1. From society’s standpoint, cooperation among oligopolists is
a.
desirable, because it leads to less conflict among firms and a wider variety of products for consumers.
b.
desirable, because it leads to an outcome closer to the competitive outcome than what would be observed in
the absence of cooperation.
c.
undesirable, because it leads to output levels that are too low and prices that are too high.
d.
undesirable, because it leads to output levels that are too high and prices that are too high.
2. A law that encourages market competition by prohibiting firms from gaining or exercising excessive market power is
a.
b.
c.
d.
3. The primary purpose of antitrust legislation is to
a.
protect small businesses.
b.
protect the competitiveness of U.S. markets.
c.
protect the prices of American-made products.
d.
ensure firms earn only a fair profit.
4. Suppose that antitrust laws were successful in moving the allocation of resources in the computer software industry
closer to the social optimum. This situation would illustrate which of the following Ten Principles of Economics?
a.
Trade can make everyone better off.
b.
The cost of something is what you give up to get it.
c.
Governments can sometimes improve market outcomes.
d.
A country’s standard of living depends on its ability to produce goods and services.
5. To move the allocation of resources closer to the social optimum, policymakers should typically try to induce firms in
an oligopoly to
a.
collude with each other.
b.
form various degrees of cartels.
c.
compete rather than cooperate with each other.
d.
cooperate rather than compete with each other.
6. Which of the following statements is true?
a.
The proper scope of antitrust laws is well defined and definite.
b.
Antitrust laws focus on granting certain firms the option to form a cartel.
c.
Policymakers have the difficult task of determining whether some firms’ decisions have legitimate purposes
even though they appear anti-competitive.
d.
There is always a need for policymakers to try to limit a firm’s pricing power, regardless of whether the firm’s
market is competitive, a monopoly, or an oligopoly.
7. Which of the following is necessarily a problem with antitrust laws?
a.
They may target a business whose practices appear to be anti-competitive but in fact have legitimate purposes.
b.
They may encourage firms to collude and reduce social welfare compared to the unregulated market.
c.
They reduce the effectiveness of the market to self-regulate.
d.
They are enforced by agencies whose self-interest contradicts the interests of society as a whole.
8. Which of the following groups or entities has the authority to initiate legal suits to enforce antitrust laws?
a.
the U.S. Justice Department
b.
private citizens
c.
corporations
d.
All of the above are correct.
9. Which government entity is charged with investigating and enforcing antitrust laws?
a.
the U.S. Justice Department
b.
the U.S. Commerce Department
c.
the U.S. Treasury Department
d.
the Bureau of Alcohol, Tobacco, and Firearms
10. Who wrote, “People of the same trade seldom meet together, but the conversation ends in a conspiracy against the
public, or in some diversion to raise prices.”?
a.
Thomas Jefferson
b.
Adam Smith
c.
Bill Gates
d.
Robert Axelrod
11. The Sherman Antitrust Act
a.
was passed to encourage judicial leniency in the review of cooperative agreements.
b.
was concerned with self-interest dominated Nash equilibriums in prisoners’ dilemma games.
c.
enhanced the ability to enforce cartel agreements.
d.
restricted the ability of competitors to engage in cooperative agreements.
12. The Sherman Act made cooperative agreements
a.
unenforceable outside of established judicial review processes.
b.
enforceable with proper judicial review.
c.
a criminal conspiracy.
d.
a crime, but did not give direction on possible penalties.
13. The Sherman Antitrust Act was passed in
a.
1836.
b.
1890.
c.
1914.
d.
1946.
14. The Sherman Antitrust Act prohibits price-fixing in the sense that
a.
competing executives cannot even talk about fixing prices.
b.
competing executives can talk about fixing prices, but they cannot take action to fix prices.
c.
a price-fixing agreement can lead to prosecution provided the government can show that the public was not
well-served by the agreement.
d.
None of the above is correct. The Sherman Act did not address the matter of price-fixing.
15. The Sherman Antitrust Act prohibits executives of competing companies from
a.
fixing prices, but it does not prohibit them from talking about fixing prices.
b.
even talking about fixing prices.
c.
sharing with one another their knowledge of game theory.
d.
failing to stand by agreements that they had made with one another.
