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Class:
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Chapter 15: Economic Regulation and Antitrust Policy
True / False
1. The average cost curve for a natural monopoly is downward sloping where it intersects the market demand curve.
a.
True
b.
False
True
2. Public utilities refer to government-owned or government-regulated monopolies.
a.
True
b.
False
True
3. In order to ensure allocative efficiency on the part of a natural monopoly, regulators would set price equal to marginal
cost.
a.
True
b.
False
True
4. When regulating a natural monopoly, the regulating agency should set price equal to marginal cost.
a.
True
b.
False
True
5. The figure below shows the cost and revenue curves faced by a monopolist. If regulators allow the natural monopolist
to earn only a normal profit, it will result in a greater consumer surplus than that under an unregulated monopoly.
Figure 15.4
a.
True
b.
False
True
6. Producers play a disproportionately large role in influencing public regulation because they have a strong interest in
matters that affect their specialized source of income.
a.
True
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Chapter 15: Economic Regulation and Antitrust Policy
b.
False
True
7. Regulation that intends to improve the quality of service provided by carpenters will tend to increase the price of their
services.
a.
True
b.
False
True
8. Economic regulation aims to control the price, output, the entry of new firms, and the quality of service in industries in
which monopoly appears inevitable or even desirable.
a.
True
b.
False
True
9. The requirement that New York City taxi drivers must own a medallion in order to operate a taxi in the city reduces
competition and raises the fares that customers pay.
a.
True
b.
False
True
10. Over time, the regulatory machinery may shift toward the special interests of producers, who, in effect, “capture” the
regulating agency.
a.
True
b.
False
True
11. Antitrust policy has no relationship with socially desirable market performance.
a.
True
b.
False
False
12. The Sherman Antitrust Act makes it unlawful for firms to collude to restrain trade.
a.
True
b.
False
True
13. The Clayton Act prohibits all horizontal mergers, regardless of their economic consequences.
a.
True
b.
False
False
14. Price discrimination that substantially lessens competition is prohibited by the Clayton Act.
a.
True
b.
False
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Chapter 15: Economic Regulation and Antitrust Policy
True
15. Horizontal mergers involve firms in different industries.
a.
True
b.
False
False
16. The U.S. antitrust policy is focused primarily on market conduct.
a.
True
b.
False
False
17. When a court uses a per se rule to interpret the Sherman Antitrust Act, its ruling is based on market conduct alone.
a.
True
b.
False
True
18. Under the rule of reason, no firm with a large market share can be found guilty of violating the Sherman Antitrust Act.
a.
True
b.
False
False
19. “Mere size is no offense” is an antitrust ruling based on the rule of reason.
a.
True
b.
False
True
20. Price fixing is illegal in the United States.
a.
True
b.
False
True
21. The Herfindahl index is the sum of the squared market shares of the four largest firms in an industry.
a.
True
b.
False
False
22. If the pre-merger Herfindahl index is less than 1,000, the Department of Justice is likely to challenge the merger.
a.
True
b.
False
False
23. If the value of the Herfindahl index is 10,000, there must be exactly one firm in the industry.
a.
True
b.
False
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Chapter 15: Economic Regulation and Antitrust Policy
True
24. If there are only two firms in an industry, the value of the Herfindahl index must be 5,000.
a.
True
b.
False
False
25. As concentration in an industry increases, the value of the Herfindahl index falls.
a.
True
b.
False
False
26. The Herfindahl index would be 5000 if there are only two firms in an industry with equal market shares.
a.
True
b.
False
True
27. Industry A has four firms, each with a 25% market share, while Industry B has four firms, one firm with a 70% market
share and the other three firms with a 10% market share each. According to the Herfindahl–Hirschman Index, Industry A
is highly concentrated.
a.
True
b.
False
False
28. In its case against Microsoft, the government contended that Microsoft engaged in a pattern of predatory behavior to
extend its monopoly power. This is an example of a ruling according to the principle of “per se illegality.”
a.
True
b.
False
True
29. Conglomerate mergers involve more than two firms.
a.
True
b.
False
False
30. According to William Shepherd, the total assets of the firms in the United States have been declining mostly in
response to increased imports.
a.
True
b.
False
False
31. The United States economy has experienced a decrease in competition over the last three decades.
a.
True
b.
False
False
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Chapter 15: Economic Regulation and Antitrust Policy
32. The research of William Shepherd suggests that since World War II, the three main reasons for increased competition
in U.S. industries are competition from imports, deregulation, and antitrust policy.
a.
True
b.
