Deck 7: The Nature of Industry

Question 1

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.

Answer 1

A

Question 2

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 four 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.

Answer 2

A

Question 3

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.

Answer 3

B

Question 4

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.

Question 5

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

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

Question 6

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 7

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 answers are correct.

Question 8

A Herfindahl index of 10,000 suggests:

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

Question 9

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

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

Question 10

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 four 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 11

A Lerner index of 0 suggests:

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

Question 12

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 13

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

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

Question 14

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

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

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

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) Both they overstate the actual level of concentration in markets served by foreign firms and they understate the degree of concentration in local markets, such the gasoline market are correct.
D) None of the statements are correct.

Question 17

Monopolistic competition is characterized by:

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

Question 18

A Herfindahl index of 0 suggests:

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

Question 19

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 20

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 21

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 four 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 22

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

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

Question 23

Pricing is an aspect of a firm's:

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

Question 24

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

A) market power increased in the two decades.
B) the industry 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 mismanagement of computer firms.

Question 25

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 four 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 26

Suppose each of the 50 states had only one gasoline station, and all stations were 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 27

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 28

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 29

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 30

Suppose each of the 50 states had only one gasoline station, and all stations were 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 31

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 index contains data on only the largest four firms, while the HHI is 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 index contains data on only the largest four firms, while the HHI is 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 32

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

A) competitive.
B) noncompetitive.
C) noninclusive.
D) monopoly.

Question 33

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 34

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

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

Question 35

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 36

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 they 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 answers are correct.

Question 37

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 38

Suppose each of the 50 states had only one gasoline station, and all stations were the same size. The four-firm concentration ratio a consumer would experience is:

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

Question 39

Which of the following measures market power?

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

Question 40

The causal view of an industry is 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 41

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 42

The products in a monopolistically competitive industry are:

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

Question 43

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 44

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

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

Question 45

The Dansby-Willig index measures market:

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

Question 46

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 47

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 48

An electronics 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 49

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 50

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 51

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 52

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

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

Question 53

Which market structure has the most market power?

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

Question 54

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 55

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 56

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 57

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 58

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

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

Question 59

Which of the following is NOT a type of integration?

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

Question 60

Which of the following integration types exploits economies of scope?

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

Question 61

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 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

Suppose the market for good X has a four-firm concentration ratio of 0.80. Having worked for the four largest firms in the industry, you know the sales for these four firms are given by $100,000, $125,000, $150,000, and $175,000. Based on this information, we know that sales for the remaining firms in the industry are:

A) $687,500.
B) $550,000.
C) $250,500.
D) $137,500.

Question 64

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 65

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 66

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 67

Suppose the market for good X has a four-firm concentration ratio of 0.50. Furthermore, assume that total sales in the industry are $1.2 million. Based on this information, we know that sales for the largest four firms in the industry equal (in aggregate):

A) $600,000.
B) $60,000.
C) $2,400,000.
D) $240,000.

Question 68

The Dansby-Willig index measures the potential for a change in social welfare by examining the effect of changes in industry:

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

Question 69

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 70

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 71

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 72

Suppose that the demand in a particular industry is given by Q^d = 100 - 2P. When the market price in the industry is $10 per unit, total demand in the industry is ___. Furthermore, assume that each of the four largest firms in the industry sell 15 units. Based on this information, the four-firm concentration ratio is ____.

A) 80 units; 1.00
B) 45 units; 0.75
C) 80 units; 0.75
D) 45 units; 0.25

Question 73

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 74

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

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

Question 75

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 76

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) increase or decrease the Lerner index depending on the relative magnitude of the price increase.

Question 77

Conglomerate integration:

A) reduces the 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 are correct.

Question 78

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 79

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 the Rothschild index is:

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

Question 80

Suppose that the demand in a particular industry is given by Q^d = 500 - 2P. When the market price in the industry is $50 per unit, total demand in the industry is _________. Furthermore, assume that the entire market consists of four firms that share the market equally. The HHI under these conditions is then _________.

A) 225 units; 1,600
B) 400 units; 2,500
C) 225 units; 3,333.33
D) 400 units; 10,000