1. Which of the following is the preferred strategy for the government to follow to remedy the inefficient allocation of
resources associated with monopolies?
a.
preventing mergers through antitrust laws
b.
regulating the prices that monopolies can charge
c.
doing nothing
d.
None of the above strategies is preferred. Each is a viable strategy.
2. Which of the following statements is not correct?
a.
The government may use antitrust laws to break up an existing company to improve competition.
b.
The government may break up a natural monopoly to lower the price charged to customers.
c.
Private ownership is typically preferred to public ownership.
d.
Sometimes the best strategy is for the government to do nothing about monopoly inefficiency because the
“fix” may be worse than the problem.
3. Which of the following statements is not correct?
a.
The government may use antitrust laws to prevent a merger if the government believes the merger will reduce
competition and increase prices.
b.
By regulating a natural monopoly where price equals average total cost, the monopoly earns zero profits.
c.
An advantage of private ownership over public ownership is that private business owners tend to fire
inefficient managers.
d.
The government should always intervene to improve monopoly inefficiency.
4. Which of the following governmental actions would eliminate some or all of the inefficiency that results from
monopoly pricing? The government could
a.
regulate the monopoly.
b.
prohibited the monopoly from price discriminating.
c.
force the monopoly to operate at a point where its marginal revenue is equal to its marginal cost.
d.
None of the above would eliminate any inefficiency associated with a monopoly.
5. Antitrust laws have economic benefits that outweigh the costs if they
a.
prevent mergers that would decrease competition and lower the costs of production.
b.
prevent mergers that would decrease competition and raise the costs of production.
c.
allow mergers that would decrease competition and raise the costs of production.
d.
None of the above is correct because antitrust laws never have economic benefits that outweigh the costs.
6. Which of the following statements is not correct?
a.
Two examples of early antitrust laws are the Sherman and Clayton Antitrust Acts.
b.
Antitrust laws automatically prevent mergers between companies that produce similar products.
c.
Antitrust laws give the government power to increase competition.
d.
Antitrust laws can reduce social welfare if they prevent mergers that would lower costs through more efficient
joint production.
7. Which of the following statements is correct?
a.
Two examples of early antitrust laws are the Clinton and Stigler Antitrust Acts.
b.
Antitrust laws automatically prevent mergers between companies that produce similar products.
c.
Antitrust laws reduce the government’s power to regulate private companies.
d.
Antitrust laws can reduce social welfare if they prevent mergers that would lower costs through more efficient
joint production.
8. The first major piece of antitrust legislation was the
a.
Clayton Act.
b.
Obama Care Act.
c.
Sherman Act.
d.
Clinton Act.
9. The legislation passed by Congress in 1890 to reduce the market power of large and powerful “trusts” was the
a.
Morgan Act.
b.
Sherman Act.
c.
Clayton Act.
d.
14th Amendment.
10. The legislation passed by Congress in 1914 to strengthen the government’s powers and authorize private lawsuits was
the
a.
Morgan Act.
b.
Sherman Act.
c.
Clayton Act.
d.
14th Amendment.
11. The collection of statutes aimed at curbing monopoly power is called
a.
the 14th amendment.
b.
the Clayton Act.
c.
the Sherman Act.
d.
antitrust law.
12. In order for antitrust laws to raise social welfare, the government must
a.
disallow synergy benefits from accruing to monopolists.
b.
disallow any mergers from taking place.
c.
be able to determine which mergers are desirable and which are not.
d.
always attempt to keep markets in their most competitive form.
13. Reduced competition through merging of companies will raise social welfare
a.
if the social cost from the synergies exceeds the benefit of increased market power.
b.
if the benefit from the synergies exceeds the social cost of increased market power.
c.
always.
d.
never.
14. One method used to control the ability of firms to capture monopoly profit in the United States is through
a.
government purchase of products produced by monopolists.
b.
government distribution of a monopolist’s excess production.
c.
enforcement of antitrust laws.
d.
regulation of firms in highly competitive markets.
15. Antitrust laws may
a.
enhance the ability of firms to capture profits from a concentration of market power.
b.
enhance the ability of firms to reduce economic losses.
c.
restrict the ability of firms to operate at the socially efficient level of production.
d.
restrict the ability of firms to merge.