False
True
33. Technological change has played a major role in increasing competition in recent years.
a.
True
b.
False
True
34. Technological change is decreasing competition in the market for media.
a.
True
b.
False
False
35. A private firm that sustains a financial loss because of an antitrust violation may be able to recover three times the
actual damages.
a.
True
b.
False
True
36. One of the remedies used in the case of antitrust violations is the awarding of treble damages to the party that has been
harmed.
a.
True
b.
False
True
Multiple Choice
37. A natural monopoly exists when throughout the range of market demand:
a.
average cost is equal to marginal cost.
b.
there exist diseconomies of scale.
c.
there exist economies of scale.
d.
average cost is constant.
e.
marginal cost exceeds average cost.
c
38. For a natural monopolist, _____ throughout the range of market demand.
a.
average cost increases
b.
there exist diseconomies of scale
c.
average cost decreases
d.
average cost remains constant
e.
marginal cost exceeds average cost
c
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Chapter 15: Economic Regulation and Antitrust Policy
39. In a(n) _____, throughout the range of market demand, marginal cost is less than average cost and pulls average cost
downward.
a.
oligopoly market
b.
perfectly competitive market
c.
natural monopoly
d.
duopoly
e.
monopsony
c
40. Which of the following is the best example of a natural monopoly?
a.
A company involved in gold mining in the Colorado Rocky Mountains
b.
A company involved in filmmaking in Hollywood
c.
A company providing electrical service to homes in Seattle
d.
Kodak producing film
e.
IBM producing computers
c
41. Due to economies of scale, throughout the range of market demand, natural monopolies have:
a.
downward-sloping long-run average cost curves.
b.
upward-sloping long-run average total cost curves.
c.
upward-sloping short-run average cost curves.
d.
upward-sloping short-run average total cost curves.
e.
horizontal long-run average cost curves.
a
42. A natural monopoly, such as a local telephone company, is characterized by _____.
a.
a lack of natural competitors
b.
low fixed costs and diseconomies of scale
c.
economies of scale
d.
a lack of government regulation
e.
constant costs of production
c
43. If a firm has a downward-sloping long-run average cost curve over the entire range of market demand, it is a _____.
a.
local monopoly
b.
firm in a perfectly competitive market
c.
firm in a monopsony market
d.
firm in an oligopoly market
e.
natural monopoly
e
44. Most local phone companies:
a.
face a vertical demand curve.
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Chapter 15: Economic Regulation and Antitrust Policy
b.
operate in a perfectly competitive industry.
c.
operate in an oligopoly industry.
d.
face an upward-sloping demand curve.
e.
are natural monopolies.
45. In order to maximize profit, an unregulated monopolist:
a.
produces the level of output at which marginal cost equals marginal revenue.
b.
produces the level of output at which marginal cost exceeds marginal revenue.
c.
charges a price that is equal to its marginal cost of production.
d.
charges a price that is equal to its average cost of production.
e.
produces the level of output at which marginal cost is less than marginal revenue.
46. Which of the following is a possible outcome if a monopolist is allowed to maximize profit?
a.
The equilibrium price-output combination is inefficient.
b.
Consumers pay a price that is equal to the marginal cost of production.
c.
Consumer surplus is more than producer surplus.
d.
The equilibrium price-output combination is socially optimal.
e.
The quantity of output produced by the monopolist is larger than the socially optimal level of output.
47. In which of the following ways can the government increase social welfare in an unregulated monopoly?
a.
By allowing the monopolist to maximize profit
b.
By forcing the monopolist to lower the price and expand output
c.
By forcing the monopolist to shut down operations
d.
By providing tax exemptions to the monopolist
e.
By increasing corporate tax rates
48. The rail system in Metropolis is a natural monopoly. Which of the following is likely to be true if the government
regulates the system by setting a competitive price?
a.
Price and output will be higher in a regulated monopoly than in an unregulated monopoly.
b.
Price and output will be lower in a regulated monopoly than in an unregulated monopoly.
c.
Price will be lower and output will be higher in a regulated monopoly than in an unregulated monopoly.
d.
Price will be higher and output will be lower in a regulated monopoly than in an unregulated monopoly.
e.
Profit will be lower in a regulated monopoly than in an unregulated monopoly, but there will be no change in
output.
49. Which of the following is a possible effect of government regulation on a natural monopolist?
a.
The firm earns zero economic profit.
b.
The firm earns positive economic profit.
c.
The firm faces a horizontal demand curve.
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Chapter 15: Economic Regulation and Antitrust Policy
d.
