Deck 12: Government and Product Markets: Antitrust and Regulation

Question 1

A firm defending itself in an antitrust suit would prefer to have the market it operates in defined broadly, rather than narrowly.

Answer 1

True

Question 2

Antitrust law is legislation passed for the stated purpose of

A)reducing the profits of chain stores.
B)promoting U.S. banking practices in foreign countries.
C)controlling labor union practices in the states of New York, California, and Texas.
D)controlling monopoly power and preserving and promoting competition.

Answer 2

controlling monopoly power and preserving and promoting competition.

Question 3

Thomas Edison played a key role in putting together the Movie Trust which reportedly tried to eliminate competition in the early days of the movie industry.

Answer 3

True

Question 4

The Clayton Act of 1914 makes price discrimination, exclusive dealers, tying contracts, and the acquisition of competing companies' stock illegal when their effects "substantially lessen competition or tend to create a monopoly."

Question 5

When it comes to network goods, being one of the first companies in a market seems to really pay off.

Question 6

Natural monopolies arise because of economies of scale.

Question 7

Assuming the same revenue and cost conditions, a  monopoly produces less than a perfectly competitive firm produces, charges a higher price, and causes a deadweight loss.

Question 8

The Sherman Act of 1890 was passed with the intent of

A)establishing the Federal Trade Commission (FTC)to deal with "unfair methods of competition."
B)preventing monopolization and\or conspiracy in the restraint of trade.
C)spelling out the conditions under which mergers would be considered anti-competitive.
D)dealing with false and deceptive advertising.
E)declaring interlocking directorates illegal.

Question 9

Economists are nearly unanimous in their belief that small firms in highly competitive markets with many rivals are more likely to innovate than are firms with larger market shares.

Question 10

The antitrust act that says, "Every contract, combination in the form of trust or otherwise, or conspiracy, in restraint of trade or commerce among the several states, or with foreign nations, is hereby declared to be illegal" is the

A)Sherman Act.
B)Clayton Act.
C)Federal Trade Commission Act.
D)Robinson-Patman Act.

Question 11

The Wheeler-Lea Act of 1938 was designed to close the merger loophole that remained in the Clayton Act.

Question 12

Natural monopolies can be regulated based on price, profit, or output.

Question 13

A good example of a vertical merger would need to be the merger between two automobile manufacturers.

Question 14

The Herfindahl index for a monopoly is 1,000.

Question 15

Under profit regulation, a natural monopolist has an incentive to be very careful about minimizing costs.

Question 16

The type of proposed merger that generally concerns the federal government the most is a horizontal merger.

Question 17

The capture theory of regulation holds that regulators use their influence and power to support the well being of the regulatory agency itself.

Question 18

A network good is a good whose value decreases as the expected number of units sold increases.

Question 19

The Justice Department began using the Herfindahl index (rather than the four- and eight-firm concentration ratios)in 1982.

Question 20

The hotel industry contains some aspects that economists consider to be part of the "hidden fee" economy.

Question 21

The antitrust legislation that empowers the Federal Trade Commission to deal with false and deceptive acts or practices (such as false and deceptive advertising)is

A)the Clayton Act.
B)the Wheeler-Lea Act.
C)the Celler-Kefauver Antimerger Act.
D)the Robinson-Patman Act.

Question 22

Which of the following statements is false ?

A)The way a market is defined can have much to say about whether a firm is viewed as a monopoly or not.
B)In 1945, a court ruled that Alcoa was a monopoly.
C)In the Dupont case in 1956, the market relevant to Dupont was ruled to be the cellophane market rather than the flexible wrapping materials market.
D)The government eventually dropped its 1969 suit against IBM.

Question 23

The Cellar-Kefauver Antimerger Act of 1950 was designed to

A)prevent one company from acquiring another company's stock if the acquisition reduces competition.
B)prevent one company from acquiring another company's physical assets if the acquisition reduces competition.
C)require that pending mergers be reported in advance to the Federal Trade Commission and the Justice Department.
D)prevent price discrimination, exclusive dealing, and tying contracts.
E)prevent interlocking directorates.

Question 24

The Robinson-Patman Act of 1936 prohibited

A)large retailers from selling at prices below those prices charged by small retailers.
B)large retailers from engaging in false and deceptive acts and practices.
C)suppliers from offering price discounts to large retailers unless they also offered discounts to all other retailers.
D)customers from seeking out the lowest-priced good from different retailers.

