Deck 16: Real-World Competition and Technology

Question 1

Real-world competition should not be viewed as a static condition but rather as a fight between the forces of monopolization and the forces of competition.

Answer 1

True

Question 2

Refer to the following graph. A lazy monopolist is best described by earning area A and B in profits.

Answer 2

False

Question 3

Peter Theil sees monopolies as:

A) bad for business.
B) bad for society.
C) bad for consumers.
D) solving a unique problem for consumers.

Answer 3

D

Question 4

According to Peter Thiel's book Zero to One, firms are always working toward:

A) dynamic monopoly.
B) perfect competition.
C) oligopoly.
D) monopolistic competition.

Question 5

According to the phrase, "competition is for losers," a goal of all firms is to:

A) monopolize a market.
B) be perfect competitors.
C) provide social goods.
D) provide public goods.

Question 6

Perfect competition is more conducive to technological change than any of the other market structures.

Question 7

According to economic theory, a monopolist would hire a lobbyist only if the expected marginal benefit of lobbying exceeded the marginal cost.

Question 8

Economic reasoning predicts that there will be strong pressures to make real-world markets perfectly competitive.

Question 9

The monitoring problem exists because employees' incentives differ from owners' incentives.

Question 10

According to Peter Theil's book Zero to One,

A) there are two market structures-oligopoly and monopoly.
B) there is only one market structure-perfect competition.
C) there is only one market structure-dynamic monopoly.
D) there are two market structures-oligopoly and competition.

Question 11

Potential profits encourage new firms to try to figure out ways to break down methods of protecting monopolies.

Question 12

Natural monopolies are mostly regulated industries because otherwise too many firms would enter the market and price would be driven too low for any firm to offer goods for a profit.

Question 13

In a dynamic context, firms concentrate on:

A) long-run profit.
B) short-run profit.
C) long-run customers.
D) short-run customers.

Question 14

Competition is best seen as a process.

Question 15

Real-world market structures tend to be:

A) perfectly competitive.
B) monopolies.
C) between monopolistically competitive and oligopolistic.
D) oligarchies.

Question 16

The majority of large corporations are directly controlled by the owners of the corporation.

Question 17

A contract that makes a manager's salary dependent on total profit would be a type of incentive-compatible contract.

Question 18

Competitive pressure places a limit on firms' laziness.

Question 19

According to the author of your textbook, competition is best understood:

A) as a dynamic process.
B) within a structural framework.
C) as price-driven.
D) as technology driven.

Question 20

The net effect of restricting entry into a market is to decrease the income of the remaining suppliers.

Question 21

The fact that U.S. managers' salaries are about four times higher than those of comparable managers in Japan, where banks control firms more closely, is probably:

A) an example of the monitoring problem in the United States.
B) an example of X-inefficiency in Japan.
C) due to the fact that the U.S. economy is much less competitive.
D) due to the fact that there are more natural monopolies in the United States.

Question 22

The fact that U.S. managers' salaries are substantially greater than those of comparable managers in Japan may be related to:

A) an increase in the demand for CEOs.
B) an increase in the supply of CEOs.
C) the comparatively greater competitive markets in Japan.
D) the greater number of public goods provided in the United States.

Question 23

Refer to the following graph. The additional profit that might be achieved by monitoring a lazy monopolist with ATC (X-inefficient) is equal to the area of rectangle:

A) A minus the cost of monitoring.
B) B minus the cost of monitoring.
C) A plus rectangle B minus the cost of monitoring.
D) A minus rectangle B minus the cost of monitoring.

Question 24

How do you know that firms benefit society?

A) Entrepreneurs start businesses.
B) Firms earn profits and produce goods.
C) Firms pay taxes and employ people.
D) Customers voluntarily pay for their products.

Question 25

The profit-maximization assumption of economic theory does not fit reality because:

A) all real firms want to maximize long-term profits rather than short-run profits.
B) all real firms want to maximize their share of the market.
C) real-world firms have a single goal, but this goal has nothing to do with profits.
D) real-world firms have many goals, which depend on the incentive structure incorporated into the firm's organization.

Question 26

Which of the following is an example of the monitoring problem?

A) Government fails to stop firms hiring child labor to produce goods.
B) Two firms collude to set the market price, but the government cannot prove this conclusively.
C) The managers of a firm maximize their own salaries to the detriment of maximizing profit for the owner of the firm.
D) A firm does not take into account the air pollution caused by a coal factory when pricing its product.

