Deck 16: Government and Business

Question 1

If all Pareto improvements have been made,

A)the result is increased government regulations.
B)the outcome is Pareto efficient.
C)consumer surplus is maximized.
D)monopolists are unhappy.

Answer 1

the outcome is Pareto efficient.

Question 2

If the government regulates the price a monopoly can charge, and the price ceiling is set below what the competitive market price would be, then

A)a shortage will exist.
B)a surplus will exist.
C)producer surplus is maximized.
D)consumer surplus is maximized.

Answer 2

a shortage will exist.

Question 3

If a government policy increases benefits to the unemployed without having a detrimental effect on any other constituent, the policy is

A)a Pareto improvement.
B)redistributive.
C)regressive.
D)a positive externality effect.

Answer 3

a Pareto improvement.

Question 4

Governments can eliminate market failure due to an imperfectly competitive market by

A)changing the market structure, for example by eliminating monopoly protection.
B)having the government own the monopoly.
C)imposing regulations that reduce prices.
D)All of the above.

Question 5

If a change is a Pareto improvement, then

A)we also achieve Pareto efficiency.
B)consumer surplus is maximized.
C)it also passes the cost-benefit test.
D)the distributional effect is likely to be regressive.

Question 6

Optimal price regulation sets price equal to

A)marginal cost.
B)average variable cost.
C)average cost.
D)minimum average cost.

Question 7

When discussing rules that governments use to intervene in a market, we can take a(n)________ approach where we discuss what governments should do, or a ________ approach where we discuss what governments actually do.

A)normative; positive
B)positive; normative
C)optimistic; cynical
D)bipartisan; normative

Question 8

If a change passes the cost-benefit test, then

A)it is a Pareto improvement.
B)it may be a Pareto improvement.
C)it is not a Pareto improvement.
D)total surplus is maximized.

Question 9

If Pareto efficiency has been achieved,

A)there are no additional Pareto improvements that can be made.
B)surplus is maximized.
C)economic efficiency is also achieved.
D)All of the above.

Question 10

Market failures ________ and generate ________.

A)compel the government to act; regulations
B)create monopolies or oligopolies; deadweight loss
C)reduce economic efficiency; deadweight loss
D)create deadweight loss; externalities

Question 11

A main rationale for government intervention in markets ________ and ________.

A)is to reduce producer surplus; redistribute wealth
B)concerns the creation of public goods; reduces free-riding
C)is to correct market failures; increase surplus
D)There is never an economic rationale for government intervention.

Question 12

Which of the following is a Pareto improvement?

A)A monopolist loses its monopoly when a government policy allows another firm to enter the market, resulting in lower prices and higher quantity available for consumers.
B)A government policy is implemented that results in the middle class being better off, and the very rich only have to pay a little bit more in taxes.
C)A government policy removes a market failure.
D)None of the above.

Question 13

If a policy helps some but harms others,

A)the result is a Pareto improvement for the people who are helped.
B)then the cost-benefit analysis will show a net increase in surplus and is therefore desirable.
C)we cannot use the Pareto principle to evaluate whether or not the policy is desirable.
D)it is too hard to determine whether or not the outcome is desirable.

Question 14

Who said "If it moves, tax it. If it still moves, regulate it. If it stops moving, subsidize it."?

A)Barack Obama
B)Ronald Reagan
C)Vilfredo Pareto
D)Adam Smith

Question 15

If a government policy change harms a monopolist, the government could

A)tax those who get additional gains and compensate the monopolist, thereby making the change a Pareto improvement.
B)increase the general tax rate and compensate the monopolist, thereby making the change a Pareto improvement.
C)do nothing, because the change is a Pareto improvement.
D)It is not possible to mitigate the harm to a monopolist.

Question 16

According to the cost-benefit principle, if a change generates $50,000 in gains and $45,000 in losses,

A)it is desirable.
B)the gain is not large enough to justify the change.
C)the desirability depends on who gains and who loses.
D)it is a Pareto improvement.

Question 17

Reparations for slavery in the United States would

A)be consistent with the Pareto principle.
B)be inconsistent with the Pareto principle.
C)have nothing to do with the Pareto principle.
D)be unconstitutional.

Question 18

Which of the following statements is TRUE?

A)A government policy that eliminates a market failure, but only some people gain while others are kept the same, is not a Pareto improvement.
B)A government policy that eliminates a market failure, but only some people gain while others are kept the same, is a Pareto improvement.
C)A government policy that eliminates a market failure and some people gain and some lose only a little, is a Pareto improvement.
D)A government policy that generates a Pareto improvement eliminates all deadweight loss.

Question 19

One way a government can eliminate a market failure

A)is to regulate the price so that it equals marginal cost.
B)is to implement a price floor equal to marginal cost.
C)is to regulate the price so that it is below average cost.
D)None of the above solutions will eliminate a market failure.