Question 25

Which antitrust legislation made price discrimination illegal?

A)the Sherman Act
B)the Clayton Act
C)the Federal Trade Commission Act
D)the Robinson-Patman Act

Question 26

A firm defending itself in an antitrust suit would prefer the market it operates in to be defined _____________, which ______________ the firm's market share compared to what it might be judged otherwise.

A)narrowly; raises
B)narrowly; lowers
C)broadly; raises
D)broadly; lowers

Question 27

What is the Herfindahl index of a monopoly?

A)10
B)100
C)1,000
D)10,000

Question 28

The Justice Department considers a Herfindahl index that is ____________________________ to be representative of a moderately concentrated industry.

A)less than 1,000
B)between 1,000 and 1,800
C)greater than 1,800
D)greater than 2,000

Question 29

The Federal Trade Commission Act of 1914 declared illegal

A)interlocking directorates.
B)anticompetitive mergers that occurred as a result of one company acquiring the physical assets of another company.
C)unfair or overly aggressive methods of competition.
D)price discounting of goods supplied to large sellers.

Question 30

"Exclusive dealing" is

A)a situation in which sellers provide only high-quality, name-brand goods.
B)selling to a retailer on the condition that the retailer not resell the product to another business.
C)selling to a retailer on the condition that the retailer not carry any rival products.
D)when a union's leadership deals only with the firm's managers and vice versa, so that individual workers cannot "cut their own deal."

Question 31

"Tying contracts" are

A)agreements between unions and businesses such that when a labor contract is signed, the union and the firm are bound by its terms.
B)selling to a retailer on the condition that the retailer not resell the product to another business.
C)selling to a retailer on the condition that the retailer not carry any rival products.
D)arrangements whereby the sale of one product is dependent on the purchase of some other product.

Question 32

The antitrust legislation that declares illegal "unfair methods of competition in commerce" is

A)the Sherman Act.
B)the Clayton Act.
C)the Federal Trade Commission Act.
D)the Robinson-Patman Act.

Question 33

The Robinson-Patman Act of 1936 was passed in an attempt to

A)strengthen unions' powers to deal with businesses during the Great Depression.
B)close the loophole that remained in the Clayton Act with respect to mergers.
C)decrease the failure rate of small businesses.
D)protect consumers from large retailers who were receiving price discounts from their suppliers but were not passing on the price savings to the consumers.
E)protect all U.S. businesses from foreign competition during the Great Depression.

Question 34

The Wheeler-Lea Act of 1938 empowered the Federal Trade Commission to

A)deal with anticompetitive mergers that occurred as a result of one company acquiring the physical assets of another company.
B)deal with false and deceptive advertising.
C)deal with unfair methods of competition and to determine which actions taken by businesses were too aggressive.
D)regulate the trucking and railroad industries.
E)decrease the failure rate of small businesses by protecting them from competition from large and growing chain stores.

Question 35

Which antitrust legislation was passed in an attempt to decrease the failure rate of small businesses by protecting them from competition from large and growing chain stores?

A)the Sherman Act.
B)the Clayton Act.
C)the Federal Trade Commission Act.
D)the Robinson-Patman Act.

Question 36

The Justice Department considers a Herfindahl index ____________________________ to be representative of a concentrated industry.

A)less than 1,000
B)between 1,000 and 1,800
C)greater than 1,800
D)greater than 10,000

Question 37

Suppose an industry consists of five equal-sized firms. Two of the firms plan to merge. The merger ______________ raise anti-trust concerns at the Justice Department given that the Herfindahl index before the merger was _____________ and the merger would cause the Herfindahl index to rise by __________.

A)would; between 1,000 and 1,800; more than 100
B)would; greater than 1,800; more than 100
C)would not; less than 1,000; less than 300
D)would not; between 1,000 and 1,800; less than 100

Question 38

An "interlocking directorate" is

A)an arrangement whereby the leaders of a union are also in the top management of the business with which the union is dealing.
B)selling to a retailer on the condition that the retailer not carry any rival products.
C)an arrangement whereby the sale of one product is dependent on the purchase of some other product.
D)an arrangement whereby the directors of one company sit on the board of directors of another company in the same industry.

Question 39

The Justice Department considers a Herfindahl index less than __________ to be representative of an unconcentrated (competitive)industry.

A)1,000
B)2,000
C)1,500
D)1,800

Question 40

The Herfindahl index measures the

A)average market share of the firms in an industry.
B)total market share of the four largest domestic firms in an industry.
C)total market share of the four largest firms worldwide in an industry.
D)degree of concentration in an industry.
E)degree of competition among the four largest firms in an industry.

