Deck 17: Government and Business

Question 1

Teal Taxi Company has a regulated taxi monopoly in Colortown.It faces a demand for rides given by P = 3 - 0.02Q. It has total costs (exclusive of the required rate of return on its invested capital)of TC = -110 + 0.1Q + 0.01Q².If the commission that regulates Teal Taxi determines that $100 is sufficient to compensate equity holders for their invested capital,what are the regulated price and output?

A) P = 0, Q = 150.
B) P = .5, Q = 125.
C) P = 1, Q = 100.
D) P = 1.5, Q = 75.
E) P = 2, Q = 50.

Answer 1

C

Question 2

Catalina Cable Company (CCC)faces a demand for basic cable service given by P = 160 - Q.It has total costs (exclusive of the required rate of return on its invested capital)of TC = 250 + Q².If the commission that regulates CCC determines that $500 is sufficient to compensate equity holders for their invested capital,what are the regulated price and output?

A) P = 85, Q = 75.
B) P = 75, Q = 85.
C) P = 65, Q = 95.
D) P = 55, Q = 105.
E) P = 45, Q = 115.

Answer 2

A

Question 3

The antitrust law that made "every contract,combination . . . or conspiracy,in restraint of trade" illegal was the:

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

Answer 3

A

Question 4

The antitrust law aimed at preventing unfair competitive practices,including those not yet dreamed up by creative entrepreneurs,was the:

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

Question 5

The market concentration ratio:

A) shows the percentage of total sales or production accounted for by the four largest firms in an industry.
B) is a widely used, reliable measure of an industry's market structure.
C) was developed by a Swedish and a German statistician in the late 1890s.
D) shows the percentage of total sales or production accounted for by the 10 largest firms in the United States.
E) is so flawed a measure of an industry's market structure that it is almost never used.

Question 6

When setting rates that natural monopolists can charge,regulatory commissions attempt to establish a maximum price:

A) at the minimum long-run average cost of the monopolist.
B) at the minimum short-run average cost of the monopolist.
C) where price equals average total cost plus a fair rate of return on the invested capital of the monopolist.
D) where price equals average variable cost plus a fair rate of return on the invested capital of the monopolist.
E) at the minimum long-run average variable cost of the monopolist.

Question 7

If there are 10 equal-sized firms in an industry,the Herfindahl-Hirschman index would be:

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

Question 8

The Herfindahl-Hirschman index measures market structure as the:

A) sum of the squared market shares of the 10 largest firms in an industry.
B) sum of the squared market shares of all firms in an industry.
C) sum of the squared market shares of the four largest firms in an industry.
D) squared market share of the largest firm in an industry.
E) sum of the market shares of the four largest firms in an industry.

Question 9

When economies of scale persist to such high levels of output that it is efficient to have only one firm produce,the resulting firm is known as a(n):

A) patent holder.
B) regulated monopolist.
C) reluctant monopolist.
D) natural monopolist.
E) acceptable monopolist.

Question 10

The law that closed a loophole in an earlier law that allowed firms to merge to monopoly by buying a firm's assets rather than its shares was the:

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

Question 11

Many economists believe that competition is preferable to monopoly:

A) because competition allocates resources more efficiently than monopoly does.
B) because diffuse economic power leads to more diffuse political power.
C) because competition yields a greater variety of goods and services.
D) regardless of the costs of de-concentrating a concentrated industry.
E) because monopolies tend to pay too little in taxes.

Question 12

The lengthy delays for hearings and appeals over proposed rate increases by a natural monopoly are known as:

A) regulatory lags.
B) leaves of appeal.
C) leaves of repeal.
D) prudent delays.
E) the public's right to be heard.

Question 13

The major disadvantage of rate regulation of natural monopolies is that:

A) natural monopolists spend too much time lobbying for higher rates.
B) unlike a competitive firm, the natural monopoly has too much incentive to increase efficiency.
C) the regulatory bureaucracy grinds slowly and generates regulatory lags.
D) state public service commissions are poorly staffed and supervised.
E) natural monopolists spend too much money on philanthropic activities.

Question 14

If there are two large firms,each with one-quarter of the market,and 10 firms,each with one-twentieth of the market,in an industry,the market four-firm concentration ratio will be:

A) 40.
B) 50.
C) 60.
D) 10.
E) 12.

Question 15

If there are two large firms,each with one-quarter of the market,and 10 firms,each with one-twentieth of the market,in an industry,the Herfindahl-Hirschman index will be:

A) 250.
B) 1,350.
C) 1,500.
D) 1,600.
E) 1,850.

Question 16

The antitrust law that made giving discounts to large buyers on the basis of volume purchases illegal was the:

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

Question 17

The first federal antitrust law was the:

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

Question 18

Breckner Gas Company faces a demand for their gas given by P = 30 - 0.25Q.It has total costs (exclusive of the required rate of return on its invested capital)of TC = -60 + 8Q + 0.75Q².If the commission that regulates Breckner determines that $100 is sufficient to compensate equity holders for their invested capital,what are the regulated price and output?

A) P = 23.75, Q = 25.
B) P = 25, Q = 20.
C) P = 27.5, Q = 10.
D) P = 22.5, Q = 30.
E) P = 20, Q = 40.

Question 19

The antitrust law that made certain specified practices that tend to reduce competition or create monopoly illegal was the:

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

Question 20

If there are two equal-sized firms in an industry,the Herfindahl-Hirschman index would be:

A) 50.
B) 100.
C) 2,500.
D) 5,000.
E) 250.

Question 21

An external diseconomy occurs whenever a(n):

A) action taken by a firm or individual results in uncompensated benefits to others.
B) action taken by a firm or individual results in compensated benefits to others.
C) action taken by a firm or individual results in compensated costs to others.
D) firm trains workers in a highly specialized, firm-specific skill.
E) action taken by a firm or individual results in uncompensated costs to others.

Question 22

The rule of reason,which states that only unreasonable combinations in restraint of trade are illegal,was enunciated in the:

A) Alcoa case.
B) Standard Oil case.
C) Von's Grocery case.
D) Brown Shoe case.
E) IBM case.

Question 23

A competitive market with demand Q = 120 - 4P and supply Q = -30 + 2P is in equilibrium.If government imposes a price floor of 23,what quantity will be traded on the market?

A) 28.
B) 16.
C) 20.
D) 22.
E) None of the above.

Question 24

The Supreme Court case that reestablished sheer size as a violation per se of the antitrust laws was the:

A) Alcoa case.
B) Standard Oil case.
C) Von's Grocery case.
D) Brown Shoe case.
E) IBM case.

Question 25

The socially optimal level of pollution control occurs where the marginal:

A) benefit of pollution control is zero.
B) cost of pollution is minimized.
C) cost of pollution control equals the marginal cost of pollution.
D) cost of pollution control is minimized.
E) cost of pollution control equals the marginal benefit of pollution.

Question 26

A public good is any good that:

A) is provided by the federal government.
B) can be consumed by everyone.
C) can be consumed by any person without reducing the amount available to be consumed by everyone else.
D) can be easily withheld from consumers.
E) citizens demand of their public institutions.

Question 27

A competitive market with demand Q = 120 - 4P and supply Q = -30 + 2P is in equilibrium.If government imposes a price floor of 26,what quantity will be traded on the market?

A) 28.
B) 16.
C) 20.
D) 22.
E) None of the above.

Question 28

A competitive market with demand Q = 120 - 4P and supply Q = -30 + 2P is in equilibrium.If government imposes a price ceiling at 22,what quantity will be traded on the market?

A) 28.
B) 32.
C) 20.
D) 14.
E) None of the above.

Question 29

Transferable emissions permits establish property rights to:

A) generate a certain amount of pollution.
B) generate more business for the Chicago Board of Trade.
C) reduce the regulatory burden of the FTC.
D) allocate the costs of pollution control equitably.
E) generate unlimited amounts of specified pollutions.

Question 30

An effluent fee is a:

A) fine polluters must pay the government for discharging waste.
B) brokerage fee paid to the EPA by parties exchanging transferable emissions permits.
C) fine paid to the EPA by firms caught violating the pollution laws.
D) fine paid to the injured parties by firms caught violating the pollution laws.
E) way to reduce the costs of regulated firms.

Question 31

The cost of pollution originating in the chemical industry is C_p = 4P + 2P²,where P is the quantity of pollutants emitted.The cost of pollution control for this industry is C_c = 120 - 12P.What is the optimal level of pollution?

A) 0 units.
B) 1 unit.
C) 2 units.
D) 3 units.
E) 4 units.

Question 32

An external economy occurs whenever a(n):

A) action taken by a firm or individual results in uncompensated benefits to others.
B) action taken by a firm or individual results in compensated benefits to others.
C) action taken by a firm or individual results in compensated costs to others.
D) firm trains workers in a highly specialized, firm-specific skill.
E) action taken by a firm or individual results in uncompensated costs to others.

Question 33

If an activity produces an external economy,then there will be too:

A) much of the activity undertaken by private parties from a social viewpoint.
B) little of the activity undertaken by private parties from a social viewpoint.
C) much of the activity undertaken by government from a private viewpoint.
D) much of the activity undertaken by private parties from a private viewpoint.
E) much of the activity undertaken by government from a social viewpoint.

Question 34

If an activity produces an external diseconomy,then there will be too:

A) much of the activity undertaken by private parties from a social viewpoint.
B) little of the activity undertaken by private parties from a social viewpoint.
C) much of the activity undertaken by government from a private viewpoint.
D) much of the activity undertaken by private parties from a private viewpoint.
E) much of the activity undertaken by government from a social viewpoint.

Question 35

The cost of pollution originating in the chemical industry is C_p = 4P + 2P²,where P is the quantity of pollutants emitted.The cost of pollution control for this industry is C_c = 120 - 12P.What is the optimal effluent fee?

A) $4.
B) $8.
C) $12.
D) $16.
E) $24.