Question 20

The argument that society should be in favor of changes that benefit some people without making others worse off is known as

A)a positive externality.
B)the Coase Theorem.
C)the cost-benefit principle.
D)the Pareto principle.

Question 21

Laws that are used to prevent firms from colluding and setting high prices are called

A)anti-trust laws.
B)price ceiling laws.
C)anti-cartel laws.
D)anti-competition policies.

Question 22

Cartels persist despite laws against them because

A)international cartels are legal.
B)firms believe they can avoid detection and the penalties are small anyway.
C)firms can coordinate without explicitly colluding.
D)All of the above.

Question 23

In the U.S., charging monopoly-level prices

A)is evidence of a conspiracy.
B)is illegal.
C)is not necessarily illegal.
D)constitutes a per se violation.

Question 24

In the U.S., the ________ and the ________ prohibit firms from explicitly agreeing to take actions that reduce competition.

A)Department of Justice Act; Federal Trade Commission Act
B)Sherman Antitrust Act; Federal Trade Commission Act
C)Per Se Act; Sherman Antitrust Act
D)Pareto Act; Anti-Cartel Act

Question 25

Regulation

A)always increases consumer surplus.
B)passes the cost-benefit test.
C)solves market failures of all size.
D)None of the above.

Question 26

Regulation might NOT increase total surplus because

A)the costs of the regulation might outweigh the benefits.
B)it may not be possible to gather the information necessary to set prices correctly.
C)regulators might get captured by the industry.
D)All of the above.

Question 27

Rent seeking is

A)when consumers search for the lowest possible rent on housing.
B)illegal in the U.S.
C)what regulators do to improve their chances of getting jobs in the regulated industry after they leave government service.
D)where firms expend effort and money to profit from government actions.

Question 28

In the U.S., one example of a cartel that is legal is

A)the railroads, including Union Pacific.
B)the oil industry.
C)Major League Baseball.
D)None, all cartels are prohibited.

Question 29

Mergers may result in

A)anticompetitive behavior.
B)more efficient production.
C)fewer firms in a market.
D)All of the above.

Question 30

Mergers harm society.

A)True. Firms merge to avoid antitrust laws and increase their prices.
B)Maybe. It depends on whether the effect on prices is larger from reducing competition or increasing efficiency.
C)False. Firms gain economies of scale and pass the price savings on to their customers.
D)True. Total surplus is reduced when firms merge.

Question 31

When attempting price regulation, a government faces what problem(s)?

A)limited information
B)bribes
C)uncooperative firms
D)All of the above.

Question 32

Regulatory capture is where

A)governments take over monopolies through use of regulation.
B)firms impose barriers to entry on regulators.
C)regulators of an industry look out for the industry instead of society.
D)the government taxes the profits of monopolies such that all producer surplus goes to the government.

Question 33

If a monopolist's production process has economies of scale and average cost exceeds marginal cost, then

A)the government could set price equal to marginal cost and subsidize the monopoly.
B)the government should not offer a subsidy, since the monopoly can make a profit setting price equal to marginal costs.
C)if the government sets price equal to average cost, the monopoly will go out of business.
D)the government cannot regulate price.

Question 34

In order to regulate a monopoly's price, the government

A)needs to hire former executives from the monopoly.
B)should rely on industry experts for information.
C)needs accurate information on the monopoly's demand and cost curves.
D)needs to know the monopoly's supply curve.

Question 35

If the government wants to regulate a natural monopoly while ensuring the firm does not earn profits or require subsidies, the government will force the firm to set price equal to

A)average cost.
B)marginal cost.
C)marginal revenue.
D)None of the above.

Question 36

If a monopolist's production process has economies of scale and average cost exceeds marginal cost, then

A)the government should set price equal to marginal cost.
B)if the government sets price equal to marginal cost, the monopoly will go out of business.
C)if the government sets price equal to average cost, the monopoly will go out of business.
D)the government cannot regulate price.

Question 37

If the government regulates the price a monopoly can charge, and the price ceiling is set below what the competitive market price would be, then

A)there will be excess supply.
B)there will be excess demand.
C)producer surplus is maximized.
D)consumer surplus is maximized.

Question 38

Mergers are closely scrutinized by the government because

A)they might allow the firms involved to dominate the market and act as a legalized cartel (monopoly).
B)they always result in a more efficient market.
C)they always result in lower joint profits of the firms involved.
D)all mergers are undesirable.

Question 39

What is one problem with trying to regulate a monopoly's price?

A)The government needs information on the monopoly's marginal cost.
B)The government needs information on the maximum quantity the monopoly can supply.
C)The government needs to identify which firm is a monopolist.
D)Anything that the government does is problematic.

