Deck 13: Limiting Market Power: Regulation and Antitrust

Question 1

It is easy to discern the difference between vigorous competition and the exercise of monopoly power.

Answer 1

False

Question 2

Over the course of the twentieth century there has been no pronounced tendency for concentration in the United States to increase.

Answer 2

True

Question 3

The goal of all regulation is the creation of perfectly competitive markets.

Answer 3

False

Question 4

Selling at a price that is only slightly above the firm's cost of production is called predatory pricing.

Question 5

Concentration ratios have not been studied much in the last century.

Question 6

Trusts were groups of firms that acted together to raise prices above competitive levels.

Question 7

Market power allows firms to raise prices significantly above the competitive level.

Question 8

The government used the Herfindahl-Hirschman index to determine if a proposed merger will lead to excessive concentration.

Question 9

In a market with only one firm (a pure monopoly), the Herfindahl-Hirschman Index (HHI) would equal 10,000.

Question 10

In highly contestable markets, increases in concentration will enhance market power.

Question 11

Increasing concentration always means an industry has become effectively monopolized.

Question 12

A merger occurs when two previously independent firms are combined under a single owner.

Question 13

A concentration ratio provides a better assessment of market power than the Herfindahl-Hirschman index does.

Question 14

Antitrust laws prohibit undesirable business practices by firms holding monopoly power.

Question 15

The antitrust laws are enforced by government agencies such as the Federal Trade Commission and the Department of Justice.

Question 16

All large firms have monopoly power.

Question 17

Firms with monopoly power tend to be more efficient than competitive firms.

Question 18

High prices redistribute wealth from consumers to firms.

Question 19

The concentration ratio of industry is a measure relating to the proportion of the industry's total output that is produced by a small number of firms.

Question 20

Microsoft has been accused of violating an antitrust law pertaining to bundling.

Question 21

Universal service may require making a service available in small communities where the limited scale of operations may make costs extremely high.

Question 22

Economies of scale and scope encourage free competition.

Question 23

Economies of scope are present when a bank also sells insurance and provides brokerage services for stocks and bonds.

Question 24

Many industries are regulated in the United States, from railroads and electric utilities to cable TV.

Question 25

Many regulated industries are not pure monopolies.

Question 26

The antitrust laws are sometimes used by companies to reduce competition in their markets rather than enhance it.

Question 27

Economists believe mergers can sometimes achieve greater efficiency than two companies that do not merge.

Question 28

The "universal service" argument often requires that some products be sold at a loss while other products be sold at profits higher than normal.

Question 29

Universal service means that one company provides service to all consumers, everywhere.

Question 30

Powers of many regulatory agencies are designed to protect public health and safety.

Question 31

The concept of economies of scope describes the savings acquired from simultaneous production of different products.

Question 32

The main instrument of control of public monopolies is the regulatory agency.

Question 33

If an industry consists of five firms each with a 20% market share, then the Herfindahl-Hirschman index would equal 1,600.

Question 34

Cross-subsidization implies that a loss from one product's sales will be made up by the profit from another product's sales.

Question 35

Regulation began in the United States in the 1950s.

Question 36

Economies of scale tend to create natural monopolies.

Question 37

Prices that maximize the public interest will always allow reasonable profits for firms.

Question 38

Regulation of industry is usually carried out by special government agencies that administer and interpret the law.

Question 39

By definition, an industry with high concentration also is highly competitive.

Question 40

The Federal Trade Commission was established in the 1930s under President Franklin D.Roosevelt.

Question 41

Airline deregulation led to the demise of many smaller airlines but large carriers were not materially affected.

Question 42

Service to consumers of deregulated products has generally not diminished.

Question 43

Cost-plus pricing and guaranteed profit regulation give the same results.

Question 44

In most industries, deregulation has led to lower prices.

Question 45

Economists ordinarily favor setting price equal to marginal cost when this option is feasible.

Question 46

The most important advantages of bigness will be found in industries that show increasing returns to scale.

Question 47

Serious concern for deregulation began to appear in Congress in the 1970s.

Question 48

Beginning in the mid-1970s, Congress deregulated several industries including airlines and trucking.

Question 49

Unrestrained monopolies are criticized because they restrict output and reduce innovation.

Question 50

If a firm is a natural monopoly, society will benefit if it is broken into several small companies.

Question 51

Deregulation of the airline and trucking industries was followed by the creation of many new firms.

Question 52

Regulatory agencies always protect consumers by forcing regulated firms to sell at the lowest possible price.

Question 53

Monopolies may be the only firms large enough to commercially produce a significantly innovative new product.

Question 54

Deregulation has dramatically decreased airline safety.

Question 55

In regulated industries, the optimal regulation is to set price such that MC=P.

Question 56

A policy of marginal-cost pricing will ensure that many regulated industries will lose money.

Question 57

One economically valid approach to regulation is simply to break all large firms into many smaller ones.

