate in a perfectly competitive industry.
C)operate in an oligopoly industry.
D)face an upward-sloping demand curve.
E)are natural monopolies.

Question 54

A natural monopoly, such as a local telephone company, is characterized by _____.​

A)a lack of natural competitors
B)low fixed costs and diseconomies of scale
C)economies of scale
D)a lack of government regulation
E)constant costs of production

Question 55

Which of the following is a possible effect of government regulation on a natural monopolist?​

A)The firm earns zero economic profit.
B)The firm earns positive economic profit.
C)The firm faces a horizontal demand curve.
D)The firm incurs an economic loss.
E)The firm faces an upward-sloping demand curve.

Question 56

If government regulators force a natural monopoly to produce where price equals marginal cost, the monopoly will _____.​

A)continue operations in the long run
B)earn a normal profit
C)earn zero economic profit
D)earn a negative economic profit
E)reduce the level of production

Question 57

Which of the following is a possible outcome if a monopolist is allowed to maximize profit?​

A)The equilibrium price-output combination is inefficient.
B)Consumers pay a price that is equal to the marginal cost of production.
C)Consumer surplus is more than producer surplus.
D)The equilibrium price-output combination is socially optimal.
E)The quantity of output produced by the monopolist is larger than the socially optimal level of output.

Question 58

Figure 15.2 shows the cost and revenue curves for a monopolist. The consumer surplus that results if the monopoly is unregulated is shown by the _____. ​
Figure 15.2
​

A)triangular area abc
B)triangular area adf
C)triangular area cef
D)rectangular area dfeg
E)rectangular area bcfd

Question 59

Due to economies of scale, throughout the range of market demand, natural monopolies have:​

A)downward-sloping long-run average cost curves.
B)upward-sloping long-run average total cost curves.
C)upward-sloping short-run average cost curves.
D)upward-sloping short-run average total cost curves.
E)horizontal long-run average cost curves.

Question 60

Production by a monopolist would result in the socially optimal allocation of resources if:​

A)price is set equal to marginal cost.
B)marginal revenue is greater than price.
C)marginal revenue is equal to marginal cost.
D)price is set equal to average total cost.
E)marginal revenue is equal to average total cost.

Question 61

A regulated natural monopoly that must set price equal to average cost will:​

A)incur an economic loss.
B)earn a net economic profit.
C)earn a normal profit.
D)shut down in the short run.
E)experience diseconomies of scale.

Question 62

Which of the following is true when regulators require a natural monopolist to set price equal to marginal cost?​

A)This policy results in a less than socially optimal allocation of resources.
B)The marginal cost of producing the last unit sold exceeds the consumers' marginal value for that last unit.
C)The monopolist experiences recurring losses unless a subsidy is provided.
D)The monopolist earns a normal profit.
E)The monopolist earns an economic profit.

Question 63

The figure below shows the cost and revenue curves for a natural monopolist. If the natural monopoly is regulated and earns a normal profit, then: ​
Figure 15.3
​

A)P = $24 and Q = 8.
B)P = $22 and Q = 6.
C)P = $24 and Q = 5.
D)P = $20 and Q = 8.
E)P = $18 and Q = 5.

Question 64

The government of a state wants Gigantic Software Corp., a natural monopoly, to stay in business yet still produce where price equals marginal cost. In order to encourage Gigantic Software Corp. to stay in business, the government might choose to:​

A)set a price ceiling 10 percent lower than its previous level.
B)impose a tax on the company for each dollar of sales.
C)establish regulations that raise the company's cost of doing business.
D)provide a subsidy to the company to cover the loss and ensure a normal profit.
E)replace the company's top management.

Question 65

If ball bearings producers support a proposed regulation of their industry, then it is likely that:​

A)the prices of ball bearings will decrease under the regulation.
B)the profits of firms in the ball-bearing industry will decrease after the regulation.
C)ball bearings producers will promote the interests of the public.
D)ball bearings producers will promote the interests of the public.
E)consumers of ball bearings will suffer from the proposed regulation

Question 66

If producers support the proposed regulation of their industry, then: ​

A)it is likely that consumers will benefit from the regulation.
B)it is likely that the regulation will eliminate deadweight loss.
C)it is likely that both producers and consumers will be adversely affected by the legislation.
D)it is possible that consumers will be adversely affected by the legislation.
E)it is likely that prices will fall.