Question 40

Cartels persist despite laws against them because

A)international cartels are legal.
B)it is impossible to convict firms.
C)of the Prisoners' Dilemma issue.
D)All of the above.

Question 41

What is one reason drunk driving is held in such disrepute?

A)Drunk driving imposes high potential costs on non-drunk drivers.
B)Drunk driving destroys cars and telephone poles, causing disruption in essential services.
C)Only drunk drivers cause automobile fatalities.
D)Drunk drivers impose high potential costs on other drunk drivers.

Question 42

If children go to school and become productive members of society,

A)a negative externality is created by the schools.
B)a positive externality is created by the schools.
C)no externality is created by the schools.
D)an externality is created that may be positive or negative.

Question 43

A firm charging prices below marginal cost is said to be engaged in

A)price fixing.
B)predatory pricing.
C)a cartel.
D)irrational behavior.

Question 44

Students who talk loudly with each other in class

A)create an externality because other students cannot follow the lecture as well.
B)disturb nobody.
C)benefit the other students in class because they engage in conversation.
D)only create an externality if they talk about something unrelated to class.

Question 45

The government forcing a monopoly telecommunications company to allow other firms to use its cables is an attempt to

A)regulate prices.
B)decrease the monopoly market power by eliminating a natural monopoly.
C)decrease the monopoly market power by increasing competition.
D)None of the above.

Question 46

If a production process creates pollution, a competitive market produces excessive pollution because

A)the firms do not include the social cost of the pollution in their profit-maximizing decisions.
B)the firms place too high a price on society's cost of inflation.
C)people are not injured by the pollution.
D)zero pollution is optimal.

Question 47

In general, an externality is created when

A)people are affected (other than by price)by a transaction which they were not part of.
B)firms produce a product of low quality and consumers don't like it.
C)firms have to pay for pollution the environment.
D)the government subsidizes education.

Question 48

Resale price maintenance

A)requires a retailer to sell a good no lower than the specified price.
B)is per se illegal.
C)is the price of a maintenance contract on a good, such as an extended service contract on a car.
D)has a net negative impact on competition.

Question 49

The price of pie increases. Some people who purchased pie before the price increase no longer purchase pie. This is

A)a positive externality.
B)a negative externality.
C)a positive externality for some consumers and a negative externality for others.
D)not an externality.

Question 50

Which of the following statements about private and social costs associated with a negative externality is TRUE?

A)Social costs include externalities.
B)Private cost do not include externalities.
C)Social costs are never smaller than private costs.
D)All of the above.

Question 51

An externality

A)is always either a negative or positive externality.
B)could be either a negative or positive externality.
C)can be a negative externality for one group of people and a positive externality for another.
D)creates market failures only when they are negative.

Question 52

An example of an essential facility is

A)the telephone line into your house.
B)U.S. Route 66.
C)the Golden Gate Bridge.
D)your local pizza parlor.

Question 53

A firm's private costs

A)include only its direct costs.
B)are the private profit minus the producer surplus.
C)include both direct and indirect costs.
D)exclude the taxes on any externalities generated.

Question 54

An exclusive deal is

A)always illegal.
B)welfare reducing.
C)one where a firm will only sell to a customer if the customer agrees not to buy anything from the firm's rivals.
D)All of the above.

Question 55

Positive externalities are created when

A)other consumers reduce their demand for coffee and price thereby declines.
B)farmers spray pesticide in their fields and it washes into the local river after the first rainstorm.
C)your neighbor plants beautiful trees and flowers in her yard.
D)you purchase the "Mona Lisa" and lock it in a vault.

Question 56

Antitrust laws seek to prevent actions that harm society such as

A)price discrimination.
B)refusal to deal.
C)predatory pricing.
D)All of the above.

Question 57

Consider a housing development built near an existing airport. After the houses are occupied, homeowners complain that the airport imposes a negative externality on them and it should be moved or otherwise limited. Is the airport a negative externality?

A)No, the airport was there first.
B)No, if the original property values reflect the costs imposed by the airport.
C)No, airports are government entities and therefore don't impose costs on individuals.
D)Yes, the airport's noise should be curtailed for the well-being of the homeowners.

Question 58

Negative externalities are created when

A)an increase in the price of butterfat drives up the price of ice cream.
B)a driver leaves his car in a parking space after the meter expires and receives a ticket.
C)a driver drives recklessly on a busy highway.
D)a driver pulls over to help a stranded motorist fix a flat tire.

Question 59

According to the U.S. Robinson-Patman Act of 1936, price discrimination

A)is always illegal.
B)is legal unless it harms competition.
C)may be used to drive rivals out of business.
D)can only be justified if the price discrimination is due to actual cost differences.

