Question 1

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

Accepted Answer

Price regulation is often supported by those who view monopolies as inevitable and undesirable because it can prevent monopolies from setting excessively high prices, thus protecting consumers and ensuring fair competition.

Question 2

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

Accepted Answer

A natural monopoly can remain in business without a subsidy if the regulated price covers its average cost, allowing it to recover its costs and earn a normal profit.

Question 3

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.

Accepted Answer

A firm may be a natural monopoly in a small market due to high fixed costs and economies of scale making it inefficient for multiple firms to operate. However, in a larger market like New York City, the increased demand and potential for more competitors can change the market structure, making it possible for the firm to operate in a monopolistically competitive environment.

Question 4

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

Accepted Answer

The answer of Antitrust activity is not a good example...

Question 5

Antitrust problems rarely appear in competitive markets.

Accepted Answer

Antitrust problems are less likely in competitive markets because competition prevents any single company from gaining excessive market power, which is the primary concern of antitrust laws.

Question 6

Perfectly competitive markets do not exist in the real world.

Accepted Answer

While the concept of perfectly competitive markets is used in economic theory to model and analyze market behaviors, in reality, no market meets all the strict criteria (such as infinite buyers and sellers, homogeneous products, and perfect information) required for perfect competition.

Question 7

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

Accepted Answer

While government regulation of prices can sometimes mitigate the negative effects of monopolies by making goods and services more affordable, it does not address the root causes of monopoly power, such as lack of competition, barriers to market entry, or control over essential resources. Additionally, price regulation can lead to reduced incentives for innovation and efficiency.

Question 8

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.

Accepted Answer

When a regulatory commission chooses a fair price for a public utility, it often sets the price where Average Total Cost (ATC) equals demand (P = ATC), not where Price equals Marginal Cost (P = MC), to ensure the company can cover its costs and maintain financial viability.

Question 9

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.

Accepted Answer

The Green Bay Packers are indeed a unique example within the NFL as they are owned by shareholders and operated as a nonprofit corporation, yet they compete successfully on the field and in financial terms with other teams that operate on a for-profit basis.

Question 10

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

Accepted Answer

The theory of creative destruction, introduced by Joseph Schumpeter, suggests that economic development arises from the destruction of existing economic structures through the creation of innovative ones, not that competition leads to monopolies.

Question 11

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.

Accepted Answer

Laissez-faire proponents believe in minimal government intervention in the economy, but they do support the government creating and enforcing a patent system. This is because patents provide an incentive for firms to invest in research and development by granting them exclusive rights to their inventions for a period of time, thus fostering innovation and economic growth.

Question 12

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

Accepted Answer

The Sherman Antitrust Act of 1890 was initially not very effective in curbing monopoly power due to its vague terms and the judiciary's narrow interpretation, which made enforcement difficult.

Question 13

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.

Accepted Answer

The per se criterion is a legal doctrine that holds that certain conduct is illegal without regard to its actual effects. In antitrust law, the per se criterion is applied to certain types of conduct that are considered to be inherently anticompetitive, such as price fixing and market allocation. Being too big a firm in an industry can be sufficient grounds to charge the firm with violating antitrust laws under the per se criterion because it can create a presumption of market power and the ability to engage in anticompetitive conduct.

Question 14

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.

Accepted Answer

While the Antitrust Division of the Department of Justice does play a significant role in antitrust investigation and enforcement, the characterization that the Congressional budget has allocated substantial funds specifically since the 1980s, leading to it being one of the most vigorous agencies today, is misleading. Funding and vigor of enforcement can fluctuate based on various factors including political priorities, economic conditions, and specific cases at hand, rather than a consistent increase in budget allocation since the 1980s.

Question 15

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

Accepted Answer

A consent decree is a legal agreement used to settle disputes without admitting guilt or wrongdoing. In antitrust cases, it allows an enterprise to avoid prosecution by agreeing to take certain actions that address the government's concerns about unfair competition or monopolistic practices.

Question 16

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.

Accepted Answer

Creative destruction theory, proposed by Joseph Schumpeter, suggests that innovation by entrepreneurs within a competitive industry leads to the demise of outdated businesses, products, or technologies, thereby fostering new growth and leading to economic development, rather than strengthening the original industry's market power.

Question 17

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

Accepted Answer

Average cost pricing allows the company to cover all its costs, including a normal profit, which can help ensure prices are kept at a reasonable level for consumers while allowing the company to stay in business.

Question 18

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

Accepted Answer

Schumpeter's economies of scale argument suggests that larger firms can be more efficient and innovative, which can actually increase their market power rather than reduce it. This is not consistent with the goal of reducing the power of firms in the market.

Question 19

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

Accepted Answer

A contestable market is characterized by the threat of potential entry by new competitors, which can help to moderate prices even if the market currently has few or no competitors. This threat ensures that existing firms behave competitively to deter new entrants.

Question 20

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

Accepted Answer

Antitrust laws are designed to prevent monopolies and promote competition because it is believed that the price and quantity outcomes of a perfectly competitive market are the most efficient and socially beneficial. These laws aim to ensure that no single entity can control a market to the detriment of consumers and the economy.

Quiz 13: Antitrust and Regulation