Question 41

One of the criticisms of average cost regulated pricing of a natural monopoly is that the firm

A)has no incentive to hold costs down.
B)must bear losses continually.
C)will retain positive economic profits.
D)produces more output than is resource-allocative efficient.

Question 42

Evidence pertaining to the airline industry suggests that

A)since the airlines have become deregulated, airline fares have increased steadily.
B)under regulation the airlines' fares were low, which indicates that the regulators were doing a good job setting prices.
C)airline fares are no higher and no lower than they were when the industry was regulated.
D)deregulation of the airline industry has brought significant price reductions.

Question 43

If government regulators guarantee that a natural monopoly will earn normal profits, then

A)the monopolist has little or no incentive to hold down its costs.
B)the monopolist has a sharp incentive to hold down its costs so as to increase profits.
C)the monopolist will probably try its best to maintain its costs at the current level.
D)it is impossible to determine the monopolist's incentives regarding costs before the firm actually incurs some changes in its costs.

Question 44

The public interest theory of regulation holds that

A)regulators are seeking to do and will do through regulation what is in the best interest of the public.
B)over time, natural monopolies will wither away.
C)regulators are uninformed on specific matters that relate to regulation and therefore are often swayed by false information.
D)natural monopolies manipulate the public into buying particular products.

Question 45

Empirical research (described in the textbook)has shown that immediately upon deregulation of the airline industry,

A)airlines spent less time and money on aircraft maintenance.
B)airline safety decreased.
C)airline fares decreased.
D)airline fares remained constant.

Question 46

Which of the following is not a realistic scenario faced by government regulators of a natural monopoly?

A)The monopolist may have an incentive to prevent the regulators from learning the true costs of production.
B)The monopolist may want to give the regulators information on the costs of production but may not have it to give.
C)The regulators may not care whether the monopolist gives them the true costs of production.
D)Any cost information that is given to the regulators may be outdated by the time the regulators act on it.
E)All of the scenarios presented here are realistic.

Question 47

The primary intent of antitrust legislation is to

A)ensure that product safety standards are met.
B)eliminate positive economic profits.
C)eliminate price discrimination.
D)control monopoly power and preserve and promote competition.

Question 48

Which of the following is usually considered a natural monopoly ?

A)a major car manufacturer
B)a car stereo installer
C)overnight mail services
D)state universities

Question 49

If government regulators want a natural monopolist to earn only zero economic profits, then they will set a price

A)equal to average total cost (ATC).
B)equal to marginal cost.
C)such that marginal revenue equals marginal cost.
D)equal to average variable cost (AVC).

Question 50

"Regulatory lag" refers to the period between the time when

A)the natural monopolist's costs change and the time the regulatory agency adjusts the monopolist's prices.
B)the natural monopolist changes its prices and the time when the regulatory agency rules on that change.
C)the regulatory agency decides to regulate a firm and the time it actually accomplishes the task.
D)a firm is initially regulated by an agency and the time the firm "captures" that agency.
E)the regulatory agency decides to deregulate a firm and the time it actually accomplishes the task.

Question 51

If government regulators guarantee a natural monopolist that it will earn normal profits, then the monopolist will

A)achieve resource-allocative efficiency.
B)charge a price above average total cost.
C)produce a quantity of output at which marginal revenue equals price.
D)charge a price equal to average total cost.

Question 52

Which of the following is an example of government regulation of a natural monopoly distorting incentives?

A)A natural monopoly is held to average-cost pricing; therefore, it has extra incentives to hold costs down.
B)A natural monopoly is protected from competitors; therefore, it has excellent customer service.
C)A natural monopoly is protected from competitors; therefore, it doesn't care much about the quality of the product it sells.
D)A natural monopoly is held to average-cost pricing; there it has no fixed costs.

Question 53

If average total costs for a natural monopoly are declining where they intersect the demand curve, and government regulators set the price equal to marginal cost, then the firm will

A)likely earn a profit.
B)likely break even.
C)likely suffer a loss.
D)surely go out of business.
E)There is not enough information to answer this question.

Question 54

Which of the following is not a way that natural monopolies are regulated?

A)Government regulators determine the price of the product.
B)Government regulators determine an acceptable profit.
C)Government regulators determine an acceptable output.
D)Government regulators determine which patents the monopoly can retain.