The firm incurs an economic loss.
e.
The firm faces an upward-sloping demand curve.
50. Watt Power and Light, an electric company, is an example of a natural monopoly. It will suffer an economic loss:
a.
irrespective of the output it produces because marginal cost is always less than average cost.
b.
irrespective of the price it charges because average cost is always less than marginal cost.
c.
if regulators insist that it produce where price equals marginal cost because marginal cost is less than average
cost.
d.
if regulators insist that it produce where price equals marginal cost because average cost is always less than
marginal cost.
e.
if regulators insist that it produce where price equals average cost because average cost is always less than
marginal cost.
51. If a regulator sets the price in a natural monopoly equal to the monopolist’s marginal cost, the monopolist will _____.
a.
experience a loss
b.
earn an economic profit
c.
earn zero economic profit
d.
shut down in the short run
e.
face a horizontal demand curve
52. The figure below shows the cost and revenue curves for a natural monopolist. Suppose the monopolist was originally
producing at a profit-maximizing output level. If regulators set price equal to marginal cost, the price will change from:
Figure 15.1
a.
$24 to $18, and quantity will increase from 5 units to 8 units.
b.
$14 to $20, and quantity will increase from 5 units to 8 units.
c.
$24 to $18, and quantity will remain unchanged.
d.
$18 to $14, and quantity will increase from 5 units to 8 units.
e.
$24 to $22, and quantity will increase from 5 units to 10 units.
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Chapter 15: Economic Regulation and Antitrust Policy
a
53. Figure 15.2 shows the cost and revenue curves for a monopolist. The increase in consumer surplus when price is set
equal to marginal cost rather than at the profit-maximizing level is shown by area _____.
Figure 15.2
a.
abc
b.
adf
c.
cef
d.
dfeg
e.
bcfd
e
54. Figure 15.2 shows the cost and revenue curves for a monopolist. The consumer surplus that results if the monopoly is
unregulated is shown by the _____.
Figure 15.2
a.
triangular area abc
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Chapter 15: Economic Regulation and Antitrust Policy
b.
triangular area adf
c.
triangular area cef
d.
rectangular area dfeg
e.
rectangular area bcfd
55. Figure 15.2 shows the cost and revenue curves of a monopolist. The consumer surplus that results if the monopoly is
regulated and it charges a price equal to MC is shown by the _____.
Figure 15.2
a.
triangular area abc
b.
triangular area adf
c.
triangular area cef
d.
rectangular area dfeg
e.
rectangular area bcfd
56. The figure below shows the cost and revenue curves of a natural monopolist. The welfare loss that occurs if the
monopoly is unregulated is shown by the area _____.
Figure 15.2
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Chapter 15: Economic Regulation and Antitrust Policy
a.
cef
b.
abc
c.
adf
d.
dfeg
e.
bcfd
a
57. If a natural monopolist switches to marginal cost pricing from charging a profit-maximizing price, there will be a(n):
a.
decrease in the demand for the monopolist’s product.
b.
increase in the price charged by the monopolist.
c.
fall in consumer surplus.
d.
increase in economic profit.
e.
increase in the level of output produced by the monopolist.
e
58. If government regulators force a natural monopoly to produce where price equals marginal cost, the monopoly will
_____.
a.
continue operations in the long run
b.
earn a normal profit
c.
earn zero economic profit
d.
earn a negative economic profit
e.
reduce the level of production
59. Production by a monopolist would result in the socially optimal allocation of resources if:
a.
price is set equal to marginal cost.
b.
marginal revenue is greater than price.
c.
marginal revenue is equal to marginal cost.
d.
price is set equal to average total cost.
e.
marginal revenue is equal to average total cost.
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Chapter 15: Economic Regulation and Antitrust Policy
60. Suppose the local government is considering using marginal cost pricing to set rates for a cable TV company. Which
of the following arguments supports marginal cost pricing?
a.
Marginal cost pricing gives the monopoly an economic profit and a reason to stay in business.
b.
Marginal cost pricing gives the firm a normal economic profit and a reason to stay in business.
c.
Marginal cost pricing results in allocative efficiency.
d.
Unlike firms adopting average cost pricing, firms using marginal cost pricing do not require subsidies, which
can be costly.
e.
Unlike average cost pricing, marginal cost pricing enables monopolies to stay in business in the long run.
61. Which of the following is true when regulators require a natural monopolist to set price equal to marginal cost?
a.
This policy results in a less than socially optimal allocation of resources.
b.
