Question 1

Baxter International, a manufacturer of hospital supplies, acquired American Hospital Supply, a distributor of hospital supplies.This is an example of
A)a conglomerate merger.
B)a horizontal merger.
C)a vertical merger.
D)a two-dimensional merger.

Accepted Answer

This is a vertical merger. Baxter International acquired a distributor of its own product, thus integrating the distribution aspect of their supply chain.

Question 2

Merger guidelines developed by the U.S.Department of Justice and the Federal Trade Commission use the Herfindahl-Hirschman Index as a measure of concentration.This index measures concentration in an industry by
A)adding up the market shares of all firms in the industry, squaring this number and then dividing by the number of firms in the industry.
B)squaring the market shares of each firm in an industry and then adding up the values of the squares.
C)squaring the four-firm concentration ratio of the industry and dividing this number by the total number of firms in the industry.
D)determining the market shares of the four largest firms in the industry, but unlike the concentration ratio, the Index includes sales in the United States by foreign firms.

Accepted Answer

The Herfindahl-Hirschman Index (HHI) measures concentration in an industry by summing the squares of the market shares of all firms in an industry. Therefore, choice B, which describes this method, is the correct answer. Choice A describes a simpler measure called the concentration ratio, which sums the market shares of only the top firms in an industry. Choice C is partially correct but incomplete because it only squares the four-firm concentration ratio, which is a subset of the total market shares. Choice D is incorrect because it only considers the market shares of the top four firms, rather than all firms in the industry.

Question 3

Figure 15-17
  
Your college decides to offer a psychology course as a MOOC that can be taken by students anywhere in the world, whether they are actually enrolled in your college or not. The demand and cost situation for the MOOC is shown in the figure.
-Refer to Figure 15-17.The faculty member who designed the course argues: "I think the course should be priced so that the maximum number of students enroll." How much profit (or loss)will the college make on the course if it charges this price?
A)-$2,592,000
B)-$1,080,000
C)$0
D)$450,000

Accepted Answer

The answer of Figure 15-17
  
Your college decides to...

Question 4

Figure 15-17
  
Your college decides to offer a psychology course as a MOOC that can be taken by students anywhere in the world, whether they are actually enrolled in your college or not. The demand and cost situation for the MOOC is shown in the figure.
-Refer to Figure 15-17.An economics professor argues: "I think the course should be priced so as to achieve economic efficiency." Which price should this faculty member favor?
A)$0
B)$40
C)$88
D)$150

Accepted Answer

Economic efficiency is achieved when the price is set equal to the marginal cost of providing the course. In this context, $40 is likely the marginal cost, making it the efficient price.

Question 5

Figure 15-16
  
Figure 15-16 shows the market demand and cost curves facing a natural monopoly.
-Refer to Figure 15-16.In the absence of any government regulation, the profit-maximizing owners of this firm will produce ________ units and charge a price of ________.
A)Q₀ units; P₀
B)Q₂ units; P₂
C)Q₁ units; P₄
D)Q₃ units; P₃

Accepted Answer

The profit-maximizing output level is where marginal cost (MC) equals marginal revenue (MR), which occurs at Q2 in this graph. At this output level, the price charged is P2.

Question 6

Beginning in 1965, the head of the Antitrust Division of the U.S.Department of Justice began to change antitrust policy.How did antitrust policy change?
A)For the first time, horizontal mergers were allowed-with government approval-and vertical mergers were allowed without need for approval from the government.
B)For the first time, concentration ratios were used to evaluate the degree of competition in the industries of firms that proposed mergers.
C)The Division began to systematically consider the economic consequences of proposed mergers.
D)Proposed mergers no longer needed the approval of the Federal Trade Commission or the court system.

Accepted Answer

The Antitrust Division began to systematically consider the economic consequences of proposed mergers, reflecting a shift towards a more analytical and economic-based approach to antitrust policy.

Question 7

If a firm is a natural monopoly, competition from other firms cannot be counted on to force price down to the level where the company earns zero economic profit.How are prices usually set in natural monopoly markets in the United States?
A)Each natural monopoly is made a public franchise. The public franchise is then required to set its price equal to its marginal cost.
B)Natural monopolies are privately owned, but prices proposed by the firms must be approved by the Antitrust Division of the Department of Justice.
C)Natural monopolies are privately owned and are allowed to set their own prices. Government regulation of the firms would result in greater deadweight losses.
D)Local or state regulatory commissions usually set prices for natural monopolies.

Accepted Answer

Local or state regulatory commissions usually set prices for natural monopolies in the United States. This is done to prevent the natural monopoly from charging excessively high prices and to ensure that customers have access to the service provided. The regulatory commissions determine a fair and reasonable price that allows the natural monopoly to earn a reasonable rate of return on their investment while also protecting consumers from price gouging.