Question 27

The general monitoring problem implies that:

A) profit maximization should always be a firm's goal.
B) there is a cost of supervising employees so that they work toward the owner's goals rather than their own.
C) government must intervene to protect national goals.
D) competition will ensure common goals among the owners and managers of a firm.

Question 28

Explanation: The monitoring problem arises when employees' goals do not match the goals of owners of a firm. Since managers can influence the level of their pay, a monitoring problem can result in firms giving exorbitant pay to managers.
Difficulty: 2 Medium
Topic: Incentives and Monitoring Costs
Learning Objective: 16-02 Discuss why competition should be seen as a process, not a state.
Bloom's: Understand
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
The fact that U.S. managers' salaries are substantially higher than the salaries of comparable managers in Japan may be related to the fact that:

A) the demand for CEOs has decreased.
B) the supply of CEOs has decreased.
C) there are no government controls on CEOs' earnings in the United States.
D) there are more natural monopolies in the United States.

Question 29

The standard monopoly model eliminates the monitoring problem by assuming that:

A) the owner does not maximize profit.
B) marginal cost is zero, and so the output at which profit is maximized is the same as the output at which sales revenues are maximized.
C) the owner of the firm makes all the decisions.
D) the owner of the firm has no control over decisions.

Question 30

An agreement in which the incentives of both parties match their goals as closely as possible is:

A) an X-inefficiency contract.
B) a public good.
C) an incentive-compatible contract.
D) a corporate takeover contract.

Question 31

Refer to the graphs shown. The maximum profits that an efficient monopolist that produces a profit-maximizing quantity could earn is best shown by the area:

A) A + B in graph (1).
B) A in graph (1).
C) C + D in graph (2).
D) C in graph (2).

Question 32

Lazy monopolists are characterized by the tendency to:

A) maximize profits at the cost of losing market share.
B) pay too much to protect their monopoly positions.
C) earn enough profits to keep their shareholders happy without trying too hard to hold costs down.
D) minimize losses so that the dividends of shareholders are maximized.

Question 33

Refer to the graphs shown. The maximum profits that a lazy monopolist whose average total costs are given by the ATC (X-inefficient) curve but who still produces the profit-maximizing quantity might earn is best shown by the area:

A) A+ B in graph (1).
B) A in graph (1).
C) C + D in graph (2).
D) C in graph (2).

Question 34

It is not uncommon for businesses to pay contingent bonuses that depend on performance. Contingent bonuses are an example of what the text calls:

A) X-inefficiency.
B) an incentive-compatible contract.
C) a winner-take-all contract.
D) a network externality.

Question 35

Refer to the graph shown. The per-unit cost incurred by a monopolist that is X-inefficient but produces the profit-maximizing level of output is best illustrated by:

A) A.
B) B.
C) C.
D) D.

Question 36

Refer to the graph shown. A monopolist that efficiently produces the profit-maximizing level of output would have per-unit cost equal to:

A) A.
B) B.
C) C.
D) D.

Question 37

A monitoring problem most likely will occur when:

A) employees' self-interest is the same as the firm's interest.
B) employees' self-interest differs from the firm's interest.
C) the owner makes all the decisions for the business.
D) a company is employee-owned.

Question 38

Entrepreneurs care about:

A) only profits.
B) profits and solving problems.
C) only themselves.
D) profits and prices.

Question 39

Refer to the following graph. Although this monopolist could technically keep average total costs down to C_0, its costs are C₁. This is an example of a(n):

A) lazy monopolist.
B) Y-inefficient firm.
C) monopolistic minimizer.
D) oligopolistic market.

Question 40

Monitoring a monopoly to keep it efficient would itself be efficient if the extra profit achieved by:

A) raising production costs is less than the costs of monitoring.
B) raising production costs exceeds the costs of monitoring.
C) reducing production costs is less than the costs of monitoring.
D) reducing production costs exceeds the costs of monitoring.

Question 41

Which of the following is a legal right to control who may produce a good?

A) A proxy
B) A patent
C) A controller
D) A legal controller

Question 42

Consumers tend to accept the market restrictions imposed by suppliers because:

A) government prevents them from organizing.
B) they see themselves as laborers and therefore benefit from restrictions.
C) their costs of organizing are higher than the cost of the collusion by the suppliers.
D) when combined, their losses are small for the group as a whole.

Question 43

A rise in X-inefficiency:

A) shifts the ATC curve up.
B) shifts the ATC curve down.
C) shifts the ATC curve down or up, depending on the nature of the inefficiency.
D) does not affect costs, only the price and quantity.

