Deck 7: The Nature of Industry

Question 1

In perfect competition, which is not true?

A)Every firm has a small but perceivable market power.
B)There are a large number of firms.
C)Firms are price-takers.
D)Firms produce homogenous goods.

Answer 1

A

Question 2

Which of the following is used to measure market structure and performance?

A)Four-firm concentration ratio.
B)HHI (Herfindahl-Hirschman Index).
C)Dansby-Willig Performance Index.
D)All of the statements associated with this question are correct.

Answer 2

D

Question 3

Monopolistic competition is characterized by:

A)heterogenous products.
B)employing labor from a perfectly competitive labor market.
C)no free entry.
D)large markets.

Answer 3

A

Question 4

Which of the following is not one class of a market structure?

A)Perfect competition.
B)Dictatorship.
C)Monopoly.
D)Monopolistic competition.

Question 5

An industry is comprised of 20 firms, each with an equal market share.What is the 4-firm concentration ratio of this industry?

A)0.2.
B)0.4.
C)0.6.
D)0.8.

Question 6

An industry is comprised of ten (10) firms, each with an equal market share.What is the 4-firm concentration ratio of this industry?

A)0.2.
B)0.4.
C)0.6.
D)0.8.

Question 7

A Herfindahl index of 0 suggests

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

Question 8

A firm's average cost is $20 and it charges a price of $20.The Lerner index for this firm is:

A)0.20.
B)0.50.
C)0.33.
D)insufficient information.

Question 9

An unregulated industry has a Lerner index of zero.These numbers:

A)reveal that social welfare would be improved by regulating the firms.
B)are consistent with the industry being monopolistically competitive.
C)are consistent with the industry being perfectly competitive.
D)reveal that social welfare would be improved by regulating the firms and are consistent with the industry being monopolistically competitive.

Question 10

Which of the following kinds of market structure are not associated with market power?

A)oligopoly.
B)perfect competition.
C)monopolistic competition.
D)perfect competition and monopolistic competition.

Question 11

When economies of scale are large, firms can reduce their average total cost by

A)selling off their subsidiaries.
B)merging into an even larger firm.
C)eliminating the bureaucratic costs.
D)hiring professional managers.

Question 12

Suppose that there are two industries, A and

A)3,200.
B)2,800.
B)There are five firms in industry A with sales at $5 million, $2 million, $1 million, $1 million, and $1 million, respectively.There are 4-firms in industry B with equal sales of $2.5 million for each firm.The HHI for industry A is
C)1,800.
D)2,500.

Question 13

A Lerner index of 0 suggests

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

Question 14

The industry elasticity of demand for gadgets is -2, while the elasticity of demand for an individual gadget manufacturer's product is -2.Based on the Rothschild approach to measuring market power, we conclude that

A)there is little monopoly power in this industry.
B)there is significant monopoly power in this industry.
C)the Herfindahl index for this industry is -2.
D)the Herfindahl index for this industry is 2.

Question 15

Which of the following are measures of industry concentration?

A)Four-firm concentration ratio.
B)HHI index.
C)Consumer surplus.
D)Four-firm concentration ratio and HHI index.

Question 16

Suppose that there are two industries, A and

A)0.9.
B)1.0.
B)There are five firms in industry A with sales at $5 million, $2 million, $1 million, $1 million, and $1 million, respectively.There are 4-firms in industry B with equal sales of $2.5 million for each firm.The four-firm concentration ratio for industry A is:
C)0.8.
D)0.7.

Question 17

Oligopoly differs from monopoly as follows:

A)Oligopoly involves a few firms; monopoly involves a single firm.
B)Oligopoly does use advertisement; monopoly does not use advertisement.
C)Oligopoly involves free entry; monopoly involves no free entry.
D)Oligopoly involves a few firms; monopoly involves a single firm and oligopoly involves free entry; monopoly involves no free entry.

Question 18

The concentration and Herfindahl indices computed by the U.S.Bureau of Census must be interpreted with caution because

A)they overstate the actual level of concentration in markets served by foreign firms.
B)they understate the degree of concentration in local markets, such the gasoline market.
C)all of the statements associated with this question are correct.
D)none of the statements associated with this question are correct.

Question 19

A firm has a marginal cost of $20 and charges a price of $40.The Lerner index for this firm is:

A)0.20.
B)0.50.
C)0.33.
D)0.75.

Question 20

A Herfindahl index of 10,000 suggests

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

Question 21

An industry consists of six firms with annual sales of $300, $500, $400, $700, $600, and $600, respectively.What is the industry's HHI?