16. The Sherman Antitrust Act
a.
overturned centuries-old views of English and American judges on agreements among competitors.
b.
had the effect of discouraging private lawsuits against conspiring oligopolists.
c.
strengthened the Clayton Act.
d.
elevated agreements among conspiring oligopolists from an unenforceable contract to a criminal conspiracy.
17. Which of the following prohibits executives of competing firms from even talking about fixing prices?
a.
Sherman Act
b.
Clayton Act
c.
Federal Trade Commission
d.
U.S. Justice Department
18. Two CEOs from different firms in the same market collude to fix the price in the market. This action violates the
a.
Clayton Act of 1914.
b.
Sherman Antitrust Act of 1890.
c.
Crandall-Putnam ruling of 1983.
d.
Jackson-Microsoft ruling of 2000.
19. The Clayton Act
a.
preceded the Sherman Act.
b.
replaced the Sherman Act.
c.
strengthened the Sherman Act.
d.
was specifically designed to reduce the ability of cartels to organize.
20. According to the Clayton Act,
a.
lawyers are given an incentive to reduce the number of cases involving cooperative arrangements.
b.
individuals can sue to recover damages from illegal cooperative agreements.
c.
the government was able to incarcerate the CEO of a firm for illegal pricing arrangements.
d.
private lawsuits are discouraged.
21. If a person can prove that she was damaged by an illegal arrangement to restrain trade, that person can sue and recover
a.
the damages she sustained, as provided for in the Sherman Act.
b.
the damages she sustained, as provided for in the Clayton Act.
c.
three times the damages she sustained, as provided for in the Sherman Act.
d.
three times the damages she sustained, as provided for in the Clayton Act.
22. Which of the following statements is false?
a.
The Clayton Act allows triple damages in civil lawsuits in order to encourage lawsuits against conspiring
oligopolists.
b.
Many economists defend the practice of resale price maintenance on the grounds that it may help solve a free-
rider problem.
c.
Most economists agree that predatory pricing is a profitable business strategy that usually preserves market
power.
d.
The U.S. Supreme Court’s view that the practice of tying usually allows a firm to extend its market power is
not generally supported by economic theory.
23. When individuals are damaged by an illegal arrangement to restrain trade, which law allows them to pursue civil
action and recover up to three times the damages sustained?
a.
Trade Damage Act
b.
Clayton Act
c.
Sherman Act
d.
No law allows individuals to pursue civil action and recover up to three times the damages sustained.
24. The Clayton Act of 1914 allows those harmed by illegal arrangements to restrain trade to
a.
sue for up to two times the damages they incurred.
b.
sue for up to three times the damages they incurred.
c.
sue for up to four times the damages they incurred.
d.
sue for damages, but only for the actual amount of damages they incurred.
25. Antitrust laws in general are used to
a.
prevent oligopolists from acting in ways that make markets less competitive.
b.
encourage oligopolists to pursue cooperative-interest at the expense of self-interest.
c.
encourage frivolous lawsuits among competitive firms.
d.
encourage all firms to cut production levels and cut prices.
26. The practice of selling a product to retailers and requiring the retailers to charge a specific price for the product is
called
a.
fixed retail pricing.
b.
resale price maintenance.
c.
cost plus pricing.
d.
unfair trade.
27. Economists claim that a resale price maintenance agreement is not anti-competitive because
a.
suppliers are never able to exercise noncompetitive market power.
b.
if a supplier has market power, it will be likely to exert that power through wholesale price rather than retail
price.
c.
retail markets are inherently noncompetitive.
d.
retail cartel agreements cannot increase retail profits.
28. Assume that Bart’s Batteries has entered into a resale price maintenance agreement with Radio Shanty but not with
Prime Purchase. In this case,
a.
the wholesale price of Bart’s Batteries will be different for Radio Shanty than it is for Prime Purchase.
b.
Bart’s Batteries will never increase profits by having a resale price maintenance agreement with all retail
outlets that sell its products.
c.
