c.
sometimes leave the regulated firm with economic losses.
d.
leave the regulated firm with profits that are about 10 percent higher than those of other firms.
DISC: The role of government
United States – BPROG: Analytic
The role of government
Two Key Issues that Face Regulators
120. If a firm’s average cost is declining, setting price equal to marginal cost will
a.
maximize the firm’s profits.
b.
minimize the firm’s losses.
c.
guarantee that the firm will lose money.
d.
help the firm earn the opportunity costs of its resources.
DISC: The role of government
United States – BPROG: Analytic
The role of government
Two Key Issues that Face Regulators
121. Setting price equal to marginal cost in a natural monopoly will lead to
a.
excess profits for the firm.
b.
losses for the firm.
c.
zero profits for the firm.
d.
One cannot tell without further information.
DISC: The role of government
United States – BPROG: Analytic
The role of government
Two Key Issues that Face Regulators
122. In many regulated industries, marginal cost will be
a.
below average cost.
b.
above total cost.
c.
above marginal fixed cost.
d.
below incremental cost.
DISC: The role of government
United States – BPROG: Analytic
The role of government
Two Key Issues that Face Regulators
123. A monopoly firm operates with declining marginal cost. If regulators impose marginal cost pricing, the market will
a.
b.
c.
d.
DISC: The role of government
United States – BPROG: Reflective Thinking – BPROG: Analysis
The role of government
Two Key Issues that Face Regulators
124. If average cost is declining,
a.
marginal cost must be below average cost.
b.
firms would go bankrupt if all prices were set equal to marginal costs.
c.
marginal cost may be declining or increasing.
d.
All of the above are correct.
DISC: The role of government
United States – BPROG: Reflective Thinking – BPROG: Analysis
The role of government
Two Key Issues that Face Regulators
125. Regulating an industry to remove all economic profit
a.
removes all incentive for efficiency and responsiveness to consumer demand.
b.
removes distortions caused by cross subsidies.
c.
removes allocative inefficiency.
d.
increases incentives to be productively efficient.
DISC: The role of government
United States – BPROG: Analytic
The role of government
Two Key Issues that Face Regulators
126. One possible solution to improve performance of regulated firms is which of the following?
a.
Allow the firm to set its own rate of return.
b.
Allow higher rates of return to cover higher cost of better performance.
c.
Allow a higher rate of return for better performance.
d.
Set lower prices when efficiency improves.
DISC: The role of government
United States – BPROG: Analytic
The role of government
Two Key Issues that Face Regulators
127. Bigness, or large firms, may benefit consumers in which of the following ways?
a.
Larger firms usually charge lower prices than smaller firms.
b.
Larger firms with monopoly power definitely have greater incentive to be efficient and innovative.
c.
Larger firms may take advantage of economies of scale and scope.
d.
Larger firms are more responsive to consumers’ desires.
DISC: The role of government
United States – BPROG: Reflective Thinking – BPROG: Analysis
The role of government
The Pros and Cons of “Bigness”
128. Unions typically ____ deregulation because it generally makes pricing ____ competitive.
a.
oppose; more
b.
oppose; less
c.
support; more
d.
support; less
DISC: The role of government
United States – BPROG: Analytic
The role of government
129. Airline deregulation has led to: (i) lower prices; (ii) a deterioration of service to isolated communities.
a.
i and ii
b.
i but not ii
c.
ii but not i
d.
neither i nor ii
DISC: The role of government
United States – BPROG: Analytic
The role of government
130. Deregulation of the airline and trucking industry has (i) resulted in considerable entry of new firms, and (ii) has
forced unions in these industries to make large concessions on wages and working conditions.
a.
i and ii
b.
i but not ii
c.
ii but not i
d.
neither i nor ii
DISC: The role of government
United States – BPROG: Reflective Thinking – BPROG: Analysis
The role of government
131. One of the clear effects of deregulation was
a.
lower prices of many services.
b.
increased entry of new firms into regulated industries.
c.
lower income to unions working in regulated industries.
d.
all of the above.
DISC: The role of government
United States – BPROG: Analytic
The role of government
132. As an apparent result of airline deregulation,
a.
many small communities have been left without airline service.
b.
the wages and benefits of airline workers have been reduced.
c.
air fares have risen more quickly than they probably would have under continued regulation.
d.
small commuter airlines have almost vanished.