Question 67

When government regulations force a natural monopoly to produce where price equals average total cost, social welfare is:​

A)maximum.
B)less than it would be without regulation.
C)greater than it would be without regulation, but it is not maximized.
D)exactly the same as it would be without regulation.
E)minimum.

Question 68

Compared to the profit-maximizing outcome, average-cost pricing in a natural monopoly leads to:​

A)a lower marginal cost.
B)a higher price.
C)decreased consumer surplus.
D)the elimination of economic profit.
E)less output.

Question 69

Which of the following is true of a natural monopoly?​

A)If regulated, the firm will have a higher level of output than if it was unregulated.
B)If regulated, the firm will have a lower level of output than if it was unregulated.
C)If regulated, the firm will be allowed to charge a price higher than its average cost.
D)If regulated, the firm will earn economic profit in the long run.
E)If regulated, the firm will earn economic profit in the long run.

Question 70

Suppose the market for taxis in Mexico City is a natural monopoly. Which of the following is likely to result from the regulation of taxis in Mexico City?​

A)The price of taxi rides will decrease.
B)The price of taxi rides will increase.
C)The income of taxi owners will increase.
D)Taxi owners will have greater monopoly power.
E)The supply of taxis will decrease.

Question 71

According to the special interest theory, _____.​

A)economic regulation is designed to promote social welfare
B)producers may be able to influence regulators to impose restrictions favorable to producers
C)groups of consumers with special interests are always able to control a regulatory agency to their own benefit
D)foreign lobbyists may be able to control a regulatory agency to their own benefit
E)the conflict of interest among Special Interest Groups over economic regulation may cancel out the effects of such regulation

Question 72

A natural monopolist earns zero economic profit when:​

A)government regulators force it to set price equal to marginal cost.
B)government regulators force it to set price equal to average total cost.
C)the government provides it with a subsidy.
D)the government provides it with a tax exemption.
E)government regulators force it to produce where MC = MR.

Question 73

In which of the following ways can a government assure that a natural monopolist earns zero economic profit?​

A)By setting the price equal to marginal cost
B)By setting the price equal to average total cost
C)By setting the price lower than the average total cost
D)By asking the monopolist to produce where marginal cost is equal to marginal revenue
E)By asking the monopolist to produce where marginal cost is equal to average total cost

Question 74

The figure below shows the cost and revenue curves for a natural monopolist. If regulators allow the natural monopolist to earn only a normal profit, it will produce an output equal to _____. ​
Figure 15.4​

A)0​
B)g
C)h
D)i
E)j

Question 75

A physicians' professional association supports legislation seeking higher quality medical care. According to the special interest theory of regulation, which of the following groups will benefit the most from this legislation?​

A)The government, through decreased regulation of physician quality
B)Patients, through reduced prices for medical care
C)Physicians, through increased prices for medical care
D)Hospitals, through reduced prices for physicians' services
E)The government, since higher quality health care is clearly in the public interest

Question 76

If an electric company is allowed by regulators to earn only a normal profit, it will produce at the point where _____.​

A)MR = MC
B)P = MC
C)MC = Qd
D)P = AC
E)MR = AC

Question 77

The capture theory of regulation, espoused by George Stigler, asserts that:​

A)consumers "capture" regulatory agencies so that regulations favor consumers.
B)producers "capture" regulatory agencies so that regulations favor producers.
C)regulators limit the market power of producers.
D)a regulation favoring producers also leads to an increase in consumer surplus.
E)consumers and producers work together to "capture" regulatory agencies in order to achieve more desirable regulations.

Question 78

Figure 15.4 shows the revenue and cost curves for a natural monopolist. The monopolist will set the price equal to _____ if it is allowed to earn only a normal profit. ​
Figure 15.4
​

A)a
B)b
C)c
D)f
E)e

Question 79

According to the special interest theory, the licensing of beauticians would be:​

A)desired by consumers in order to promote the public interest.
B)desired by beauticians in order to promote the public interest.
C)discouraged by all beauty salons, large or small.
D)desired by some beauticians in order to restrict entry into their profession.
E)discouraged by the government in order to protect the jobs of unlicensed beauticians.

Question 80

Governments often enact regulations that benefit producers because:​

A)they seek to regulate in the best interest of the public.
B)consumers have less information than producers and therefore seek government protection.
C)consumers have a strong interest in matters that affect their standard of living.
D)producers lobby as they have a strong interest in matters that affect their specialized source of income.
E)producers seek to act in the best interest of the public.