Prime Purchase might benefit from customers who go to Radio Shanty for information about different
batteries.
d.
Radio Shanty will sell Bart’s Batteries at a lower price than Prime Purchase.
29. Assume that Samorola has entered into an enforceable resale price maintenance agreement with Trint and U-Mobile.
Which of the following will always be true?
a.
The wholesale price of Samorolas will be different for Trint than it is for U-Mobile.
b.
U-Mobile will benefit from customers who go to Trint for information about different mobile phones.
c.
Trint will sell Samorolas at a lower price than U-Mobile.
d.
U-Mobile and Trint will always sell Samorolas for exactly the same price.
30. A firm that practices resale price maintenance
a.
has incentive to reduce competition between its retailers. Resale price maintenance can lead to more service.
b.
has incentive to reduce competition between its retailers. Resale price maintenance cannot lead to more
service.
c.
has no incentive to reduce competition between its retailers. Resale price maintenance can lead to more
service.
d.
has no incentive to reduce competition between its retailers. Resale price maintenance cannot lead to more
service.
31. Resale price maintenance involves a firm
a.
colluding with another firm to restrict output and raise prices.
b.
selling two individual products together for a single price rather than selling each product individually at
separate prices.
c.
temporarily cutting the price of its product to drive a competitor out of the market.
d.
requiring that the firm reselling its product do so at a specified price.
32. The manufacturer of South Face sells jackets to retail stores for $120 each, and it requires the retail stores to charge
customers $150 per jacket. Any retailer that charges less than $150 would violate its contract with South Face. What do
economists call this business practice?
a.
predatory pricing
b.
resale price maintenance
c.
tying
d.
leverage
33. If Levi Strauss & Co. were to require every retailer that carried its clothing to charge customers $42 for each pair of
jeans, Levi Strauss & Co. would be practicing
a.
resale price maintenance.
b.
fixed retail pricing.
c.
tying.
d.
cost plus pricing.
34. Acme Computer Co. sells computers to retail stores for $400. If Acme requires the retailers to charge customers $500
for the computers, then it is engaging in
a.
resale price maintenance.
b.
predatory pricing.
c.
tying.
d.
monopolistic competition.
35. Predatory pricing refers to
a.
a firm selling certain products together rather than separately.
b.
a monopoly firm reducing its price in an attempt to maintain its monopoly.
c.
firms colluding to set prices.
d.
All of the above are examples of predatory pricing.
36. Predatory pricing occurs when a firm
a.
exercises its oligopoly power by raising its price through the formation of a cartel.
b.
exercises its monopoly power by raising its price.
c.
cuts its prices in order make itself more competitive.
d.
cuts its prices temporarily in order to drive out any competition.
37. Although the practice of predatory pricing is a common claim in antitrust suits, some economists are skeptical of this
argument because they believe
a.
the evidence of its practice is nearly impossible to collect.
b.
predatory pricing is not a profitable business strategy.
c.
even though predatory pricing is a profitable business strategy, it is on balance beneficial to society.
d.
predatory pricing actually attracts new firms to the industry.
38. Consider a market served by a monopolist, Firm A. A new firm, Firm B, enters the market and, as a result, Firm A
lowers its price to try to drive Firm B out of the market. This practice is known as
a.
resale price maintenance.
b.
predatory tying.
c.
tying.
d.
predatory pricing.
39. Which of the following questions about predatory pricing remains unresolved?
a.
Are the courts capable of determining which price cuts are competitive and which are predatory?
b.
Are the courts capable of determining which price cuts are good for consumers?
c.
Is predatory pricing ever a profitable business strategy?
d.
All of the above questions about predatory pricing are unresolved.
40. Predatory pricing occurs when
a.
firms collude to set prices. Economists are certain this practice is profitable.
b.
firms collude to set prices. Economists are skeptical that this practice is profitable.
c.
A monopolist decreases its prices to maintain its monopoly. Economists are certain this practice is profitable.
d.
A monopolist decreases its prices to maintain its monopoly. Economists are skeptical that this practice is
profitable.
