Deck 12: Monopoly and Monopsony

Question 1

A market with one buyer is called:

A) monopsony.
B) monopoly.
C) perfect competition.
D) oligopsony.

Answer 1

A

Question 2

The Sherman Act specifically prohibits:

A) monopolizing.
B) asset acquisitions that reduce competition.
C) price discrimination.
D) mergers that reduce competition.

Answer 2

A

Question 3

The level of competition in a given market tends to increase if:

A) minimum efficient scale of firms increases.
B) the number of substitutes increase.
C) significant barriers to exit are imposed.
D) the number of potential entrants decreases.

Answer 3

B

Question 4

For a monopoly in equilibrium:

A) MR = MC
B) MC £ AC
C) MR £ AC
D) P ³ AC

Question 5

A natural monopoly exists if:

A) marginal revenue is falling as output expands.
B) price equals average cost.
C) average cost falls as output expands.
D) marginal revenue equals marginal cost.

Question 6

Holding supply conditions constant, the costs of regulation fall wholly on producers when:

A) e_P = ¥
B) e_P ³ 1
C) e_P = 1
D) e_P = 0

Question 7

Utility price and profit regulation is based on the perception of:

A) externalities.
B) diseconomies of scale.
C) natural monopoly.
D) Consumers' surplus.

Question 8

The Clayton Act specifically prohibits:

A) monopolies.
B) asset acquisitions that reduce competition.
C) price discrimination.
D) conspiracies in restraint of trade.

Question 9

In monopoly competitive markets, profits are maximized when:

A) MC = AC
B) P > AC
C) MR = MC
D) MR = P

Question 10

The Celler-Kefauver Act specifically prohibits:

A) mergers that reduce competition.
B) asset acquisitions that reduce competition.
C) tying contracts that reduce competition.
D) conspiracies in restraint of trade.

Question 11

Windfall profit is economic profit due to:

A) superior operating efficiency.
B) innovation.
C) economies of scale.
D) unexpected or unwarranted good fortune.

Question 12

Government seeks to aid economic efficiency in the case of natural monopoly through:

A) creating government-financed corporations to compete with the natural monopolist.
B) subsidizing competitors.
C) price regulation.
D) breaking the natural monopolist up into smaller competitors.

Question 13

A monopsony is a market with:

A) many sellers.
B) one buyer.
C) many buyers.
D) one seller.

Question 14

A monopolist maximizes profits by producing a level of output where:

A) P = AC
B) P > MC
C) P < MC
D) P = MC

Question 15

The demand curve for a unique product without substitutes is:

A) upward sloping.
B) downward sloping.
C) horizontal.
D) vertical.

Question 16

Government-mandated wage arbitration for employers can enhance efficiency when the labor market involves:

A) monopoly.
B) excess seller power.
C) perfect competition.
D) monopsony.

Question 17

At the profit maximizing level of output for a monopolist:

A) P = AR and AR = AC
B) P = MC and MR > MC
C) P > MC and MR = MC
D) P = MR and AC = MC

Question 18

Economic agents that have countervailing power in transactions with monopolists are:

A) other monopolists.
B) perfect competitors.
C) monopsonists.
D) individual consumers.

Question 19

In long-run equilibrium, monopoly prices are set a level where:

A) price exceeds marginal revenue.
B) industry demand equals industry supply.
C) industry demand is less than industry supply.
D) price exceeds average revenue.

Question 20

In the short run, a monopolist will:

A) shut down if price equals average total cost.
B) shut down if price is less than average total cost.
C) shut down if price is less than average variable cost.
D) never shut down.

Question 21

The view of regulation as a government-imposed means of private-market control is called:

A) capture theory.
B) public choice theory.
C) public interest theory.
D) none of these.

Question 22

Monopoly Equilibrium. Quick Tax, Inc., enjoys pricing power in the Daytona Beach market for tax preparation services. Total and marginal revenue relations for small business customers are:

Marginal costs are stable at $100 per unit. All other costs have been fully amortized.