The marginal cost of producing the last unit sold exceeds the consumers’ marginal value for that last unit.
c.
The monopolist experiences recurring losses unless a subsidy is provided.
d.
The monopolist earns a normal profit.
e.
The monopolist earns an economic profit.
62. The government of a state wants Gigantic Software Corp., a natural monopoly, to stay in business yet still produce
where price equals marginal cost. In order to encourage Gigantic Software Corp. to stay in business, the government
might choose to:
a.
set a price ceiling 10 percent lower than its previous level.
b.
impose a tax on the company for each dollar of sales.
c.
establish regulations that raise the company’s cost of doing business.
d.
provide a subsidy to the company to cover the loss and ensure a normal profit.
e.
replace the company’s top management.
63. If an electric company is allowed by regulators to earn only a normal profit, it will produce at the point where _____.
a.
MR = MC
b.
P = MC
c.
MC = Qd
d.
P = AC
e.
MR = AC
64. The figure below shows the cost and revenue curves for a natural monopolist. If the natural monopoly is regulated and
earns a normal profit, then:
Figure 15.3
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Chapter 15: Economic Regulation and Antitrust Policy
a.
P = $24 and Q = 8.
b.
P = $22 and Q = 6.
c.
P = $24 and Q = 5.
d.
P = $20 and Q = 8.
e.
P = $18 and Q = 5.
b
65. Figure 15.4 shows the revenue and cost curves for a natural monopolist. The monopolist will set the price equal to
_____ if it is allowed to earn only a normal profit.
Figure 15.4
a.
a
b.
b
c.
c
d.
f
e.
e
c
66. The figure below shows the cost and revenue curves for a natural monopolist. If regulators allow the natural
monopolist to earn only a normal profit, it will produce an output equal to _____.
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Chapter 15: Economic Regulation and Antitrust Policy
Figure 15.4
a.
0
b.
g
c.
h
d.
i
e.
j
d
67. In which of the following ways can a government assure that a natural monopolist earns zero economic profit?
a.
By setting the price equal to marginal cost
b.
By setting the price equal to average total cost
c.
By setting the price lower than the average total cost
d.
By asking the monopolist to produce where marginal cost is equal to marginal revenue
e.
By asking the monopolist to produce where marginal cost is equal to average total cost
b
68. A regulated natural monopoly that must set price equal to average cost will:
a.
incur an economic loss.
b.
earn a net economic profit.
c.
earn a normal profit.
d.
shut down in the short run.
e.
experience diseconomies of scale.
69. Compared to the profit-maximizing outcome, average-cost pricing in a natural monopoly leads to:
a.
a lower marginal cost.
b.
a higher price.
c.
decreased consumer surplus.
d.
the elimination of economic profit.
e.
less output.
d
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Chapter 15: Economic Regulation and Antitrust Policy
70. A natural monopolist earns zero economic profit when:
a.
government regulators force it to set price equal to marginal cost.
b.
government regulators force it to set price equal to average total cost.
c.
the government provides it with a subsidy.
d.
the government provides it with a tax exemption.
e.
government regulators force it to produce where MC = MR.
71. When government regulations force a natural monopoly to produce where price equals average total cost, social
welfare is:
a.
maximum.
b.
less than it would be without regulation.
c.
greater than it would be without regulation, but it is not maximized.
d.
exactly the same as it would be without regulation.
e.
minimum.
c
72. Which of the following is true of a natural monopoly?
a.
If regulated, the firm will have a higher level of output than if it was unregulated.
b.
If regulated, the firm will have a lower level of output than if it was unregulated.
c.
If regulated, the firm will be allowed to charge a price higher than its average cost.
d.
If regulated, the firm will earn economic profit in the long run.
e.
If regulated, the firm will earn economic profit in the long run.
a
73. Suppose the market for taxis in Mexico City is a natural monopoly. Which of the following is likely to result from the
regulation of taxis in Mexico City?
a.
The price of taxi rides will decrease.
b.
The price of taxi rides will increase.
c.
The income of taxi owners will increase.
d.
Taxi owners will have greater monopoly power.
e.
The supply of taxis will decrease.
a
74. If producers support the proposed regulation of their industry, then:
a.
it is likely that consumers will benefit from the regulation.
b.
it is likely that the regulation will eliminate deadweight loss.
c.
it is likely that both producers and consumers will be adversely affected by the legislation.
d.
it is possible that consumers will be adversely affected by the legislation.
e.
it is likely that prices will fall.
75. The capture theory of regulation, espoused by George Stigler, asserts that: