Deck 13: Antitrust and Regulation

Question 1

A fair price is set where P = ATC.

Answer 1

True

Question 2

Optimal resource allocation is achieved if P = MC.

Answer 2

True

Question 3

Most markets in the U.S. economy are perfectly competitive.

Answer 3

False

Question 4

Monopoly profit cushions the losses that may arise from a failed technological change.

Question 5

Laissez-faire implies a hands-off approach to the market by the government.

Question 6

If price is set equal to marginal cost when marginal cost is below ATC, the firm will suffer a loss.

Question 7

If price is set equal to marginal cost when marginal cost is below ATC, the firm will receive a profit greater than profit earned when marginal cost is above ATC.

Question 8

Deregulation is a process that undoes regulation.

Question 9

A contestable market will always end up as a monopoly in the absence of antitrust protection.

Question 10

Contestable markets require that there be multiple participants in the marketplace.

Question 11

The primary rationale for antitrust policy is mistrust and an expectation of foul play.

Question 12

The biggest weapon of the Federal Trade Commission (FTC) is the "threat" of antitrust action, not action itself.

Question 13

The "per se" standard makes antitrust action less likely than would the "rule of reason".

Question 14

The theory of countervailing power provides support for a more laissez-faire approach to government regulation.

Question 15

When firms already in the industry produce under conditions of substantial economies of scale, entry into the industry is usually more difficult than if the firms produced without those economies of scale.

Question 16

When firms already in the industry produce under conditions of substantial economies of scale, the market is said to be contestable.

Question 17

If the courts apply the rule of reason criterion to a firm that dominates a market but does not engage in anticompetitive behavior, it would not find the firm to be in violation of the antitrust laws.

Question 18

If the courts apply the per se criterion to a firm that dominates a market but does not engage in anticompetitive behavior, it would not find the firm to be in violation of the antitrust laws.

Question 19

The purchase of voting stock by a competing firm is illegal in the United States.

Question 20

Antitrust legislation prohibits a person from being on the board of directors of more than one firm at any time.

Question 21

Those who believe that monopolies are both inevitable and undesirable would probably support price regulation.

Question 22

If a natural monopoly is subject to fair price regulation, it will require a subsidy to remain in business.

Question 23

A firm, judged to be a natural monopoly in a small rural market like Centerville, may be considered monopolistically competitive in a market such as New York City.

Question 24

Antitrust activity is not a good example of using the "power of the purse" to control administrative activities in support of political ideology.

Question 25

Antitrust problems rarely appear in competitive markets.

Question 26

Perfectly competitive markets do not exist in the real world.

Question 27

A simple solution to the problem of monopolies is for the government to regulate price.

Question 28

When a regulatory commission of a public utility, such as an electric company, chooses a fair price as the regulated price, it chooses P = MC.

Question 29

The text refers to the Green Bay Packers as an example of a nonprofit corporation that is no less efficient than a profit-maximizing NFL team.

Question 30

The theory of creative destruction implies that too much competition leads to monopolies.

Question 31

Laissez-faire proponents contend that the government can serve a valuable role in encouraging firms to engage in research and development by creating a patent system.

Question 32

The Sherman Antitrust Act of 1890 proved to be not sufficiently specific to curb monopoly power in the United States.

Question 33

For the courts, being too big a firm in an industry can be sufficient grounds, using the per se criterion, to charge the firm with violating antitrust laws.

Question 34

Since the 1980s, the Congressional budget has allocated substantial funds to antitrust investigation and enforcement, which is why the Antitrust Division of the Department ofJustice is one of the most vigorous agencies of government today.

Question 35

A "consent decree" is one way in which an enterprise may avoid antitrust prosecution.

Question 36

Creative destruction theory is essentially an argument that profit potential within a noncompetitive industry creates an incentive for new types of competing industry, thereby strengthening the original industry's market power.