Question 55

What is the maximum value of the Herfindahl index?

A)10
B)100
C)1,000
D)10,000
E)There is no maximum value of the Herfindahl index.

Question 56

Which of the following does not lend support to the capture theory of regulation?

A)Persons who have been in the industry will be asked to help regulate the industry.
B)There will be more people from the regulated industry at a regulatory hearing than people from the general public.
C)It is in the best interest of an industry that is being regulated to have its personnel develop social relationships with members of the regulatory agency.
D)Persons who have worked in the industry will never be asked to help regulate the industry.

Question 57

Exhibit 25-1 ​

Refer to Exhibit 25- 1. If average-cost pricing is imposed on the natural monopoly firm, what price is charged?

A)P₁
B)P₂
C)P₃
D)any of the three prices

Question 58

Exhibit 25-1 ​

Refer to Exhibit 25-1. Which of the following statements is false ?

A)If marginal-cost pricing is imposed on the natural monopoly firm, the firm takes a loss.
B)If average-cost pricing is imposed on the natural monopoly firm, the firm earns zero economic profits.
C)If the natural monopoly firm produces Q₃ units of output and charges P₃ per unit, the firm earns zero economic profits.
D)If the natural monopoly firm produces Q₂ units of output and charges P₂ per unit, the firm earns zero economic profits.

Question 59

Natural monopoly exists when

A)one firm can supply the entire output demanded at lower cost than two or more firms can.
B)one firm can supply the entire output demanded at higher cost than two or more firms can.
C)one firm can supply the entire output demanded at the same cost as two or more firms.
D)one firm controls all of the rights to a scarce resource.

Question 60

Exhibit 25-1 ​

Refer to Exhibit 25-1. What price is charged if marginal-cost price regulation is imposed on the natural monopoly firm?

A)P₁
B)P₂
C)P₃
D)a price below P₂ and above P₁

Question 61

The Herfindahl index

A)measures the degree of concentration in an industry.
B)is the square of the sum of the market shares of each firm in the industry.
C)is not subject to any of the criticisms of the concentration ratios.
D)is the sum of the market shares of the largest four firms in an industry.

Question 62

The Clayton Act of 1914

A)made conspiracy in the restraint of trade illegal.
B)made price discrimination, exclusive dealing, tying contracts, and the acquisition of competing companies' stock illegal when they "substantially lessen competition or tend to create a monopoly."
C)declared "unfair methods of competition in commerce" illegal.
D)attempted to decrease the failure rate of small businesses by protecting them from the competition of large and growing chain stores.
E)banned anticompetitive mergers that occurred as a result of one company acquiring the physical assets of another company.

Question 63

If there are six firms in an industry and the market shares of the firms are 32 percent, 25 percent, 19 percent, 9 percent, 8 percent and 7 percent, the Herfindahl index is

A)2,204.
B)2,091.
C)8,600.
D)10,000.
E)85.

Question 64

If natural monopolies are regulated to produce where there is resource-allocative efficiency, they produce where

A)price equals average total cost.
B)marginal revenue equals marginal cost.
C)price equals marginal cost.
D)marginal revenue equals average total cost.

Question 65

The capture theory of regulation holds that

A)regardless of the motive for the initial regulation and the establishment of the regulatory agency, eventually the special interests of the industry that is being regulated will be "captured" (controlled)by the regulatory agency.
B)regardless of the motive for the initial regulation and the establishment of the regulatory agency, eventually the regulatory agency will be "captured" (controlled)by the special interests of the industry that is being regulated.
C)whether or not the special interests of the industry that is being regulated will be "captured" (controlled)by the regulatory agency depends on the motive for the initial regulation and the establishment of the regulatory agency.
D)whether or not the regulatory agency will be "captured" (controlled)by the special interests of the industry depends on the motive for the initial regulation and the establishment of the regulatory agency.

Question 66

If natural monopolies are regulated to produce where there is a normal profit, they produce where

A)price equals average total cost.
B)marginal revenue equals marginal cost.
C)price equals marginal cost.
D)marginal revenue equals average total cost.

Question 67

If there are five firms in an industry and the market shares of the firms are 45 percent, 22 percent, 17 percent, 10 percent and 6 percent.  The four-firm concentration ratio for this industry is __________________ percent and the Herfindahl Index is ________________.

A)90; 3,300
B)94; 2,898
C)94; 2,934
D)86; 9,216
E)This information cannot be determined from the data given.