Question 58

____ occur when an X percent increase in input use raises output by more than X percent, so that the more the firm produces, the lower its per-unit costs become.

A) Economies of scope
B) Scale economies
C) Product differentiation
D) Perfect competition

Question 59

Regulating firms so that they always receive a guaranteed profit rate will lead to greatest efficiency.

Question 60

Deregulation has led to higher prices.

Question 61

The government considers a market to be unconcentrated if its HHI number is less than ____, and highly concentrated if that number exceeds ____.

A) 1,000; 1,800
B) 100; 9,000
C) 50; 500
D) 500; 1,300

Question 62

What is the primary threat of monopoly and oligopoly to the public interest?

A) Cartels
B) Predatory pricing
C) Price wars
D) Monopoly power

Question 63

If all large firms in the economy were broken into smaller firms, the result might be

A) decreased manufacturing efficiency in some industries.
B) increased prices for some manufactured goods.
C) decreased investment in research and development in some industries.
D) All of the above are correct.

Question 64

Policies that preclude the deliberate creation of monopoly and undesirable practices are called

A) antitrust policies.
B) anti-monopoly policies.
C) anti-competitive policies.
D) socialism.

Question 65

The Herfindahl-Hirschman Index measures

A) concentration in the industry.
B) industrial average output.
C) economies of scale.
D) consumer confidence.

Question 66

The four-firm concentration ratio for an industry is

A) the number of firms in the industry, divided by four.
B) the share of industry output sold by the four largest firms in the industry.
C) the percentage of total industry profits claimed by the four largest firms.
D) the share of industry output sold by the fourth largest firm in the industry.

Question 67

An economist is told that concentration in the cement industry has increased.He can safely conclude that

A) cement production must have fallen in the industry.
B) competition in the cement industry has decreased.
C) there are fewer cement producers than before.
D) All of the above are correct.

Question 68

What does the Herfindahl-Hirschman Index value near 10,000 imply about the market?

A) Pure monopoly
B) Perfect competition
C) Monopolistic competition
D) Oligopoly

Question 69

If the four-firm concentration ratio in an industry increases, the industry

A) must have become more competitive.
B) must have become a monopoly.
C) must have become less competitive, although not necessarily a monopoly.
D) may or may not have become less competitive.

Question 70

The aim of antitrust policy is to

A) provide adequate incentives for inventors and entrepreneurs.
B) prevent firms from acquiring or exercising undue market power.
C) prevent firms from becoming very large.
D) regulate the prices charged by oligopolies.

Question 71

Which of the following acts prohibits directors of one company from sitting on the board of a competitor?

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

Question 72

What does the Herfindahl-Hirschman Index value near zero imply about the market?

A) Monopoly
B) Perfect competition
C) Monopolistic competition
D) Oligopoly

Question 73

The share of industry output sold by the top four steel producers in the country are 19%, 15%, 12%, and 9% respectively.The four-firm concentration ratio for the steel industry is

A) 0.19.
B) 0.55
C) 0.138
D) 0.65

Question 74

Price discrimination by a firm is

A) illegal under all circumstances.
B) legal if the firm can show that the difference in the prices charged customers is justified by a difference in the costs of serving them.
C) legal if the firm can show that the demand for its good is relatively elastic.
D) legal under all circumstances.

Question 75

Under a tying contract,

A) the price a buyer must pay for a good is tied to the size of his purchase.
B) a customer agrees as a condition of buying a good to purchase one or more additional goods from the same seller.
C) a firm agrees to allow members of its competitors' boards of directors to sit on its board.
D) a firm agrees to pay an intermediary for having arranged a business deal for the firm.

Question 76

Which of the following is a valid effect of monopoly power?

A) Desirable effects on the distribution of wealth.
B) Efficient resource allocation.
C) Fostering of innovation.
D) Obstacle to efficiency.

Question 77

Modern antitrust policy began in response to

A) abuses of market power in the oil industry.
B) the inability of railroads to compete effectively with the new trucking industry.
C) the charge that the rights of big business were not adequately protected.
D) attempts by business leaders to pack Congress with corrupt legislators.

Question 78

In the United States, price-fixing arrangements among firms are

A) legal.
B) illegal only if a court decides that the prices fixed are unreasonable.
C) illegal only if a court has concrete evidence that the firms explicitly colluded.
D) illegal.

Question 79

What is defined as the ability of a firm to earn high profits by raising and keeping the prices of its products substantially above the levels at which those products would be priced in competitive markets?

A) Economies of scope
B) Tacit collusion
C) Monopoly power
D) Perfect competition

Question 80

Which of the following events would increase the four-firm concentration ratio in a milk industry with six firms?

A) The two largest milk producers merge.
B) The largest milk producer buys an ice cream-making plant.
C) The largest milk producer lures customers away from the second-largest producer.
D) The four largest milk producers collusively fix prices.