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Chapter 27
Regulation and Antitrust Policy in a Globalized Economy
27.1 Forms of Industry Regulation
1) U.S. government regulation of social and economic activity
A) only began after World War II. B) costs less now than it did in the 1980s.
C) has increased steadily since 1970. D) is confined to antitrust law.
2) The Food and Drug Administration (FDA) is an agency that would enforce
A) social regulation. B) economic regulation.
C) antitrust laws. D) price discrimination.
3) The two basic types of government regulation are
A) regulation of natural monopolies and regulation of cartels.
B) economic regulation and industry regulation.
C) social regulation and labor law.
D) social regulation and economic regulation.
4) The Securities and Exchange Commission and the Federal Aviation Administration are
examples of agencies engaged in
A) the regulation of natural monopolies.
B) the regulation of nonmonopolistic industries.
C) social regulation.
D) health and safety regulation.
5) Which of the following federal agencies is NOT engaged in social regulation?
A) Environmental Protection Agency B) Federal Trade Commission
C) Food and Drug Administration D) Federal Deposit Insurance Corporation
6) Which of the following federal agencies is NOT engaged in economic regulation?
A) The Federal Reserve B) Federal Aviation Administration
C) Food and Drug Administration D) Federal Deposit Insurance Corporation
7) Which type of regulation applies to all firms in the economy, as opposed to only covering
specific industries?
A) Economic regulation B) Social regulation
C) Rate regulation D) Statutory regulation
8) Commonwealth Edison is the only provider of electricity to many households in the Chicago
area. Commonwealth Edison is regulated by the government. This type of regulation is known
as
A) the Federal Register. B) social regulation.
C) the market share test. D) economic regulation.
9) The regulation of the prices charged by insurance companies is known as
A) the Federal Register. B) social regulation.
C) the market share test. D) economic regulation.
10) The Federal Trade Commission (FTC) is a regulatory agency that is responsible for preventing
firms from engaging in misleading advertising. This type of regulation is known as
A) the Federal Register. B) social regulation.
C) the market share test. D) economic regulation.
11) Which of the following protects people from incompetent or unscrupulous producers?
A) The Federal Register B) Social regulation
C) The market share test D) Economic regulation
12) According to OSHA standards, the air in the building that John works in is unsafe. The type of
regulation that OSHA engages in is known as
A) the Federal Register. B) social regulation.
C) the market share test. D) economic regulation.
13) One of the basic differences between social and economic regulations is that
A) economic regulations only apply to financial institutions while social regulations apply to
a greater variety of institutions.
B) social regulations only apply to non profit organizations while economic regulations
apply only to for profit organizations.
C) economic regulations cover only particular industries while social regulations apply to all
firms in the economy.
D) economic regulations focus on the banking industry while social regulations focus on
monopolies.
14) One key purpose of economic regulation is
A) to force a firm to produce at the point at which marginal cost equals marginal revenue.
B) to control the quality of service provided by a monopolist.
C) to control the price that regulated enterprises are allowed to charge.
D) to focus on the impact of production on the environment and society, the working
conditions under which goods and services are produced, and sometimes the physical
attributes of goods.
15) Which of the following federal agencies is engaged in social regulation?
A) Equal Employment Opportunity Commission
B) Office of the Comptroller of the Currency
C) The Securities and Exchange Commission
D) Federal Deposit Insurance Corporation
16) Which of the following federal agencies is engaged in economic regulation?
A) Occupational Safety and Health Administration
B) Federal Motor Carrier Safety Administration
C) Food and Drug Administration
D) Consumer Product Safety Commission
17) Cab drivers operating from JFK Airport to the City of New York legally must charge a specific
fare. This is an example of
A) social regulation. B) economic regulation.
C) the market share test. D) the rate of return test.
18) The goals of rate regulation have included the prevention of
A) monopoly profits. B) oligopolistic pricing.
C) marginal cost pricing. D) average cost pricing.
19) A difference between economic regulation and social regulation is that
A) the former tends to affect the prices at which products are sold and the latter does not.
B) the former tends to affect the profits of firms and the latter does not.
C) the former tends to be specific to an industry and the latter tends to affect firms in all
industries.
D) the former tends to be done at the state level and the latter at the federal level.
20) The purpose of social regulation is
A) to force a firm to produce at the point where marginal cost equals marginal revenue.
B) to control the quality of service provided by a monopolist.
C) to control the price that regulated enterprises are allowed to charge.
D) to focus on the impact of production on the environment and society, the working
conditions under which goods and services are produced, and sometimes the physical
attributes of goods.
21) The major goal of social regulation is
A) a better quality of life through a less polluted environment, better working conditions, and
safer and better products.
B) to make sure that firms are not earning monopoly profits.
C) to make sure that prices are kept low enough so that every person can purchase the good.
D) to make sure that the firm produces at the socially optimal point of production.
22) All of the following are regulatory agencies EXCEPT
A) the National Rifle Association.
B) the Environmental Protection Agency.
C) the Food and Drug Administration.
D) the Occupational Safety and Health Administration.
23) This agency is responsible for preventing businesses from engaging in misleading advertising,
unfair trade practices, and monopolistic actions, as well as for protecting consumer rights.
