Managerial Economics, 7e (Keat)
Chapter 14 Government and Industry: Challenges and Opportunities for Today’s
Manager
Multiple-Choice Questions
1) Which of the following is not considered a rationale for the intervention of government in the
market process in the United States?
A) the redistribution of income
B) the reallocation of resources
C) the long-run planning of scarce resources
D) the short-run stabilization of prices
E) All of the above
2) Which of the following is the best example of a product or service that provides a benefit
externality?
A) the construction of a private road that allows vehicles if a toll is paid
B) a public library
C) a bookstore that is open to everyone
D) All of the above
E) None of the above
3) Which of the following is not an example of a cost externality?
A) the dumping of industrial waste into a lake
B) unsightly billboards
C) a neighbor that blasts his stereo system
D) the building of a new type of jet fighter bomber
E) All of the above
4) The demand for products that provide benefit externalities is generally ________ the demand
for products that do not.
A) greater than
B) less than
C) the same as
D) greater or less (depending on the market) than
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5) An example of a cost externality occurs when a mining company
A) dumps waste in river upstream from a popular fishing spot.
B) produces coal that is not in demand in a recession.
C) underpays its employees.
D) overwork its employees.
6) An example of an activity that is likely to generate benefit (positive) externality is
A) a well manicured lawn of your neighbor.
B) growing wild flowers on city street islands.
C) fireworks on the 4th of July.
D) an educated workforce.
E) All of the above
7) The supply for products that exhibit cost externalities is generally ________ the supply for
products that do not.
A) greater than
B) less than
C) the same as
D) greater or less (depending on the market) than
8) Which of the following is an example of a government action to internalize a cost externality?
A) a fine imposed on a company that pollutes a stream
B) the closing of a public library
C) a sales tax on jewelry
D) the increase on bridge tolls
9) When cost externalities exist, an optimal equilibrium can be attained if the government
A) restricts production.
B) levies a tax for the difference between private costs and social costs.
C) prohibits production.
D) All three above
E) Both A and B
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10) The Coase theorem states that, in the presence of cost externalities, an optimal equilibrium
can be attained
A) with government taxation.
B) by prohibiting production.
C) by correctly defining property rights and through negotiation between the parties.
D) None of the above
11) Tying arrangements that lessen competition were made illegal by
A) the Sherman Anti-Trust Act.
B) the Clayton Act.
C) the Celler-Kefauver Act.
D) the Robinson-Patman Act.
12) One school of anti-trust thought argues that, rather than ensuring efficiency, anti-trust laws
are really aimed at
A) protecting small independent firms against large corporations.
B) outlawing all monopolies whether they perform “bad acts” or not.
C) price differentiation due to differences in quality and cost.
D) restricting interlocking directorates.
13) Which of the following would not be considered a synergistic benefit from a merger?
A) an improvement in distribution systems
B) economies of scale in production
C) decreased cost of capital
D) None of the above
14) A merger between two companies in unrelated fields of business
A) will always lead to economies of scale.
B) will generally increase the value of the unified firm compared to the value of the two
companies before the merger because of the benefits of diversification.
C) may not have any synergistic effects.
D) will necessarily lead to an increase in the market power of the merged company.
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15) The delay between when a problem occurs and when it is recognized is referred to as the
A) recognition lag.
B) action lag.
C) effectiveness lag.
D) policy lag.
16) The delay between when a problem is recognized and when policy action is taken is referred
to as the
A) recognition lag.
B) action lag.
C) effectiveness lag.
D) policy lag.
17) The delay between when a policy action is taken and when they affect the economy is
referred to as the
A) impact lag.
B) action lag.
C) recognition lag.
D) policy lag.
18) Which of the following is responsible for controlling the money supply?
A) the Congress
B) the Supreme Court
C) the Federal Reserve
D) the president
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Analytical Questions
1) What are the five major reasons for government involvement in a market economy?
2) A function of government is to regulate “natural monopolies.” Explain what is a natural
monopoly and why it requires government regulation.
3) Describe the basic motives for businesses to merge.