Question 37

Micromania's City Council has been discussing policy options regarding the local taxi company. Citizens have complained that it is a natural monopoly and that its fees are inappropriate. Which of the following would allow the company to stay in business while guaranteeing a "reasonable" taxi price for citizens?

A) average cost pricing
B) marginal cost pricing
C) laissez-faire pricing
D) countervailing pricing
E) contestable pricing

Question 38

Which of the following is not consistent with a goal of reducing the power of firms in the market?

A) shortening patent life
B) creative destruction theory
C) countervailing power theory
D) Schumpeter's economies of scale argument
E) antitrust policy

Question 39

A contestable market is one in which prices are moderated by the

A) need to build an empire
B) desire to maximize output
C) noncompetitive nature of the market
D) threat of potential entry
E) regulations imposed by government

Question 40

The reason that antitrust laws exist and are enforced is because most economists and politicians believe that

A) every industry should be perfectly competitive
B) monopolies do not maximize shareholder value in the long run
C) the price and quantity combinations delivered in a perfectly competitive market are both socially desirable and most efficient
D) monopolies use their market power to create economies of scale
E) small firms are the backbone of American society

Question 41

The consensus among economists who consider monopoly and oligopoly to be both inevitable and undesirable is, when confronted with a monopolized industry, to

A) look the other way
B) allow government regulation of the industry
C) withhold patent privileges
D) engage in a laissez-faire strategy
E) purchase controlling stock in the monopoly

Question 42

Those economists who do not believe there is anything inherently wrong with monopolies advocate a policy of

A) laissez-faire
B) marginal cost pricing
C) antitrust
D) patent control
E) nationalization

Question 43

Governments often choose to regulate monopolies, rather than break them up into smaller firms, because monopolies often are

A) entitled to economic profits
B) very big and politically powerful
C) more efficient producers
D) providing useful goods and services that would not otherwise be provided
E) heavily subsidized

Question 44

Some economists who consider monopoly to be both inevitable and bad are inclined toward a policy of ___________ if regulation of the monopoly seems ineffectual.

A) contestable market
B) price controls
C) countervailing power
D) creative destruction
E) nationalization

Question 45

Arguments in favor of a laissez-faire policy concerning government's role in the economy include the

A) need for price controls
B) possibility of creative destruction
C) gains from trade
D) contestable nature of markets
E) lack of countervailing power among the economic blocs in the economy

Question 46

Paul and Maggie advertise for a babysitter. Jenny is the only one who answers the ad and she's hired. She asks for $7 per hour and gets it. She occasionally thinks of raising the rate to $10 but is afraid that Paul and Maggie will decide to advertise again. This tale is analogous to

A) monopolistic competitive pricing
B) the idea of nationalization
C) contestable markets
D) laissez-faire
E) creative destruction

Question 47

Some economists believe that monopolies are both inevitable and beneficial to society. They believe that monopolies are more efficient than competitive markets and generate lower prices. For these reasons they oppose _________ and advocate __________.

A) antitrust laws; laissez-faire
B) laissez-faire; antitrust laws
C) nationalization; regulation
D) regulation; nationalization
E) antitrust laws; nationalization

Question 48

Government regulation of industry is designed to separate __________ from__________.

A) profit maximization; efficiency
B) efficiency; output
C) price making; the firm
D) monopolies; competitors
E) bigness; profitability

Question 49

The primary reason government chooses to regulate a natural monopoly is to

A) promote its eventual nationalization
B) control price and output
C) control profit
D) create competition
E) distribute market power more evenly among the firms in the industry

Question 50

Cable television is regulated because of its monopolistic cost structure. Baseball and basketball games, which also have monopolistic cost structures, are unregulated. What do these activities (watching TV and going to the ball park or stadium) not have in common?