Question 68

The Clayton Act of 1914

A)made interlocking directorates illegal.
B)set up the Federal Trade Commission (FTC)to deal with "unfair methods of competition."
C)made monopolization of trade a misdemeanor.
D)prohibited suppliers from offering special discounts to large chain stores without offering them to everyone else.
E)empowered the FTC to deal with false and deceptive acts or practices.

Question 69

The Robinson-Patman Act of 1936

A)made interlocking directorates illegal.
B)set up the Federal Trade Commission (FTC)to deal with "unfair methods of competition."
C)made monopolization of trade a misdemeanor.
D)prohibited suppliers from offering special discounts to large chain stores without offering them to everyone else.
E)empowered the FTC to deal with false and deceptive acts or practices.

Question 70

The Herfindahl index is obtained by

A)adding the squares of the market shares of each firm in the industry.
B)adding the market shares of the largest four firms in the industry.
C)finding the difference between the squares of the market shares of each firm in the industry.
D)finding the difference between the market shares of each firm in the industry.

Question 71

The Sherman Act of 1890

A)made interlocking directorates illegal.
B)set up the Federal Trade Commission (FTC)to deal with "unfair methods of competition."
C)made monopolization of trade a misdemeanor.
D)prohibited suppliers from offering special discounts to large chain stores without offering them to everyone else.
E)empowered the FTC to deal with false and deceptive acts or practices.

Question 72

The Wheeler-Lea Act of 1938

A)made interlocking directorates illegal.
B)set up the Federal Trade Commission (FTC)to deal with "unfair methods of competition."
C)made monopolization of trade a misdemeanor.
D)prohibited suppliers from offering special discounts to large chain stores without offering them to everyone else.
E)empowered the FTC to deal with false and deceptive acts or practices.

Question 73

The Federal Trade Commission Act of 1914

A)made conspiracy in the restraint of trade illegal.
B)made price discrimination, exclusive dealing, tying contracts, and the acquisition of competing companies' stock illegal when they "substantially lessen competition or tend to create a monopoly."
C)declared "unfair methods of competition in commerce" illegal.
D)attempted to decrease the failure rate of small businesses by protecting them from the competition of large and growing chain stores.
E)banned anticompetitive mergers that occurred as a result of one company acquiring the physical assets of another company.

Question 74

The Federal Trade Commission Act of 1914

A)made interlocking directorates illegal.
B)set up the Federal Trade Commission (FTC)to deal with "unfair methods of competition."
C)made monopolization of trade a misdemeanor.
D)prohibited suppliers from offering special discounts to large chain stores without offering them to everyone else.
E)empowered the FTC to deal with false and deceptive acts or practices.

Question 75

The Sherman Act of 1890

A)made conspiracy in the restraint of trade illegal.
B)made price discrimination, exclusive dealing, tying contracts, and the acquisition of competing companies' stock illegal when they "substantially lessen competition or tend to create a monopoly."
C)declared "unfair methods of competition in commerce" illegal.
D)attempted to decrease the failure rate of small businesses by protecting them from the competition of large and growing chain stores.
E)banned anticompetitive mergers that occurred as a result of one company acquiring the physical assets of another company.

Question 76

The natural monopolist might have an incentive to go out of business under

A)price regulation.
B)profit regulation.
C)output regulation.
D)average-cost pricing.

Question 77

The Celler-Kefauver Antimerger Act of 1950

A)made interlocking directorates illegal.
B)banned anticompetitive mergers that occurred as a result of one company acquiring the physical assets of another company.
C)attempted to decrease the failure rate of small businesses by protecting them from the competition of large and growing chain stores.
D)made interlocking directorates legal.

Question 78

The natural monopolist might have an incentive to decrease cost under

A)price regulation.
B)profit regulation.
C)output regulation.
D)profit and output regulation.

Question 79

The Robinson-Patman Act of 1936

A)made conspiracy in the restraint of trade illegal.
B)made price discrimination, exclusive dealing, tying contracts, and the acquisition of competing companies' stock illegal when they "substantially lessen competition or tend to create a monopoly."
C)declared "unfair methods of competition in commerce" illegal.
D)attempted to decrease the failure rate of small businesses by protecting them from the competition of large and growing chain stores.
E)banned anticompetitive mergers that occurred as a result of one company acquiring the physical assets of another company.

Question 80

The natural monopolist might have an incentive to let costs increase under

A)price regulation.
B)profit regulation.
C)output regulation.
D)price and output regulation