A)1,659.
B)1,779.
C)1,839.
D)1,909.

Question 22

The ranking of industries by the four-firm concentration ratio usually, but not always, reveals the same pattern as ranking by HHI.When a discrepancy is found it is usually due to the following:

A)The four-firm concentration indices contain data on only the largest four-firms, while the HHI are based on data for all firms in the industry.
B)The HHI is based on squared market shares, while the four-firm concentration ratio is not.
C)The four-firm concentration indices contain data on only the largest four-firms, while the HHI are based on data for all firms in the industry and the HHI is based on squared market shares, while the four-firm concentration ratio is not.
D)The two indices are designed to measure two different attributes of markets.

Question 23

Suppose each of the 50 states had only one gasoline station -- each of the same size.The four-firm concentration ratio, based on national data, would be:

A)0.08.
B)0.16.
C)0.32.
D)1.0.

Question 24

According to the "feedback critique"

A)the conduct of firms in an industry may affect the firm's performance.
B)the conduct of firms in an industry may affect the market structure.
C)market structure may affect the firm's conduct.
D)all of the statements associated with this question are correct.

Question 25

An industry consists of six firms with annual sales of $300, $500, $400, $700, $600, and $600, respectively.What is the industry's C₄?

A)0.58.
B)0.62.
C)0.74.
D)0.77.

Question 26

The causal view of the industry believes that:

A)market structure causes firms to behave in a certain way.
B)market performance causes firms to have a certain structure.
C)market performance causes firms to behave in a certain way.
D)behavior causes firms to have a certain structure.

Question 27

Suppose that there are two industries, A and

A)0.9.
B)1.0.
B)There are five firms in industry A with sales at $5 million, $2 million, $1 million, $1 million, and $1 million, respectively.There are 4-firms in industry B with equal sales of $2.5 million for each firm.The four-firm concentration ratio for industry B is:
C)0.8.
D)0.7.

Question 28

As a general rule of thumb, industries with a Herfindahl index below ______ are considered to be competitive, while those above ______ are considered non-competitive.

A)1,000, 1,800.
B)1,800, 1,000.
C)1,000, 3,000.
D)1,800, 3,000.

Question 29

An industry consists of six firms with annual sales of $300, $500, $400, $700, $600, and $600, respectively.According to the general rule of thumb, the HHI of this industry implies that the market structure is:

A)competitive.
B)non-competitive.
C)non-inclusive.
D)monopoly.

Question 30

Which of the following measures market structure?

A)Four-firm concentration ratio.
B)Lerner Index.
C)Herfindahl-Hirschman Index.
D)All of the choices may be used to make inferences about market structure.

Question 31

In the 1960s, each firm in the computer industry was able to make extremely large profit margins, some as high as 50-60%.The margin decreased to 20-40% in the 1970s and to 10-20% in the 1980s.We conclude that:

A)Market power increased in the two decades.
B)The industry has evolved from oligopolistic to a more competitive industry in the two decades.
C)Lower profit margins were due to the government's regulation to protect consumers.
D)Lower profit margins were largely due to the mal-management of computer firms.

Question 32

Which of the following measures market power?

A)Lerner Index.
B)Herfindahl-Hirschman Index.
C)Rothchild Index.
D)Lerner Index and Rothchild Index.

Question 33

When the relevant markets are local, the concentration and HHI based on figures for the entire United States tend to:

A)be biased downward.
B)be biased upward.
C)give a more precise description of the real situation.
D)ignore the presence of import goods.

Question 34

Pricing is an aspect of a firm's:

A)performance.
B)structure.
C)conduct.
D)environment.

Question 35

Suppose each of the 50 states had only one gasoline station -- each of the same size.The four-firm concentration ratio a consumer experiences is:

A)1.0.
B)0.08.
C)0.32.
D)0.16.

Question 36

A student in a managerial economics class calculated the four-firm concentration ratio and HHI for industries A andB.What is the proper conclusion she can draw from the following findings?

A)Industry B is a monopoly.
B)The market power of firms in industry A is greater than that in industry B.
C)C4 is higher for Industry A while the HHI is higher for Industry B.This inconsistency must be due to a calculation error.
D)Neither industry is perfectly competitive.

Question 37

A student figured out that the HHI for an industry was 15,000.What is the proper conclusion?

A)The market is monopolistic.
B)The market is close to perfectly competitive or monopolistically competitive.
C)The student made some computational errors.
D)There is free entry in the market.