A) being a leisure activity
B) being a luxury
C) entertainment value
D) large-scale public consumption
E) industry trade groups

Question 51

When regulating a firm, setting price equal to marginal cost does not necessarily requireproviding a subsidy if

A) it always requires providing a subsidy
B) ATC is always falling
C) MC is always falling
D) variable costs are covered
E) ATC is U-shaped

Question 52

Setting a fair price means

A) c and e
B) lowering the price until the monopolist says "unfair"
C) pricing at the point where average fixed and average variable costs sum to the price
D) imposing unreasonable restrictions on the price making capability of competitive firms
E) pricing as if the market were actually competitive

Question 53

A big problem with fair pricing schemes is that

A) output is lower than if the market were competitive
B) prices are higher than if the market were competitive
C) firms have no incentive to control costs
D) efficiencies result from lack of profit motive
E) the marginal cost may not be very low

Question 54

Marginal cost pricing regulations for a natural monopolist ensure that

A) b and e
B) price reflects the value society places on the last unit produced
C) output will continue to grow until the required subsidy is zero
D) fair pricing schemes are more profitable
E) subsidization will be necessary

Question 55

The Interstate Commerce Commission was created to check the monopoly power of________ and ended up protecting them from the competitive forces of _________.

A) passenger rail service; interstate bus companies
B) the Civil Aeronautics Board; the Federal Communications Commission
C) airlines; automobiles
D) railroads; truck transportation
E) railroads; inland barge service

Question 56

Antitrust issues can be political firestorms. In order to accomplish their economic missions regarding monopolies, regulation, and antitrust policy without incurring the scrutiny of the press and public, many presidents choose to

A) ignore the issue
B) adopt the rule of reason
C) adopt the per se rule
D) manipulate the budgets of enforcement agencies
E) promote policies outlined in the Clayton Act

Question 57

Suppose there are 100 firms of equal size currently sharing the market for peanut butter. If 12 of these firms merge, how much will the Herfindahl-Hirschman Index change?

A) increase by 144
B) decrease by 144
C) increase by 132
D) decrease by 132
E) increase by 232

Question 58

Suppose there are two industries, A and B. Suppose that mergers are proposed in both industries, and the Herfindahl-Hirschman Index would increase by 500 in each one. If antitrust officials allow the mergers in industry A but challenge the mergers in industry B, the most likely explanation is that

A) there are political motivations to antitrust enforcement
B) industry A was already less competitive than industry B
C) industry A had a balanced oligopoly and industry B did not
D) industry A started as a more competitive industry than B
E) antitrust authorities made a random decision

Question 59

The advantages that arise from economies of scale make entry difficult for new firms. As a result, monopolies and oligopolies are often associated with __________ and___________.

A) b and e
B) low costs; high prices
C) low costs; low prices
D) antitrust; laissez-faire
E) competition; high prices

Question 60

Which of the following are options available to government when dealing with monopolies?

A) b, c, and e
B) nationalization
C) marginal cost pricing regulation
D) marginal revenue pricing regulation
E) breaking up the firm

Question 61

Economies of scale create __________ for existing firms, which in turn creates__________ for potential entrants.

A) b and e
B) problems; opportunities
C) savings; costs
D) losses; profits
E) advantages; disadvantages

Question 62

Which of the following is not an antitrust enforcement option?

A) c and e
B) nationalization
C) laissez-faire
D) break ups
E) regulation

Question 63

In a perfectly balanced oligopoly (with eight firms, all having the same market share), if any one firm captures 1 percent of the market from one of the others,

A) c and d
B) the eight-firm concentration ratio will increase
C) the eight-firm concentration ratio will decrease
D) the Herfindahl-Hirschman index will rise
E) the Herfindahl-Hirschman index will fall

Question 64

When choosing between fair price and marginal cost regulation for a natural monopoly, regulators must choose between

A) c and d
B) c and e
C) two different price and quantity combinations
D) efficiency and equity
E) possible cost drift and subsidization

Question 65

A laissez-faire policy may be an effective antitrust policy if markets are

A) c and d
B) d and e
C) oligopolistic
D) competitive
E) contestable

Question 66

Which of the following is not part of our portfolio of antitrust acts?