Question 23

Price/Output Determination. The City of Ithaca, New York is considering two proposals to provide its city government the service of computer maintenance. First, a national computer maintenance and sales franchise has offered to purchase the city's computer equipment at an attractive price in return for an exclusive franchise on computer maintenance. A second proposal would allow several small companies to provide the service without any exclusive franchise agreement or competitive restrictions. Under this plan, individual companies would bid for the right to provide service in a given department. The city would then allocate business to the lowest bidder.
The city has conducted a survey of its department to estimate the amount they would be willing to pay for various amounts of computer maintenance. The city has also estimated the total cost of service per department. Service costs are expected to be the same whether or not an exclusive franchise is granted.

Question 24

Price Fixing. Three leading CATV companies have entered into a secret cartel to fix prices and allocate business in rural southeastern markets. The marginal costs per unit for CATV service (basic hook-up) are as follows:
1

Question 25

Price Fixing. Three leading toxic waste disposal companies have entered into a secret cartel to fix prices and allocate business in the upper Midwest. The marginal costs per unit for toxic waste disposal services are as follows:

Question 26

Price/Output Determination. Sun City, Arizona, a retirement community that features full-service living arrangements, is considering two proposals to provide lawn-care to elderly residents. First, a national lawn-care firm has offered to purchase the city's lawn-care equipment at an attractive price in return for an exclusive franchise on residential service. A second proposal would allow several small companies to enter the business without any exclusive franchise agreement or competitive restrictions. Under this plan, individual companies would bid for the right to provide service in a given neighborhood. The city would then allocate business to the lowest bidder.
The city has conducted a survey of Sun City residents to estimate the amount they would be willing to pay for various amounts of lawn service. The city has also estimated the total cost of service per resident. Service costs are expected to be the same whether or not an exclusive franchise is granted.

Question 27

Theory of Regulation. On November 21, 1986, The Wall Street Journal carried a short article titled "It'll Mean Another Two Semesters in the Red, But Who's Counting?" This article described efforts by the American Institute of Certified Public Accountants (AICPA) to require a fifth (graduate) year of study in accounting for joining the institute. The following is an excerpt from that article:
"Technical demands have become so great on accountants that they can't get five pounds of education in a four-pound bag." explains James MacNeil, director of the AICPA's education division. He says the extra year "would help graduates understand such new complexities as leveraged leases and buyouts and new types of securities being devised by Wall Street." (Hawaii, Utah and Florida already require five years of study before taking the CPA exam, and several other states are giving the matter independent consideration.)

Such arguments, however, have failed to sway many educators. "Most of the deans of the nation's 650 business schools oppose going to five years from four," says Charles Hickman, projects director for the American Assembly of Collegiate Schools of Business, based in St. Louis. "The big question raised by most deans is whether another roadblock should be raised to becoming a working accountant."

Some opponents point out that because Florida imposed its five-year rule in 1983, the number of applicants for the CPA exam there has declined sharply each year. The argue that the new education requirements reflect the regulators being "captured" by the CPA lobby.
Briefly explain:
A. The causes and consequences of regulation according to the "capture" theory of regulation.
B. How the preceding article supports this theory.

Question 28

Price Discrimination. During recent years, national hotel and restaurant chains in the United States have charged lower lodging and meal prices to senior citizens in an effort to profitably segment the market for their services. Thus, senior citizens have come to enjoy discounts of 10-25% off the prices paid by other (younger) full-price customers. This two-tier pricing scheme has raised the ire of some consumers who view it as discriminatory and a violation of antitrust laws.
A. Is this pricing scheme discriminatory in the economic sense? What conditions would be necessary for it to be profitable to the hotel and restaurant industry?
B. Carefully describe how price discrimination could violate U.S. antitrust laws and be sure to mention which laws in particular might be violated.

Question 29

In monopoly markets, market demand is:

A) perfectly inelastic with respect to price.
B) perfectly elastic with respect to price.
C) elastic with respect to price.
D) inelastic with respect to price.