Question 8

A horizontal merger
A)is a merger between firms in the same industry.
B)results in a trust (for example, the Standard Oil Company).
C)is a merger between firms at different stages of production of a good.
D)was illegal in the United States until the Federal Trade Commission Act was passed by Congress in 1914.

Accepted Answer

A horizontal merger is a merger between firms in the same industry, which often results in increased market share and reduced competition.

Question 9

The Herfindahl-Hirschman Index is one factor used to determine whether a merger between two firms should be allowed.Which of the following statements regarding the value of the Index for a given industry is true?
A)If a merger would result in an Index value less than 1,500, the merger would not be challenged.
B)If a merger would result in an Index value of 1,500 or more, the industry would be considered a monopoly and the merger would be challenged.
C)If a merger resulted in an Index of between 1,500 and 2,500, and the HHI increased by more than 100 points, the industry would be considered competitive and the merger would not be challenged.
D)If a merger would increase the Index by 100, the industry would be considered a monopoly and the merger would be challenged.

Accepted Answer

If a merger results in an HHI of less than 1,500, it is generally considered to be in a competitive market, and the merger is unlikely to be challenged.

Question 10

Figure 15-17
  
Your college decides to offer a psychology course as a MOOC that can be taken by students anywhere in the world, whether they are actually enrolled in your college or not. The demand and cost situation for the MOOC is shown in the figure.
-Refer to Figure 15-17.An economics professor argues: "I think the course should be priced so as to achieve economic efficiency." How much profit (or loss)will the college make on the course if it charges this price?
A)-$2,592,000
B)-$1,080,000
C)$0
D)$450,000

Accepted Answer

The answer of Figure 15-17
  
Your college decides to...

Question 11

Congress has divided the authority to police mergers between the Antitrust Division of the U.S.Department of Justice (AD)and the Federal Trade Commission (FTC).How is this authority divided?
A)The AD decides whether proposed horizontal mergers will be challenged; the FTC decides whether proposed vertical mergers will be challenged.
B)Both the AD and the FTC are responsible for merger policy.
C)The AD always renders its opinion on any proposed merger first. If the AD approves the merger, the case then goes to the FTC for final approval. If the AD disallows the merger, the decision stands and the FTC does not become involved.
D)The AD establishes the guidelines that are used to evaluate proposed mergers; the FTC uses these guidelines to decide whether a proposed merger will be allowed to take place.

Accepted Answer

Both the Antitrust Division of the U.S. Department of Justice and the Federal Trade Commission are responsible for merger policy, and they share the authority to review and challenge mergers that may substantially lessen competition.

Question 12

Which two factors make regulating mergers complicated?
A)First, firms may lobby government officials to influence their decision to approve the merger. Second, by the time the government officials reach a decision regarding the merger, the firms often decide not to merge.
B)First, the time it takes to reach a decision to approve a merger is so long that the firms often have new owners and managers. Second, by law, government officials are not allowed to consider the impact of foreign trade (exports and imports)on the degree of competition in the markets of the merged firms.
C)First, the Federal Trade Commission and the Antitrust Division of the U.S. Department of Justice must both approve mergers. Second, the concentration ratios that are used to evaluate the degree of competition the merged firms face are flawed.
D)First, it is not always clear what market firms are in. Second, the newly merged firm might be more efficient than the merging firms were individually.

Accepted Answer

Regulating mergers can be complicated because it may not be clear which market the firms operate in and the newly merged firm may have increased efficiency, making it hard to determine the potential impact on competition.

Question 13

Figure 15-16
  
Figure 15-16 shows the market demand and cost curves facing a natural monopoly.
-Refer to Figure 15-16.Suppose the government regulates this industry in order to remove the inefficiency implied by the behavior of the profit-maximizing owners.If regulators require that the firm produces the economically efficient output level, what is this level and what price will be charged?
A)Q₄ units; P₆
B)Q₁ units; P₄
C)Q₁ units; P₁
D)Q₃ units; P₃

Accepted Answer

The economically efficient output level is where the price equals marginal cost. In this scenario, Q₄ is the output level where this condition is met, and P₆ is the corresponding price.

Question 14

Figure 15-16
  
Figure 15-16 shows the market demand and cost curves facing a natural monopoly.
-Refer to Figure 15-16.If the regulators of the natural monopoly allow the owners of the firm to break even on their investment the firm will produce an output of ________ and charge a price of ________.
A)Q₁ units; P₄
B)Q₁ units; P₁
C)Q₅ units; P₃
D)Q₃ units; P₄

Accepted Answer

If the regulators allow the firm to break even on their investment, the firm will produce where marginal cost (MC) intersects with the demand (D) curve, which is at Q₃ units. The price charged will be where the demand curve intersects with the average total cost (ATC) curve, which is at P₄. Therefore, the correct answer is D.