DISC: The role of government
United States – BPROG: Analytic
The role of government
133. Regulators often raise prices instead of lowering them. This is designed to
a.
prevent the exit of competitors.
b.
protect the consumer from cheap products.
c.
ensure high-quality products.
d.
ensure workers are adequately paid.
DISC: The role of government
United States – BPROG: Analytic
The role of government
The Puzzle Revisited: Why Regulators Often Push Prices Upward
134. One reason regulators push for higher prices in an industry is to
a.
prevent excess profits in the industry.
b.
protect the public from excessively low prices.
c.
encourage usage of the good or service.
d.
protect against the demise of existing firms.
DISC: The role of government
United States – BPROG: Analytic
The role of government
The Puzzle Revisited: Why Regulators Often Push Prices Upward
135. One problem that haunts most antitrust litigation is that:
a.
the government seldom wins.
b.
the appearance of vigorous competition resembles acts that undermine competition.
c.
it has the effect of preventing firms from being tough on their rivals.
d.
the defendant firm may be destroyed.
DISC: The role of government
United States – BPROG: Reflective Thinking – BPROG: Analysis
The role of government
Monopolization and Vigorous Competition
136. “Anticompetitive practices” are actions by a powerful firm that:
a.
threaten to destroy competitors
b.
force competitors to compete less vigorously
c.
prevent the entry of new rivals.
d.
all of these are true.
DISC: The role of government
United States – BPROG: Reflective Thinking – BPROG: Analysis
The role of government
Anticompetitive Practices and Antitrust
137. Discuss some of the reasons why monopoly power is considered undesirable.
1.
High prices reduce the wealth of consumers.
3.
Monopoly power creates an obstacle to efficiency and innovation.
DISC: The role of government
United States – BPROG: Analytic
The Public Interest Issue: Monopoly Power versus Mere Size
138. Define the following terms and explain their importance to the study of economics:
a.
antitrust policy
b.
economies of scale
c.
economies of scope
natural monopoly in the provision of those products, and a candidate for regulation.
139. Briefly review the history of antitrust legislation in the United States.
140. What are the reasons that are usually given to justify regulation?
141. Explain why firms that enjoy economies of scale or scope are candidates for regulation.
142. Why is regulation necessary to achieve “universal service”?
143. Consider an industry consisting of four firms with market shares of 30 percent, 25 percent, 25 percent, and 20
percent. Calculate the Herfindahl Hirschman Index and interpret your result.
144. Discuss the advantages of the Herfindahl-Hirschman Index compared with the four–firm concentration ratio.
145. Compare the advantages and disadvantages of marginal and average cost pricing for natural monopolies.
146. List and discuss the importance of the major effects of the deregulation that occurred in the 1980s.
147. While monopoly power can be abused, it can also be used beneficially. What are the major pros and cons of
largeness in business?
2.
A monopoly may restrict output in pursuit of profit. This is allocatively inefficient.
monopoly chooses a quiet life, it may restrict innovation.
DISC: The role of government
United States – BPROG: Reflective Thinking – BPROG: Analysis
148. Why are the prices of some regulated industries often higher than they would be if there were no regulation?
efficiency and promoting consumer utility.
DISC: The role of government
United States – BPROG: Analytic
Two Key Issues that Face Regulators
149. Briefly and concisely define the following terms:
a.
price discrimination
b.
tying contracts
c.
concentration ratio
d.
market power
different buyers of the same product.
(or some other small number) largest firms.
period.
DISC: The role of government
United States – BPROG: Analytic
Two Key Issues that Face Regulators
150. Distinguish between predatory pricing strategy and bundling strategy.
151. The declared purpose of antitrust policy is to promote competition, yet some would say it actually may prevent
competition. Explain the two sides of the debate.
152. The Antitrust Division of the Department of Justice carefully scrutinizes mergers. Why?
153. List appropriate criteria for deciding whether a merger of two firms producing similar products should be permitted.
154. On balance, does market power promote or retard technological innovation?
155. Economists cite some beneficial effects of price discrimination. What are these benefits and how do the antitrust laws
treat price discrimination?