Question 30

Price Fixing. From 1989 through 1991, the Department of Justice (DOJ) investigated a number of private, selective colleges for price fixing. The investigation eventually settled on an "overlap group," comprised of about one-half of the most selective private colleges in the United States. The group included 23 colleges, from small liberal arts schools like Colby, Vassar, and Middlebury to larger universities like Princeton and MIT. Some students applied to more than one of the 23 schools and, each spring, officials from these institutions met to coordinate the exact calculation of such students' financial need. The case broke new ground in antitrust theory.
The DOJ alleged that the meetings enabled the colleges to collude on higher tuition and to increase their tuition revenue. The colleges defended their meetings by saying that they had to have some coordination in order to successfully implement their commitment to fully cover the need of any student they admitted. The colleges wanted to pull needy, able students into the pool of students who applied to selective private colleges because they saw such students as a "public good" for all their students. Yet, no college wanted to end up with a disproportionate share of the needy students simply because it had unintentionally made more generous need calculations than the other colleges. (All of the colleges attempted to use the same formula for need, but varying and difficult-to-interpret information from parents introduced some actual variation in their calculations.)
Although the colleges denied the price-fixing allegation, they discontinued their annual meetings in 1991. Nor did they resume, even after a federal Court of Appeals rendered a decision in their favor.
A. How would you determine if the "financial-aid overlap" meeting is an example of price fixing?
B. If price fixing did indeed occur at these meetings, which laws in particular might be violated?

Question 31

Price/Output Determination. Orange Freight, Inc., an over-the-road common carrier, is considering two proposals for truck maintenance service. First, a national diesel service franchise has offered to purchase the business' overhaul facilities at an attractive price in return for an exclusive franchise on diesel service. A second proposal would allow several small companies to enter the business without any exclusive franchise agreement or competitive restrictions. Under this plan, individual companies would bid for the right to provide service in a given region. Orange Freight would then allocate business to the lowest bidder.
Orange Freight has conducted a survey of regional service hubs to estimate the amount they would be willing to pay for various amounts of diesel service. Orange Freight has also estimated the total cost of service per truck. Service costs are expected to be the same whether or not an exclusive franchise is granted.

Question 32

The capture theory states that:

A) certain industries must be captured by government regulators to promote economic efficiency.
B) some industries actively seek regulation to limit competition and obtain government subsidies.
C) monopoly profits can be captured by society through government regulation.
D) natural monopolists tend to capture the entire market.

Question 33

Costs of Regulation. Glove-Box, Inc., produces glove boxes designed to allow workers to safely handle hazardous materials used in a wide variety of products. Market demand and marginal revenue relations for the Glove-Box units are:
Assume the Occupational Health and Safety Administration (OSHA) has recently ruled that Glove-Box must install expensive new shielding equipment to further guard against worker injuries. This will increase the $200,000 marginal cost of manufacturing by $250,000 per unit. Glove-Box's fixed expenses of $50 million per year, which include a required return on investment, will be unaffected.

Question 34

Monopoly Equilibrium. Just CDs, Inc., has developed a booming business in the purchase and sale of used CDs and used DVDs. Demand and marginal revenue relations for the local college student market are:

Fixed costs are nil, and average variable costs are constant at $4 per unit.

Question 35

To the extent that costs exceed benefits, a given mode of regulation is:

A) inequitable.
B) efficient.
C) inefficient.
D) fair.

Question 36

Price/Output Determination. Tallahassee Cars Unlimited, Inc., a rapidly expanding new entrant to this metropolitan area, is considering two proposals for the provision of its cosmetic detailing of cars (washing, waxing, polishing, engine cleaning, etc.). First, a large janitorial agency with some experience in the detailing of cars has offered to purchase the business detailing equipment in return for an exclusive franchise. A second proposal would allow several small contractors to enter the business without any exclusive franchise agreement or competitive restrictions. Under this plan, individuals would bid for the right to provide service on groups of cars as they were delivered to the lot, presumably based on how busy they were at the time. The car lot would then allocate business to the lowest bidder.
TCU has conducted a study of its past sales records and the amount of detailing spent on each car, and the premium over book value recouped in the sale to estimate the amount they would be willing to pay for various amounts of detailing. The car lot has also estimated the total cost of service per car. Service costs are expected to be the same whether or not an exclusive franchise is granted. To instigate bidding, TCU guarantees the winner of any bid a minimum per car, whether or not the service is used.