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

Question 67

__________ are most likely to raise the eyebrows of antitrust officials while ______ are not.

A) Price discriminators; predatory pricers
B) Conglomerate mergers; vertical mergers
C) Horizontal mergers; conglomerate mergers
D) Low Herfindahl-Hirschman indices; high Herfindahl-Hirschman indices
E) Patent sales; patent purchases

Question 68

Which answer best describes how economists suggest we deal with monopolies and oligopolies?

A) We should regulate them all until the markets become competitive.
B) We should leave them alone.
C) Those firms should be nationalized.
D) We should fully enforce all antitrust laws.
E) There is no consensus among economists on this issue.

Question 69

If monopolies are both inevitable and bad, which policy alternative will be least disruptive of all effective policy alternatives?

A) regulate prices
B) nationalize
C) laissez-faire
D) encourage concentration
E) split up the monopoly

Question 70

Some economists agree that monopolies are inevitable and bad, but they also believe that price regulation is the wrong way to combat the high prices of a monopolist. They prefer

A) deregulating prices
B) nationalization
C) laissez-faire
D) encouraging concentration
E) splitting up the monopoly

Question 71

Some economists see monopolies as inevitable, but not necessarily bad. They recommend a policy of

A) regulating prices
B) nationalization
C) laissez-faire
D) encouraging concentration
E) splitting up the monopoly

Question 72

Which of the following arguments are frequently used to justify laissez-faire policy?

A) b, c, and e
B) Many concentrated markets are contestable.
C) There is competition, even in the most concentrated markets.
D) Monopolies are inevitable.
E) Economic blocs keep prices down.

Question 73

Some economists feel we should encourage market concentration because they believe monopolists and oligopolists can

A) c and d
B) c, d, and e
C) become technically superior
D) achieve economies of scale
E) innovate

Question 74

The term laissez-faire has the same meaning as which Beatles song?

A) Hey Jude
B) Penny Lane
C) Nowhere Man
D) Tax Man
E) Let it Be

Question 75

Some economists believe that high concentration within industries is _________, and weshould __________.

A) c, d, and e
B) terrible; deregulate the industries
C) beneficial; encourage it
D) inevitable; learn to live with it
E) not inevitable; break up monopolies

Question 76

Some economists reject the idea that bigness is __________. These people believe our policy should be __________.

A) c, d, and e
B) efficient or technologically superior; to encourage bigness
C) inevitable; to break big firms up
D) contestable; to contest bigness
E) inevitable; laissez-faire

Question 77

A regulated firm is _________, but has no __________.

A) a monopolist; control over prices
B) privately owned; control over prices
C) privately owned; board of directors
D) a monopolist; board of directors
E) fully autonomous; board of directors

Question 78

A natural monopoly has _________, but will __________ if left unregulated.

A) exclusive access to a natural resource; price competitively
B) exclusive access to a natural resource; not maximize profit
C) low average total cost; have high marginal costs
D) low average total cost; charge a high price
E) low average total cost; undercut its competitors

Question 79

The Massachusetts Turnpike is a state toll-road where cars and trucks pay a fee in proportion to the distance they travel and the weight of the vehicle. The road was built with federal funds in the 1960s, but the state must pay for maintenance. Given what youknow about regulation, what do you think the toll charge for a particular car or truckrepresents?

A) the average variable cost of maintenance
B) the marginal cost of maintenance
C) the monopoly price
D) price discrimination against bus passengers
E) a lump-sum tax

Question 80

If a regulatory agency forces a natural monopolist to stop charging monopoly prices and start charging competitive prices,

A) taxpayers will have to subsidize the firm
B) price will fall below AVC
C) the monopolist will shut down
D) stockholders will benefit
E) quantity produced will increase