Question 44

Refer to the graph shown. Suppliers producing L will spend up to area(s) ________ to limit output to L.

A) A
B) B
C) A and B
D) B and D

Question 45

Refer to the graph shown. If suppliers can reduce output from M to L, the remaining firms in the market that are still producing L will find that their revenues will rise by:

A) area A.
B) area B.
C) area A, B, and C.
D) area A, B, and D.

Question 46

Refer to the following graph. Suppose this diagram represents a monopolist with a patent. What is the maximum the monopolist would be willing to spend to defend its patent?

A) Area A
B) Area B
C) Area A and B
D) Area D

Question 47

Refer to the following graph. A monopolist's inefficiency per unit of output at the profit-maximizing level of output is limited to cost per unit:

A) A minus B.
B) B minus C.
C) A minus C.
D) C.

Question 48

Opening an industry to international competition tends to:

A) increase X-inefficiency.
B) force lazy monopolists to increase efficiency.
C) increase the incidence of lazy monopolists.
D) raise a monopolist's profit as the price is driven up.

Question 49

Suppose a lazy monopolist's fixed costs are higher than the fixed costs of an efficient monopolist. In all other respects the monopolists are the same. Which of the following statements about this lazy monopolist is true?

A) It charges a higher price than the monopolist producing efficiently.
B) It charges a lower price than the monopolist producing efficiently.
C) It produces fewer goods than the monopolist producing efficiently.
D) It sets price and quantity the same as the monopolist producing efficiently.

Question 50

Refer to the graph shown. If suppliers can reduce output from M to L, the suppliers excluded from the market will lose the producer surplus shown by area:

A) F.
B) D.
C) E.
D) E and F.

Question 51

Suppliers would be less eager to organize to restrict output if they faced a:

A) less elastic demand.
B) more elastic demand.
C) perfectly inelastic demand.
D) unit-elastic demand curve.

Question 52

Across the United States, fire departments are fighting with private companies over the right to respond to medical emergencies. Each side will fight harder the:

A) more inelastic the demand.
B) more elastic the demand.
C) less inelastic the demand.
D) more elastic the supply.

Question 53

The text suggests that real-world competition is best seen as:

A) a process.
B) a state.
C) nonexistent.
D) existing only if government intervenes.

Question 54

One reason why our laws and social mores work against competition is:

A) society likes the advantages of monopolies.
B) managers are constantly wanting to operate more efficiently.
C) society does not want lower prices.
D) society has other goals besides efficiency.

Question 55

Refer to the graph shown. If suppliers can reduce output from M to L, consumer surplus is reduced by area(s):

A) A.
B) A and B.
C) B and D.
D) A, B, and D.

Question 56

Why is the perfect competition model unrealistic?

A) Self-seeking individuals actively seek out ways to limit competition to increase personal gains.
B) Monopoly is more prevalent in the economy than is perfect competition.
C) Homogeneous products are numerous in the economy.
D) The model assumes that market structures are dynamic.

Question 57

Suppose a lazy monopolist's fixed costs are higher than the fixed costs of an efficient monopolist. In all other respects the monopolists are the same. Which of the following statements about this lazy monopolist is true?

A) Its total profit is lower than that of the monopolist producing efficiently.
B) Its total profit is the same as that of the monopolist producing efficiently.
C) Its total revenue is less than that of the monopolist producing efficiently.
D) It produces less than does the monopolist producing efficiently.

Question 58

Suppliers would be the most eager to organize to restrict output if they faced:

A) an inelastic demand.
B) an elastic demand.
C) a unit-elastic demand.
D) a perfectly elastic demand.

Question 59

Suppose a lazy monopolist's fixed costs are lower than the fixed costs of an efficient monopolist. In all other respects, the monopolists are the same. Which of the following statements about this monopolist is true?

A) It charges a higher price than the monopolist producing efficiently.
B) It charges a lower price than the monopolist producing efficiently.
C) Its total revenue is the same as the monopolist producing efficiently.
D) It produces less than the monopolist producing efficiently.

Question 60

Refer to the graph shown. If suppliers can restrict output from M to L, the price will:

A) fall from PL to PM.
B) fall from PM to PL.
C) rise from PL to PM.
D) rise from PM to PL.

Question 61

Mail-order sales of wine are illegal in some states. Some wineries argue that the ability to ship directly to consumers helps small wineries and that shipping bans unfairly protect home-state wineries, raising prices to consumers. Others argue that the bans allow states to collect tax revenues and to keep wine from being sold to minors. Economists looking at this case would say that one effect of the ban is to prevent:

A) reverse engineering.
B) a network externality.
C) competition to existing sellers.
D) a winner-takes-all market.