16. Antitrust laws allow the government to
a.
prevent mergers.
b.
break up companies.
c.
promote competition.
d.
All of the above are correct.
17. Antitrust laws allow the government to
a.
collect revenues through the antitrust tax.
b.
break up companies.
c.
purchase privately-held companies through eminent domain.
d.
All of the above are correct.
18. Splitting up a monopoly is often justified on the grounds that
a.
consumers prefer dealing with small firms.
b.
small firms have lower costs.
c.
competition is inherently efficient.
d.
small firms produce higher quality products.
19. Antitrust laws
a.
prevent firms from maximizing profits.
b.
allow the government to prevent mergers, even ones that would benefit consumers.
c.
require the government to measure both the benefits and costs of a potential merger.
d.
All of the above are correct.
20. Which of the following statements is correct?
a.
Public ownership is preferred to regulation in order to minimize the deadweight losses associated with natural
monopolies.
b.
Antitrust laws are always the best way to limit monopoly power.
c.
It is possible that the best approach to monopolies is for the government to do nothing.
d.
Marginal-cost pricing requires a natural monopoly to earn zero economic profits.
21. Which of the following is not correct?
a.
Antitrust laws may prevent mergers that would actually raise social welfare.
b.
Public ownership is the most common public policy toward monopolies in the United States.
c.
Regulation is a common strategy for a natural monopoly.
d.
Sometimes the best public policy toward a monopoly may be to do nothing.
22. Which of the following statements is not correct?
a.
Part of the deadweight loss associated with monopoly is measured by the monopolist’s economic profit.
b.
Marginal cost is always less than average total cost in a natural monopoly.
c.
Discount coupons available free to the public are a type of price discrimination.
d.
Anti-trust laws make it harder for firms to create synergies.
23. One problem with government operation of monopolies is that
a.
a benevolent government is likely to be interested in generating profits for political gain.
b.
monopolies typically have rising average costs.
c.
the government typically has little incentive to reduce costs.
d.
a government-regulated outcome will increase the profitability of the monopoly.
24. One problem with regulating a monopolist on the basis of cost is that
a.
by focusing on costs, the regulators ignore profits.
b.
it does not provide an incentive for the monopolist to reduce its cost.
c.
a monopolist’s costs, by definition, are higher than costs of perfectly competitive firms.
d.
a monopolist is still able to generate excessive economic profits.
25. The task of economic regulation is to
a.
protect monopoly profits.
b.
approximate the results of the competitive market.
c.
replace competition with government ownership.
d.
increase competition within the market.
26. If government regulation sets the maximum price for a natural monopoly equal to its marginal cost, then the natural
monopolist will
a.
earn economic losses.
b.
earn economic profits.
c.
earn zero economic profits.
d.
produce a lower quantity of output than is socially optimal.
27. If the government regulates the price that a natural monopolist can charge to be equal to the firm’s marginal cost, the
firm will
a.
earn zero profits.
b.
earn positive profits, causing other firms to enter the industry.
c.
earn negative profits, causing the firm to exit the industry.
d.
minimize costs in order to lower the price that it charges.
28. If the government regulates the price that a natural monopolist can charge to be equal to the firm’s average total cost,
the firm will
a.
earn zero profits.
b.
earn positive profits, causing other firms to enter the industry.
c.
earn negative profits, causing the firm to exit the industry.
d.
minimize costs in order to lower the price that it charges.
29. When regulators use a marginal-cost pricing strategy to regulate a natural monopoly, the regulated monopoly
a.
will experience a loss.
b.
will experience a price below average total cost.
c.
may rely on a government subsidy to remain in business.
d.
All of the above are correct.
30. Because natural monopolies have a declining average cost curve, regulating natural monopolies by setting price equal
to marginal cost would
a.
cause the monopolist to operate at a loss.
b.
result in a less than optimal total surplus.
c.
maximize producer surplus.
d.
result in higher profits for the monopoly.
31. Policymakers are discussing various proposals regarding how to deal with natural monopolies. Senator Huff wants to
regulate natural monopolies by equating price with average total cost. Huff contends that such a policy will ensure that
monopolies make every effort to reduce costs. Senator Puff wants the government to own natural monopolies. Puff argues
that government-owned monopolies usually do a better job of holding down costs than privately owned monopolies.
