Chapter 16 Government and Business
MULTIPLE CHOICE
1. 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
2. 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
3. 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
4. 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
5. 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
6. 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
7. 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
8. According to the latest figures on industrial concentration in the United States, the 100
largest manufacturing firms control ____________ of the manufacturing assets.
a.
25 percent
b.
50 percent
c.
40 percent
d.
30 percent
e.
65 percent
9. 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 ten largest
firms in the United States
e.
is so flawed a measure of an industry’s market structure that it is almost never used
10. 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 deconcentrating a concentrated industry
e.
because monopolies tend to pay too little in taxes
11. The Herfindahl-Hirschman index measures market structure as the:
a.
sum of the squared market shares of the ten 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
12. If there are ten equal-sized firms in an industry, the Herfindahl-Hirschman index would be:
a.
1,000
b.
100
c.
10,000
d.
10
e.
1
13. 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
14. If there are two large firms, each with one-quarter of the market, and ten 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
15. 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
16. 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
17. 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
18. 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
19. 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
20. 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
21. 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
22. The Supreme Court case that reestablished sheer size as a per se violation 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
23. One hundred coal-fired power plants currently produce power, with each firm’s total costs
given by TC = 12.5 + 0.5q + 0.005q2, where q is the firm’s output. The demand for their
electricity is given by QD = 10,000 − 5,000P. If a new piece of environmental regulation
reduces the fixed costs of each firm to 4.5, what will be the change in the number of plants
operating in the long-run, zero-profit equilibrium?
a.
There will be no change in the number of firms.
b.
There will be 25 more firms.
c.
There will be 50 fewer firms.
d.
There will be 75 more firms.
e.
There will be 100 more firms.
24. 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
25. 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
26. 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
27. 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
28. 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
29. 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
30. 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
31. 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
32. The cost of pollution originating in the chemical industry is Cp = 4P + 2P2, where P is the
quantity of pollutants emitted. The cost of pollution control for this industry is Cc = 120 −
12P. What is the optimal level of pollution?
a.
0 units
b.
1 unit
c.
2 units
d.
3 units
e.
4 units
33. The cost of pollution originating in the chemical industry is Cp = 4P + 2P2, where P is the
quantity of pollutants emitted. The cost of pollution control for this industry is Cc = 120 −
12P. What is the optimal effluent fee?
a.
$4
b.
$8
c.
$12
d.
$16
e.
$24
34. If there are two large firms, each with one-quarter of the market, and ten firms, each with
one-twentieth of the market, in an industry, the market concentration ratio will be:
a.
40
b.
50
c.
60
d.
10
e.
12
35. One hundred coal-fired power plants currently produce power, with each firm’s total costs
given by TC = 12.5 + 0.5q + 0.005q2, where q is the firm’s output. The demand for their
electricity is given by QD = 10,000 − 5,000P. If a new piece of environmental regulation
increases the total costs of each firm by 25 percent, what are the new long-run, zero-profit
equilibrium price and industry output?
a.
P = $.80, Q = 6,000
b.
P = $.90, Q = 5,500
c.
P = $1.00, Q = 5,000
d.
P = $1.25, Q = 3,750
e.
P = $1.50, Q = 2,500
36. One hundred coal-fired power plants currently produce power, with each firm’s total costs
given by TC = 12.5 + 0.5q + 0.005q2, where q is the firm’s output. The demand for their
electricity is given by QD = 10,000 − 5,000P. If a new piece of environmental regulation
increases the total costs of each firm by 25 percent, what will be the change in the number
of plants operating in the long-run, zero-profit equilibrium?
a.
There will be no change in the number of firms.
b.
There will be 10 more firms.
c.
There will be 10 fewer firms.
d.
There will be 25 fewer firms.
e.
There will be 25 more firms.
37. One hundred coal-fired power plants currently produce power, with each firm’s total costs
given by TC = 12.5 + 0.5q + 0.005q2, where q is the firm’s output. The demand for their
electricity is given by QD = 10,000 − 5,000P. If environmental regulation reform reduces
the total costs of each firm by 25 percent, what are the new long-run, zero-profit equilibrium
price and industry output?
a.
P = $.75, Q = 6,250
b.
P = $.80, Q = 6,000
c.
P = $1.00, Q = 5,000
d.
P = $1.25, Q = 3,750
e.
P = $1.50, Q = 2,500
38. One hundred coal-fired power plants currently produce power, with each firm’s total costs
given by TC = 12.5 + 0.5q + 0.005q2, where q is the firm’s output. The demand for their
electricity is given by QD = 10,000 − 5,000P. If environmental regulation reform reduces
the total costs of each firm by 25 percent, what will be the change in the number of plants
operating in the long-run, zero-profit equilibrium?
a.
There will be no change in the number of firms.
b.
There will be 10 more firms.
c.
There will be 10 fewer firms.
d.
There will be 25 fewer firms.
e.
There will be 25 more firms.
39. Coal-fired power plants currently produce power, with each firm’s total costs given by TC =
12.5 + 0.5q + 0.005q2, where q is the firm’s output. The demand for their electricity is given
by QD = 10,000 − 5,000P. If a new piece of environmental regulation increases the
fixed costs of each firm to $50, what are the new long-run, zero-profit equilibrium price and
industry output?
a.
P = $.75, Q = 6,250
b.
P = $.80, Q = 6,000
c.
P = $1.00, Q = 5,000
d.
P = $1.25, Q = 3,750
e.
P = $1.50, Q = 2,500
40. Coal-fired power plants currently produce power, with each firm’s total costs given by TC =
12.5 + 0.5q + 0.005q2, where q is the firm’s output. The demand for their electricity is given
by QD = 10,000 − 5,000P. If a new piece of environmental regulation increases the fixed
costs of each firm to $50, what will be the change in the number of plants operating in the
long-run, zero-profit equilibrium?
a.
There will be no change in the number of firms.
b.
There will be 25 fewer firms.
c.
There will be 40 fewer firms.
d.
There will be 50 fewer firms.
e.
There will be 75 fewer firms.
41. Coal-fired power plants currently produce power, with each firm’s total costs given by TC =
12.5 + 0.5q + 0.005q2, where q is the firm’s output. The demand for their electricity is given
by QD = 10,000 − 5,000P. If a new piece of environmental regulation reduces the
fixed costs of each firm to 4.5, what are the new long-run, zero-profit equilibrium price and
industry output?
a.
P = $.75, Q = 6,250
b.
P = $.80, Q = 6,000
c.
P = $1.00, Q = 5,000
d.
P = $1.25, Q = 3,750
e.
P = $1.50, Q = 2,500
42. 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
43. 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
44. 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