Question 60

If a dominant firm is charged with refusal to deal under antitrust law, it is being charged because

A)the firm will not set its price at the regulated rate.
B)it is refusing to sell a key input to downstream rivals, thereby reducing or destroying competition.
C)it is refusing to cooperate with antitrust authorities, such as the Department of Justice.
D)it will sell its products only to people who agree to buy only from it and not from rival firms.

Question 61

The result that, under certain circumstances, no government action is needed to control an externality because it can be eliminated by bargaining between the affected parties is called

A)a Nash Equilibrium.
B)the Coase Theorem.
C)the Bargaining Theorem.
D)English Bargaining.

Question 62

The above figure shows the market for steel ingots. If the market is competitive, then

A)the socially optimal quantity of steel is zero.
B)the socially optimal quantity of steel of 50 units is produced.
C)the socially optimal quantity of steel of 100 units is produced.
D)more than the socially optimal quantity of 50 units of steel is produced.

Question 63

The exclusive privilege to use an asset is called a(n)

A)property right.
B)exclusive use agreement.
C)property privilege.
D)right to work privilege.

Question 64

In a market with positive externalities,

A)the efficient level of production is less than what competition will obtain.
B)the efficient level of production is equal to what competition will obtain.
C)the efficient level of production is more than what competition will obtain.
D)there cannot be an efficient level of production.

Question 65

If a production process generates pollution, then a competitive market will produce more of the good than is socially optimal because

A)firms take all costs into consideration.
B)firms incur all costs of production but ignore some of them.
C)firms ignore the costs of production that they do not incur.
D)firms set price equal to social marginal cost.

Question 66

When the government charges an output tax to eliminate an externality, it forces the manufacturer to ________ the negative externality.

A)charge customers for
B)internalize
C)stop producing
D)increase the production of

Question 67

The above figure shows the market for steel ingots. The socially optimal quantity of steel is

A)0 units.
B)50 units.
C)100 units.
D)produced if the market were competitive.

Question 68

Environmental CSR that is undertaken to reduce negative externalities might be

A)altruistic.
B)strategic.
C)undertaken because of Internet-based scrutiny.
D)All of the above.

Question 69

If a production process creates pollution, a competitive market produces excessive pollution because

A)private marginal cost of pollution exceeds its social marginal cost.
B)social marginal cost of pollution exceeds its private marginal cost.
C)the marginal benefit of pollution to the firm is zero.
D)zero pollution is optimal.

Question 70

The above figure shows the market for steel ingots. An externality can be seen because

A)the social marginal cost exceeds the private marginal cost.
B)the private marginal cost exceeds the social marginal cost.
C)the optimal quantity of steel is zero.
D)not enough steel gets produced by the competitive market.

Question 71

In the presence of no externalities,

A)social marginal cost exceeds private marginal cost.
B)social marginal cost is less than private marginal cost.
C)social marginal cost equals private marginal cost.
D)social marginal cost and private marginal cost cannot be compared.

Question 72

The above figure shows the market for steel ingots. The optimal quantity of pollution

A)is 0 units.
B)is 50 units.
C)is 100 units.
D)cannot be determined from the information provided.

Question 73

The socially optimal amount of pollution is

A)zero.
B)greater than zero.
C)indeterminant.
D)unattainable.

Question 74

If the government has enough knowledge about a market and the damage it causes through pollution, it can force the socially optimal output

A)through an emission fee.
B)using a ban on pollution.
C)by deregulating to eliminate the monopoly.
D)All of the above.

Question 75

The above figure shows the market for steel ingots. If the market is competitive, then the deadweight loss to society is

A)a.
B)b.
C)c.
D)zero.

Question 76

If a production process creates positive externalities, a competitive market produces too few positive externalities because the producer

A)does not pay all the costs of the externalities.
B)does not receive compensation for the externalities.
C)Both A and B.
D)None of the above.

Question 77

One way for the government to eliminate a negative externality is to

A)charge an emissions fee.
B)set an emissions standard.
C)levy an effluent charge.
D)All of the above.

Question 78

If a production process generates pollution, then a competitive market will

A)produce more of the good than is socially optimal.
B)produce less of the good than is socially optimal.
C)produce the socially optimal quantity of that good.
D)produce zero output.

Question 79

Suppose two neighbors share a park. One neighbor, Al, leaves trash in the park. This bothers the other neighbor, Bert. According to Coase's Theorem, the optimal level of trash in the park can be achieved if

A)Al is fined by the government.
B)Al has the right to leave trash and Bert cannot do anything about it.
C)Al has the right to leave trash and Bert can pay him to limit his dumping.
D)Bert moves.

Question 80

In a competitive market, a negative externality creates a deadweight loss because

A)the cost of the externality is double counted.
B)a harm is generated.
C)price equals social marginal cost.
D)price equals private marginal cost.