Question 37

Monopoly Equilibrium. Paradox Dental, Ltd., enjoys a local monopoly in the provision of oral examination services in Tuskegee, Alabama. Total and marginal revenue relations for the standard procedure are:

Marginal costs for the process are stable at $150 per unit. Fixed costs are nil.

Question 38

The

A) sentencing individuals up to three years imprisonment.
B) awarding triple damages.
C) issuing cease and desist orders.
D) imposing fines on corporations up to $1 million.
F)T.C. enforces antitrust laws by:

Question 39

Monopoly Equilibrium. The Athletic Medicine Center in Madison, Wisconsin, enjoys pricing power in the practice of medicine. Market demand and marginal revenue relations for a standard medical procedure to repair damaged knee cartilage are:

Fixed costs are nil, and average variable costs are constant at $4,000 per unit.

Question 40

Price Discrimination. Metropolitan bus service companies in the United States have charged lower fares to senior citizens in an effort to profitably segment the market for their services. Thus, senior citizens have come to enjoy discounts of 25-50% off the prices paid by other (younger) full-price customers. This two-tier pricing scheme has raised the ire of some consumers who view it as discriminatory and a violation of antitrust laws.
A. Is this pricing scheme discriminatory in the economic sense? What conditions would be necessary for it to be profitable to the bus service industry?
B. Carefully describe how price discrimination could violate U.S. antitrust laws and be sure to mention which laws in particular might be violated.

Question 41

Tariffs. The Nippon Switch Corporation is an importer and distributor of Japanese-made packet switches, special routing devices that direct data traffic to various computers on a large private telecommunications network for companies like GM, Sears and 3M. The U.S. Commerce Department recently informed the company that it will be subject to a new 35% tariff on the import cost of computer switch devices. The company is concerned that the tariff will slow its sales growth, given the highly competitive nature of the packet switch market. Relevant market demand and marginal revenue relations are:

The company's marginal cost equals import costs of $100 per unit, plus $20 to cover transportation, insurance, and related selling expenses. In addition these costs, the company's fixed costs, including a normal rate of return, come to $250,000 per year on this product.

Question 42

Pollution Regulation. Blue Gem, Inc., processes almonds at a large facility in Redding, California. Each pound of almonds processed yields both shelled almonds and shell by-product in a fixed 1:1 ratio. Although the by-product is unfit for human consumption, some can be sold to a regional manufacturer of stone-washed denim garments (the shells are crushed and used as abrasives). Relevant annual demand and cost relations are:
Here P is price in dollars, Q is the number of pounds of almonds processed, Q_A and Q_B are shelled almonds and shell by-product per pound of almonds, respectively; both total and marginal costs are in dollars. Total costs include a risk-adjusted normal return of 15% on a $10 million investment in plant and equipment.
Currently, the city allows the company to dump excess by-product into its landfill at no charge, viewing the service as an attractive means of keeping a valued employer in the area. However, the landfill is quickly approaching peak capacity and must be expanded at an expected operating cost of $750,000 per year. This is an impossible burden on an already strained city budget.

Question 43

Costs of Regulation. Biosystems Technology, Inc., manufacturers equipment used by the biotechnology industry in the analysis of protein and DNA. Market demand and marginal revenue relations for the Biosystems units are:

Suppose the Occupational Health and Safety Administration (OSHA) has recently ruled that Biosystems must install expensive new shielding equipment to further guard against worker injuries. This will increase the $10,000 marginal cost of manufacturing by $15,000 per unit. Biosystems' fixed expenses of $15 million per year, which include a required return on investment, will be unaffected.

Question 44

Monopoly Regulation. The Hoosier Gas Company, a utility serving customers in Bloomington, Indiana, is currently engaged in a rate case with the regulatory commission under whose jurisdiction it operates. At issue is the rate the company will charge per mcf usage of natural gas. The demand curve for monthly service is P = $6.75 - $0.000375Q. This implies annual demand and marginal revenue curves of:

where P is mcf price in dollars and Q is the units of mcf used, in thousands. Total and marginal costs per year (before investment return) are described by the function:

The company has assets of $1 million and the utility commission has authorized an 11% return on investment.