41. Predatory pricing involves a firm
a.
colluding with another firm to restrict output and raise prices.
b.
selling two individual products together for a single price rather than selling each product individually at
separate prices.
c.
temporarily cutting the price of its product to drive a competitor out of the market.
d.
requiring that the firm reselling its product do so at a specified price.
42. The practice of requiring someone to buy two or more items together, rather than separately, is called
a.
resale maintenance.
b.
product fixing.
c.
tying.
d.
free-riding.
43. The practice of tying is illegal on the grounds that
a.
it allows firms to expand their market power.
b.
it allows firms to form collusive arrangements.
c.
it prevents firms from forming collusive agreements.
d.
the Sherman Act explicitly prohibited such agreements.
44. Tying involves a firm
a.
colluding with another firm to restrict output and raise prices.
b.
selling two individual products together for a single price rather than selling each product individually at
separate prices.
c.
temporarily cutting the price of its product to drive a competitor out of the market.
d.
requiring that the firm reselling its product do so at a specified price.
45. In the U.S. government’s 1998 suit against the Microsoft Corporation, a central issue was whether Microsoft should
be allowed to integrate its Internet browser into its Windows operating system. Microsoft responded that
a.
this integration of products is an example of tying, and the U.S. Supreme Court has consistently ruled that
tying is a perfectly acceptable and legal business practice.
b.
this integration of products is an example of resale price maintenance, and the U.S. Supreme Court has
consistently ruled that fair trade is a perfectly acceptable and legal business practice.
c.
putting new features into old products is a natural part of technological practice.
d.
it would discontinue this integration of products, provided a speedy resolution of the government’s case could
be reached.
46. A central issue in the Microsoft antitrust lawsuit involved Microsoft’s integration of its Internet browser into its
Windows operating system, to be sold as one unit. This practice is known as
a.
tying.
b.
predation.
c.
wholesale maintenance.
d.
retail maintenance.
47. The argument that consumers will not be willing to pay any more for two items sold as one than they would for the
two items sold separately is used to justify the legality of which of the following?
a.
resale price maintenance
b.
tying
c.
predatory pricing
d.
free-riding
48. The practice of tying is used to
a.
enhance the enforcement of antitrust laws.
b.
encourage the enforcement of collusive agreements.
c.
control the retail price of a collection of related products.
d.
package products to sell at a combined price closer to a buyer’s total willingness to pay.
Scenario 17-5
Assume that a local restaurant sells two items, salads and steaks. The restaurant’s only two customers on a particular day
are Mr. Carnivore and Ms. Leafygreens. Mr. Carnivore is willing to pay $20 for a steak and $7 for a salad. Ms.
Leafygreens is willing to pay only $8 for a steak, but is willing to pay $12 for a salad. Assume that the restaurant can
provide each of these items at zero marginal cost.
49. Refer to Scenario 17-5. If the restaurant is unable to use tying, what is the profit-maximizing price to charge for a
steak?
a.
$20
b.
$16
c.
$12
d.
$8
50. Refer to Scenario 17-5. If the restaurant is unable to use tying, what is the profit-maximizing price to charge for a
salad?
a.
$16
b.
$14
c.
$12
d.
$7
51. Refer to Scenario 17-5. If the restaurant is able to use tying to price salads and steaks, what is the profit-maximizing
price to charge for the “tied” good?
a.
$27
b.
$20
c.
$19
d.
$15
52. Refer to Scenario 17-5. How much additional profit can the restaurant earn by switching to the use of a tying strategy
to price salads and steaks rather than pricing these goods separately?
a.
$20
b.
$12
c.
$7
d.
$6
53. A particular cable TV company requires a household to subscribe to its high-speed Internet service if it subscribes to
cable TV, and vice versa. This practice
a.
is referred to as tying.
b.
is regarded by some economists as a form of price discrimination.
c.
is controversial among economists because they disagree on whether it has adverse effects for society as a
whole.
d.
All of the above are correct.
54. Suppose that Makemoney Movies produces two new films — The Hulk and The Piano. Makemoney offers theaters
the two films together at a single price but will not supply the movies separately. What do economists call this business
practice?
a.
predatory pricing
b.
resale price maintenance
c.
tying
d.
leverage