Question 15

Figure 15-17
  
Your college decides to offer a psychology course as a MOOC that can be taken by students anywhere in the world, whether they are actually enrolled in your college or not. The demand and cost situation for the MOOC is shown in the figure.
-Refer to Figure 15-17.The dean of the college argues: "I think the course should be priced to maximize the profit the college earns, so these funds can be used to pay some other expenses." Which price should the dean favor?
A)$0
B)$40
C)$88
D)$150

Accepted Answer

The answer of Figure 15-17
  
Your college decides to...

Question 16

Economists played a key role in the development of merger guidelines by the Department of Justice and the Federal Trade Commission in 1982.These guidelines have three main parts.What are these parts?
A)concentration ratios; the Herfindahl-Hirschman Index; market standards
B)concentration standards; concentration ratios; competitive analysis
C)economic analysis; political analysis; dynamic analysis
D)market definition; measure of concentration; merger standards

Accepted Answer

The three main parts of the merger guidelines developed in 1982 are market definition, measure of concentration, and merger standards. Market definition identifies the relevant market and geographic area of competition, measure of concentration uses the Herfindahl-Hirschman Index to determine the level of market concentration, and merger standards analyze the impact of the proposed merger on competition in the market.

Question 17

According to the Department of Justice merger guidelines, a proposed merger between two firms may be challenged if the post-merger Herfindahl-Hirschman Index
A)lies between 1,500 and 2,500 and the merger raises the Index by 50 points.
B)lies between 1,500 and 2,500 and the merger raises the Index by more than 100 points.
C)lies above 2,500 and the merger raises the Index by less than 50 points.
D)lies below 1,000 and the merger raises the Index by 100 points.

Accepted Answer

According to the Department of Justice merger guidelines, a proposed merger between two firms may be challenged if the post-merger Herfindahl-Hirschman Index (HHI) lies between 1,500 and 2,500 and the merger raises the Index by more than 100 points. Therefore, option B is the correct choice as it satisfies this criterion.

Question 18

Consider an industry that is made up of six firms with the following market shares: Firm A - 50%, Firm B - 20%, Firms C and D - 10% each, and Firms E and F - 5% each.What is the value of the Herfindahl-Hirschman Index?
A)2,500
B)3,150
C)8,100
D)10,000

Accepted Answer

The Herfindahl-Hirschman Index (HHI) is calculated by summing the squares of the market shares of all firms in the industry. HHI = 50^2 + 20^2 + 10^2 + 10^2 + 5^2 + 5^2 = 2500 + 400 + 100 + 100 + 25 + 25 = 3,150.

Question 19

Figure 15-17
  
Your college decides to offer a psychology course as a MOOC that can be taken by students anywhere in the world, whether they are actually enrolled in your college or not. The demand and cost situation for the MOOC is shown in the figure.
-Refer to Figure 15-17.The faculty member who designed the course argues: "I think the course should be priced so that the maximum number of students enroll." Which price should this faculty member favor?
A)$0
B)$40
C)$88
D)$150

Accepted Answer

According to the figure, the demand for the course is highest at a price of $0, with a total of 10,000 students enrolling. As the price increases, the demand for the course decreases, resulting in fewer students enrolling. Therefore, if the faculty member wants to maximize the number of students enrolling in the course, they should favor a price of $0.

Question 20

Figure 15-16
  
Figure 15-16 shows the market demand and cost curves facing a natural monopoly.
-Refer to Figure 15-16.Which of the following would be true if government regulators require the natural monopoly to produce at the economically efficient output level?
A)This results in a misallocation of resources.
B)The marginal cost of producing the last unit sold exceeds the marginal benefit.
C)The firm will sustain persistent losses and will not continue in business in the long run.
D)The firm will break even.

Accepted Answer

If a natural monopoly is required to produce at the economically efficient output level, which is where price equals marginal cost, the firm will likely incur losses because the price may not cover the average total cost. This is because natural monopolies typically have high fixed costs and declining average costs over the range of output, making it unsustainable in the long run without subsidies.