Question 45

Monopoly Regulation. The Black Hills Telephone Company, a utility serving rural customers in South Dakota is currently engaged in a rate case with the regulatory commission under whose jurisdiction it operates. At issue is the monthly rate the company will charge for call waiting service. The demand curve for this monthly service is P = $6.25 - $0.00025Q. This implies annual demand and marginal revenue curves of:

where P is service price in dollars and Q is the number of customers served. Total and marginal costs per year (before investment return) are described by the function:

The company has assets of $100,000 used for call waiting services and the utility commission has authorized a 12% return on investment.

Question 46

Monopoly Regulation. The Woebegone Telephone Company, a utility serving rural customers in Minnesota, is currently engaged in a rate case with the regulatory commission under whose jurisdiction it operates. At issue is the monthly rate the company will charge for basic hookup service. The demand curve for monthly service is P = $50 - $0.005Q. This implies annual demand and marginal revenue curves of:

where P is service price in dollars and Q is the number of customers served. Total and marginal costs per year (before investment return) are described by the function:

The company has assets of $4 million and the utility commission has authorized a 12.5% return on investment.

Question 47

Tariffs. The Steel Supply Corporation is an importer and distributor of Taiwanese-made, 96 piece hand-tool sets (screw drivers, wrenches, and the like). The U.S. Commerce Department recently informed the company that it will be subject to a new 25% tariff on the import cost of fabricated steel. The company is concerned that the tariff will slow its sales growth, given the highly competitive nature of the hand-tool market. Relevant market demand and marginal revenue relations are:

The company's marginal cost equals import costs of $32 per unit, plus $8 to cover transportation, insurance, and related selling expenses. In addition to these costs, the company's fixed costs, including a normal rate of return, come to $2,500,000 per year on this product.

Question 48

Monopoly Regulation. The Redwood Cable Company, a CATV utility serving customers in Eugene, Oregon, is currently engaged in a rate case with the regulatory commission under whose jurisdiction it operates. At issue is the monthly rate the company will charge for basic hookup service. The demand curve for monthly service is P = $37.50 - $0.0005Q. This implies annual demand and marginal revenue curves of:
where P is service price in dollars and Q is the number of customers served. Total and marginal costs per year (before investment return) are described by the function:

The company has assets of $1.5 million and the utility commission has authorized a 15% return on investment.

Question 49

Pollution Regulation. Porky Pig, Inc., processes hogs at a large facility in Iowa City, Iowa. Each hog processed yields both pork and a render by-product in a fixed 1:1 ratio. Although the render by-product is unfit for human consumption, some can be sold to a local pet food company for further processing. Relevant annual demand and cost relations are:
Here P is price in dollars, Q is the number of hogs processed (with an average weight of 100 pounds), Q_P and Q_B are pork and rendered by-product per hog, respectively; both total and marginal costs are in dollars. Total costs include a risk-adjusted normal return of 15% on a $2 million investment in plant and equipment.
Currently, the city allows the company to dump excess by-product into its sewage treatment facility at no charge, viewing the service as an attractive means of keeping a valued employer in the area. However, the sewage treatment facility is quickly approaching peak capacity and must be expanded at an expected operating cost of $500,000 per year. This is an impossible burden on an already strained city budget.

Question 50

Tariffs. The Northern Lights Company is an importer and distributor of Scandinavian wool sweaters. The U.S. Commerce Department recently informed the company that it will be subject to a new 20% tariff on the import cost of woolen clothing. The company is concerned that the tariff will slow its sales growth, given the highly competitive nature of the clothing market. Relevant market demand and marginal revenue relations are:

The company's marginal cost equals import costs of $50 per unit, plus $10 to cover transportation, insurance, and related selling expenses. In addition these costs, the company's fixed costs, including a normal rate of return, come to $4 million per year on this product.