Question 38

Suppose each of the 50 states had only one gasoline station -- each of the same size.The four-firm concentration ratio for the state of New York, based on the state data, is:

A)1.0.
B)0.08.
C)0.32.
D)0.16.

Question 39

Suppose that there are two industries, A and

A)2,500.
B)1,800.
B)There are five firms in industry A with sales at $5 million, $2 million, $1 million, $1 million, and $1 million, respectively.There are 4-firms in industry B with equal sales of $2.5 million for each firm.The HHI for industry B is:
C)3,200.
D)2,800.

Question 40

The concentration and HHI reported in the U.S.Bureau of Census must be interpreted with caution since:

A)They are calculated by excluding foreign imports hence bias upward the degree of concentration.
B)They are based on figures for the entire national market.
C)The definition of product classes used to define an industry affects the results.
D)All of the statements associated with this question are correct.

Question 41

Which of the following is not a type of integration?

A)Vertical mergers.
B)Horizontal mergers.
C)Mega mergers.
D)Conglomerate merger.

Question 42

An electronic company purchases a food company.This is an example of:

A)vertical integration.
B)horizontal integration.
C)cointegration.
D)conglomerate integration.

Question 43

A local telephone company charges $.10/min.based on a $.08/min.marginal cost of operation.What is the Lerner Index?

A)0.2.
B)0.25.
C)0.40.
D)0.50.

Question 44

The products in a monopolistically competitive industry are:

A)homogeneous.
B)heterogeneous.
C)competitive.
D)uncompetitive.

Question 45

Which of the following integration types aims at reducing transaction costs?

A)Vertical integration.
B)Horizontal integration.
C)Cointegration.
D)Conglomerate integration.

Question 46

There are five firms in an industry with sales at $7 million, $6 million, $3 million, $2 million, and $2 million, respectively.The four-firm concentration ratio is:

A)0.8.
B)0.9.
C)1.0.
D)1.1.

Question 47

The industry elasticity of demand for telephone service is -2 while the elasticity of demand for a specific phone company is -5.What is the Rothchild index?

A)0.2.
B)0.4.
C)0.5.
D)0.7.

Question 48

Which of the following statements is true?

A)The market structure of an industry frequently changes over time.
B)Most horizontal mergers are blocked by the government.
C)Most U.S.industries are perfectly competitive.
D)Most U.S.industries are monopolies.

Question 49

Which of the following integration types has the potential problem of increasing the firm's market power?

A)Vertical integration.
B)Horizontal integration.
C)Cointegration.
D)Conglomerate integration.

Question 50

Which of the following integration types exploits economies of scope?

A)Vertical integration.
B)Horizontal integration.
C)Cointegration.
D)Conglomerate integration.

Question 51

Which market structure has the most market power?

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

Question 52

An electronic company takes over one of its original suppliers in a merger.This is an example of:

A)vertical integration.
B)horizontal integration.
C)cointegration.
D)conglomerate integration.

Question 53

A frozen food company buys a fresh food company.This takeover is an example of:

A)vertical integration.
B)horizontal integration.
C)cointegration.
D)conglomerate integration.

Question 54

The HHI of a local market is usually _____________ that of national markets.

A)lower than.
B)the same as.
C)higher than.
D)twice.

Question 55

C₄ and HHI tend to ____________ the concentration in a domestic industry.

A)provide different rankings of.
B)understate.
C)overstate.
D)understate or overstate, depending on the true geographic market.

Question 56

The Dansby-Willig Index measures market

A)structure.
B)performance.
C)conduct.
D)behavior.

Question 57

The Dansby-Willig Index measures the potential for a change in

A)production cost.
B)firm's revenue.
C)firm's profit.
D)social welfare.

Question 58

A firm has a marginal cost of $18 and charges a price of $27.The Lerner index for this firm is:

A)0.33.
B)0.50.
C)0.67.
D)0.75.

Question 59

The idea of improving cash flow by exploiting the cyclical nature of different product lines is represented in:

A)vertical integration.
B)horizontal integration.
C)cointegration.
D)conglomerate integration.

Question 60

Which of the following may transform an industry from oligopoly to monopolistic competition?

A)Entry.
B)Takeover.
C)Exit.
D)Acquisition.

Question 61

The industry elasticity of demand for gadgets is -2, while the elasticity of demand for an individual gadget manufacturer's product is -10.Based on the Rothschild approach to measuring market power, we conclude that

A)the Herfindahl index for this industry is 5.
B)the Herfindahl index for this industry is 0.2.
C)there is no monopoly power in this industry.
D)there is significant monopoly power in this industry.