Quiz 15: Monopoly and Antitrust Policy

Baxter International, a manufacturer of hospital supplies, acquired American Hospital Supply, a distributor of hospital supplies.This is an example of

Merger guidelines developed by the U.S.Department of Justice and the Federal Trade Commission use the Herfindahl-Hirschman Index as a measure of concentration.This index measures concentration in an industry by

Figure 15-16 Figure 15-16 shows the market demand and cost curves facing a natural monopoly. -Refer to Figure 15-16.In the absence of any government regulation, the profit-maximizing owners of this firm will produce units and charge a price of .

Beginning in 1965, the head of the Antitrust Division of the U.S.Department of Justice began to change antitrust policy.How did antitrust policy change?

If a firm is a natural monopoly, competition from other firms cannot be counted on to force price down to the level where the company earns zero economic profit.How are prices usually set in natural monopoly markets in the United States?

A horizontal merger

The Herfindahl-Hirschman Index is one factor used to determine whether a merger between two firms should be allowed.Which of the following statements regarding the value of the Index for a given industry is true?

Congress has divided the authority to police mergers between the Antitrust Division of the U.S.Department of Justice (AD) and the Federal Trade Commission (FTC) .How is this authority divided?

Which two factors make regulating mergers complicated?

Figure 15-16 Figure 15-16 shows the market demand and cost curves facing a natural monopoly. -Refer to Figure 15-16.If the regulators of the natural monopoly allow the owners of the firm to break even on their investment the firm will produce an output of and charge a price of .

Economists played a key role in the development of merger guidelines by the Department of Justice and the Federal Trade Commission in 1982.These guidelines have three main parts.What are these parts?

According to the Department of Justice merger guidelines, a proposed merger between two firms may be challenged if the post-merger Herfindahl-Hirschman Index

Consider an industry that is made up of six firms with the following market shares: Firm A - 50%, Firm B - 20%, Firms C and D - 10% each, and Firms E and F - 5% each.What is the value of the Herfindahl-Hirschman Index?

Figure 15-16 Figure 15-16 shows the market demand and cost curves facing a natural monopoly. -Refer to Figure 15-16.Which of the following would be true if government regulators require the natural monopoly to produce at the economically efficient output level?

Quiz 15: Monopoly and Antitrust Policy

Baxter International, a manufacturer of hospital supplies, acquired American Hospital Supply, a distributor of hospital supplies.This is an example of

Merger guidelines developed by the U.S.Department of Justice and the Federal Trade Commission use the Herfindahl-Hirschman Index as a measure of concentration.This index measures concentration in an industry by

Figure 15-16 Figure 15-16 shows the market demand and cost curves facing a natural monopoly. -Refer to Figure 15-16.In the absence of any government regulation, the profit-maximizing owners of this firm will produce ________ units and charge a price of ________.

Beginning in 1965, the head of the Antitrust Division of the U.S.Department of Justice began to change antitrust policy.How did antitrust policy change?

If a firm is a natural monopoly, competition from other firms cannot be counted on to force price down to the level where the company earns zero economic profit.How are prices usually set in natural monopoly markets in the United States?

A horizontal merger

The Herfindahl-Hirschman Index is one factor used to determine whether a merger between two firms should be allowed.Which of the following statements regarding the value of the Index for a given industry is true?

Congress has divided the authority to police mergers between the Antitrust Division of the U.S.Department of Justice (AD) and the Federal Trade Commission (FTC) .How is this authority divided?

Which two factors make regulating mergers complicated?

Figure 15-16 Figure 15-16 shows the market demand and cost curves facing a natural monopoly. -Refer to Figure 15-16.If the regulators of the natural monopoly allow the owners of the firm to break even on their investment the firm will produce an output of ________ and charge a price of ________.

Economists played a key role in the development of merger guidelines by the Department of Justice and the Federal Trade Commission in 1982.These guidelines have three main parts.What are these parts?

According to the Department of Justice merger guidelines, a proposed merger between two firms may be challenged if the post-merger Herfindahl-Hirschman Index

Consider an industry that is made up of six firms with the following market shares: Firm A - 50%, Firm B - 20%, Firms C and D - 10% each, and Firms E and F - 5% each.What is the value of the Herfindahl-Hirschman Index?

Figure 15-16 Figure 15-16 shows the market demand and cost curves facing a natural monopoly. -Refer to Figure 15-16.Which of the following would be true if government regulators require the natural monopoly to produce at the economically efficient output level?

Figure 15-16 Figure 15-16 shows the market demand and cost curves facing a natural monopoly. -Refer to Figure 15-16.In the absence of any government regulation, the profit-maximizing owners of this firm will produce units and charge a price of .

Figure 15-16 Figure 15-16 shows the market demand and cost curves facing a natural monopoly. -Refer to Figure 15-16.If the regulators of the natural monopoly allow the owners of the firm to break even on their investment the firm will produce an output of and charge a price of .