Question 62

A firm will buy monopoly power until the marginal cost of having a monopoly:

A) equals the marginal benefit.
B) equals the price of its product.
C) is more than the marginal benefit.
D) is less than the marginal benefit.

Question 63

Reverse engineering is the process of a firm buying other firms' products and:

A) selling them in the market for a cheaper price than those firms do.
B) selling them in the black market for an exorbitant price.
C) copying them within the limits of law.
D) copying them unlawfully.

Question 64

In practice, regulatory boards try to set the price of a natural monopoly so that price:

A) equals marginal cost.
B) covers all explicit costs.
C) includes all costs plus a normal return on capital investment.
D) is constant over time.

Question 65

What do economists mean by "reverse engineering"?

A) Taking a product apart in order to copy its design
B) A modification of old technology
C) A decision to adopt an old technology rather than a new one
D) Modification of existing machines so that they can be run by handicapped persons

Question 66

In the United States, lobbying is:

A) not important to most monopolies.
B) a way of protecting monopolies.
C) illegal.
D) important to firms in perfectly competitive markets.

Question 67

Suppliers who are kept out of the market generally do not retaliate because:

A) government prevents them from organizing.
B) they aren't hurt by the restriction.
C) the costs of organizing are higher than those of demanders.
D) the costs of organizing and lobbying exceed the expected gains.

Question 68

What controls the price that natural monopolies charge so that it will be a "fair price"?

A) Patents
B) Regulatory boards
C) Consumers
D) Competition

Question 69

Which best characterizes the reason why electricity was deregulated?

A) New technology
B) X-inefficiency
C) Foreign competition
D) Economies of scale

Question 70

If firms have to spend money on creating and protecting their monopoly power, they're going to buy:

A) more monopoly power than if it were free.
B) the same monopoly power as if it were free.
C) less monopoly power than if it were free.
D) no monopoly power.

Question 71

Which of the following is not a way in which monopolies fight real-world competition?

A) Lobbying
B) Advertising
C) Producing products that are difficult to copy
D) Charging a very high price for their products

Question 72

For years, Amazon.com, which began as an Internet bookseller, had no profits and was incurring annual losses. Still, the stock market valued the company very highly. One reason for this was that investors believed that:

A) Amazon.com was in a winner-takes-all market.
B) Amazon.com faced fierce foreign competition.
C) the Internet was a perfectly competitive market.
D) on the Internet brand recognition is unimportant.

Question 73

Government has:

A) deregulated the electricity industry because domestic producers are facing fierce international competition.
B) deregulated the entire electricity industry because the bureaucratic costs of maintaining the regulations became too high.
C) broken the electricity industry into subindustries and deregulated the portions that do not exhibit economies of scale.
D) broken the electricity industry into subindustries and deregulated the portions that exhibit economies of scale.

Question 74

In natural and platform monopolies, economists argue that regulation:

A) is not explicitly desirable, and society should rather rely on direct competitive forces.
B) should be heavily enforced by government.
C) is desirable, and should involve strict enforcement.
D) is irrelevant.

Question 75

Natural monopolies enjoy strong economies of scale, and so as output increases:

A) marginal revenue is continually falling.
B) average costs are continually rising.
C) average costs are continually falling.
D) marginal costs are continually rising.

Question 76

In practice, regulatory boards try to set the price of a natural monopoly so that price covers a normal return on capital investment. As a result:

A) there is an incentive to use less equipment.
B) there is an incentive to use more equipment.
C) the incentive to use equipment stays the same.
D) the price of equipment should decrease.

Question 77

A firm will spend money on a program to develop or protect its monopoly position until the:

A) marginal costs > the marginal benefits.
B) marginal costs < the marginal benefits.
C) marginal benefits = the marginal costs.
D) total costs = the total benefits.

Question 78

One way firms protect their monopoly is:

A) raising prices.
B) producing items that can be copied easily.
C) advertising.
D) taking advantage of short-run profits.

Question 79

The adoption of the QWERTY keyboard in the early days of mechanical typewriters, with its continued use today, has been suggested as a metaphor for:

A) technological lock-in.
B) a lazy monopoly.
C) reverse engineering.
D) X-inefficiency.

Question 80

In a natural monopoly, and in platform monopolies that have natural monopoly elements, the average cost:

A) decreases with additional production.
B) increases with additional production.
C) remains constant with additional production.
D) vacillates up and down with additional production.