Question 62

The tobacco industry has a Lerner index of 0.76.Based on this information, compute the optimal markup factor.

A)4.17 times price.
B)4.17 times marginal cost.
C)0.24 times price.
D)there is not sufficient information to determine the optimal markup factor.

Question 63

Having worked for many of the firms in the petroleum industry, you know that the price elasticity of demand for a representative firm is about -1.25.An industry publication recently reported that the Rothschild index for the petroleum industry is estimated to be 0.88.Based on this information you know that the price elasticity of demand for the firm you currently work for in the petroleum industry is

A)-1.42.
B)-1.10.
C)0.704.
D)1.10.

Question 64

A student figured out that the HHI for an industry was 13,000.What is the proper conclusion?

A)The market is monopolistically competitive.
B)The market is close to perfectly competitive.
C)The market is served by a monopoly.
D)The student made some computational errors.

Question 65

The chemical industry has a Lerner index of 0.67.Based on this information, a firm with marginal cost of $10 should charge a price of

A)$30.30.
B)$14,93.
C)$6.70.
D)$3.30.

Question 66

Which of the following may transform an industry from oligopoly to monopolistic competition?

A)Entry of new firms.
B)Significant vertical integration.
C)Exit of firms.
D)A series of horizontal mergers.

Question 67

The causal view of the industry believes that

A)market structure is caused by firm behavior.
B)firm behavior is caused by market structure.
C)market performance causes firms to have a certain structure.
D)market performance causes firms to behave in a certain way.

Question 68

Conglomerate integration

A)reduces transaction costs of acquiring inputs.
B)improves cash flow by exploiting the cyclical nature of different product lines.
C)exploits economies of scope by merging the production of similar products.
D)all of the statements associated with this question are correct.

Question 69

The concentration and Herfindahl indices computed by the U.S.Bureau of Census must be interpreted with caution because

A)they may overstate the actual level of concentration in markets served by foreign firms.
B)they may understate the degree of concentration in local markets.
C)the definition of product classes used to define an industry affects the results.
D)all of the statements associated with this question are correct.

Question 70

The Dansby-Willig Index measures the potential for a change in social welfare by examining the affect of changes in industry

A)production cost.
B)output.
C)revenue.
D)profit.

Question 71

Monopolistic competition is characterized by

A)employing labor from a perfectly competitive labor market.
B)Rothschild indices that are close to zero.
C)concentration ratios that are well above zero.
D)differentiated products.

Question 72

The Lerner index in the paper industry is 0.58.Based on this information, a firm charging $3.25 per ream of paper should have a marginal cost of

A)$0.
B)$1.365.
C)$1.885.
D)$3.25.

Question 73

Having worked for many of the firms in the petroleum industry, you know that the price elasticity of demand for a representative firm is about -1.25.Moreover, a recent report from an economist in your office revealed that the price elasticity of demand for the petroleum products sold by your firm is -1.5.Based on this information you know that Rothschild index is

A)0.833.
B)1.20.
C)-1.20.
D)-0.833.

Question 74

An industry is comprised of 25 firms, each with an equal market share.What is the 4-firm concentration ratio of this industry?

A)0.12.
B)0.16.
C)0.20.
D)0.25.

Question 75

In perfect competition, which is not true?

A)Both concentration ratios and Rothschild indexes tend to be close to zero.
B)There are a large number of firms, and each is small relative to the entire market.
C)At least one firm has a perceptible impact on the market price.
D)Firms produce homogenous goods.

Question 76

As a general rule of thumb, The U.S.Department of Justice views industries to be highly concentrated if the Herfindahl index is

A)above 1,000.
B)below 1,000.
C)above 1,800.
D)below 1,800.

Question 77

Which of the following industry structures would you expect to have the lowest Lerner index score?

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

Question 78

Suppose you read in an industry publication that the Rothschild index for the petroleum industry is 0.88.Based on past experience, you know that the price elasticity of demand for the petroleum products sold by your firm is -1.5.Based on this information you know that the elasticity of demand for a representative firm in the petroleum industry is

A)1.32.
B)1.70.
C)-0.587.
D)-1.32.

Question 79

Holding all else constant, higher prices will

A)increase the Lerner index.
B)decrease the Lerner index.
C)have no impact on the Lerner index.
D)may increase or decrease the Lerner index depending on the relative magnitude of the price increase.

Question 80

According to the "feedback critique"

A)the conduct of firms may affect firm performance.
B)the conduct of firms may affect market structure.
C)market structure may affect the firm's conduct.
D)all of the statements associated with this question are correct.