Which senator’s argument is correct?
a.
Senator Huff
b.
Senator Puff
c.
both senators
d.
neither senator
32. For a typical natural monopoly, average total cost is
a.
falling, and marginal cost is above average total cost.
b.
falling, and marginal cost is below average total cost.
c.
rising, and marginal cost is below average total cost.
d.
rising, and marginal cost is above average total cost.
33. For a typical natural monopoly, average total cost is
a.
rising, often because marginal costs are very large.
b.
rising, often because fixed costs are very large.
c.
declining, often because marginal costs are very large.
d.
declining, often because fixed costs are very large.
34. In the majority of cases where there is a natural monopoly in the United States, the government usually deals with the
problem
a.
by splitting the natural monopoly into smaller companies.
b.
through regulation.
c.
by turning the natural monopoly into a public enterprise.
d.
by doing nothing.
35. In a natural monopoly,
a.
society would be better off if antitrust laws were used to create many different firms in the market.
b.
the marginal cost curve is positively sloped.
c.
if the government requires marginal cost pricing, it will likely have to subsidize the firm.
d.
the marginal revenue curve is horizontal.
36. For a long while, electricity producers were thought to be a classic example of a natural monopoly. People held this
view because
a.
the average cost of producing units of electricity by one producer in a specific region was lower than if the
same quantity were produced by two or more producers in the same region.
b.
the average cost of producing units of electricity by one producer in a specific region was higher than if the
same quantity were produced by two or more produced in the same region.
c.
the marginal cost of producing units of electricity by one producer in a specific region was higher than if the
same quantity were produced by two or more producers in the same region.
d.
electricity is a special non-excludable good that could never be sold in a competitive market.
37. The reason to regulate utilities instead of using antitrust laws to promote competition is that a utility is usually a
a.
profit-maximizing monopoly.
b.
producer of externalities.
c.
revenue-maximizing monopoly.
d.
natural monopoly.
Figure 15–21
38. Refer to Figure 15-21. What is the price and quantity for this natural monopolist under fair return pricing?
a.
A and J
b.
E and J
c.
F and K
d.
H and L
39. Refer to Figure 15-21. What is the price and quantity for this natural monopolist under socially optimal pricing?
a.
A and J
b.
E and J
c.
F and K
d.
H and L
40. Refer to Figure 15-21. Which of the following areas describes the profit of this natural monopolist under socially
optimal pricing?
a.
ABCE
b.
0HIL
c.
0FGK
d.
None of the above is correct.
41. Which type of public policy toward monopolies is much more common in Europe than in the United States?
a.
antitrust laws
b.
regulation
c.
public ownership
d.
“do nothing”
42. Which of the following is an example of public ownership of a monopoly?
a.
DeBeers
b.
Microsoft
c.
U.S. Postal Service
d.
AT&T
43. Private ownership of a monopoly may benefit society because the monopoly will have an incentive to
a.
charge a price that is consistent with that of a benevolent social planner.
b.
charge a price that prevents some people from buying.
c.
price its good according to the intersection of marginal cost and average revenue.
d.
lower its costs to earn a higher profit.
44. The key issue in determining the efficiency of public versus private ownership of a monopoly is
a.
the tendency for efficient management of publicly owned enterprises.
b.
the inability of private monopolies to get rid of managers that are doing a bad job.
c.
the propensity of private monopolies to generate excessive profits.
d.
how ownership of the firm affects the cost of production.
45. The assessment by George Stigler concerning the tradeoffs between “market failure” and “political failure” in the
American economy provides support for which of the following solutions to the problems of monopolies?
a.
public ownership of monopolies
b.
government regulation of monopolies
c.
government incentives to promote competition in monopolized industries
d.
doing nothing at all
46. The George Stigler quote, “…the degree of ‘market failure’ for the American economy is much smaller than the
‘political failure’ arising from the imperfections of economic policies …” illustrates the advantage of which type of public
policy toward monopolies?
a.
antitrust laws
b.
regulation
c.
public ownership
d.
“do nothing”