A) Environmental Protection Agency
B) Food and Drug Administration
C) Equal Employment Opportunity Commission
D) Federal Trade Commission
24) This agency is responsible for regulating the quality and safety of foods, health and medical
products, pharmaceuticals, cosmetics, and animal feed.
A) Environmental Protection Agency
B) Food and Drug Administration
C) Equal Employment Opportunity Commission
D) Federal Trade Commission
25) This agency is responsible for investigating complaints of discrimination based on race, religion,
sex or age in hiring, promotion, firing, wages, testing, and all other conditions of employment.
A) Environmental Protection Agency
B) Food and Drug Administration
C) Equal Employment Opportunity Commission
D) Federal Trade Commission
26) This agency develops and enforces environmental standards for air, water, toxic waste, and
noise.
A) Environmental Protection Agency
B) Consumer Product Safety Commission
C) Equal Employment Opportunity Commission
D) Occupational Safety and Health Administration
27) This agency regulates workplace safety and health conditions.
A) Environmental Protection Agency
B) Consumer Product Safety Commission
C) Equal Employment Opportunity Commission
D) Occupational Safety and Health Administration
28) This agency is responsible for protecting consumers from products posing fire, electrical,
chemical, or mechanical hazards or dangers to children.
A) Environmental Protection Agency
B) Consumer Product Safety Commission
C) Equal Employment Opportunity Commission
D) Occupational Safety and Health Administration
29) The two basic types of government regulation are
A) monopoly and oligopoly regulation. B) labor and environmental regulation.
C) federal and state industrial regulation. D) economic and social regulation.
30) The two basic types of government regulation are
A) economic regulation and monopoly regulation.
B) economic and social regulation.
C) social regulation and health and safety regulation.
D) social regulation and financial regulation.
31) While economic regulation applies to ________ industries, social regulation applies to ________
firms.
A) particular; individual B) particular; all
C) all; individual D) utility; healthcare
32) Which of the statements best describes the difference between economic regulation and social
regulation?
A) There are no significant differences between economic and social regulation, social
regulation is a more modern way of regulating an economy.
B) Economic regulation focuses on output and price; social regulation focuses on improving
the quality of life.
C) Social regulation focuses on output and price; economic regulation focuses on quality of
life issues.
D) Social regulation targets industries like transportation, while economic regulation targets
utilities.
33) Since 1970, federal expenditures by regulatory agencies have
A) remained constant. B) decreased slightly.
C) increased dramatically. D) increased slightly.
34) All of the following are forms of social regulation EXCEPT
A) the Food and Drug Administration regulating the quality of drugs.
B) the Public Utility Commission regulating the price of telephone service.
C) the Environmental Protection Association regulating automobile emissions.
D) the Occupational Safety and Health Administration regulating workplace safety.
35) Regulation imposed by such organizations as the Food and Drug Administration or the
Environmental Protection Agency seeking to protect the welfare of people in our nation is
referred to as
A) moral regulation. B) natural regulation.
C) rate of return regulation. D) social regulation.
36) The federal regulatory agency whose mission is to regulate workplace health and safety is the
A) AFL CIO. B) FTC. C) OSHA. D) SEC.
37) Which of the following is concerned with social regulation?
A) Federal Reserve Board B) Sherman Commission
C) Food and Drug Administration D) Board of Education
38) An agency that regulates product markets is the
A) Equal Employment Opportunity Commission.
B) Environmental Protection Agency.
C) Federal Trade Commission.
D) Occupational Safety and Health Administration.
39) An agency that regulates labor markets is the
A) Equal Employment Opportunity Commission.
B) Environmental Protection Agency.
C) Federal Trade Commission.
D) Consumer Product Safety Commission.
40) Social regulation is focused on all of the following EXCEPT
A) the impact of production on the environment and society.
B)
b
etter working conditions, and safer and better products.
C) a better quality of life through a less polluted environment.
D) ensuring costs are minimized and benefits are maximized.
41) The Federal Register
A) itemizes state and local government spending.
B) is used to track immigration.
C) publishes all the new federal regulatory rules.
D) has decreased in size.
42) Financial markets are regulated by
A) the Securities and Exchange Commission.
B) the Stock and Bond Exchange Commission.
C) the Security and Protection Commission.
D) the Stock and Exchange Commission.
43) What is the main difference between economic regulation and social regulation?
27.2 Regulating Natural Monopolies
1) In the above figure, if this natural monopolist were forced to use marginal cost pricing, it would
produce
A) at Q1output rate. B) at Q2output rate.
C) at Q3output rate. D) past the Q3output rate.
2) In the above figure, if this natural monopolist were unregulated, the profit maximizing firm
would produce
A) at Q1output rate. B) at Q2output rate.
C) at Q3output rate. D) past the Q3output rate.
3) In the above figure, if this natural monopolist were regulated and allowed to earn a fair rate of
return, it would produce
A) at Q1output rate. B) at Q2output rate.
C) at Q3output rate. D) past the Q3output rate.
4) In the above figure, if this natural monopolist were forced to use marginal cost pricing, it would
sell the product at the price ________.
A) A B) C C) E D) F
5) In the above figure, if this natural monopolist were unregulated, the profit maximizing firm
would sell the product at the price ________.
A) A B) B C) C D) F
6) In the above figure, if this natural monopolist were regulated and allowed to earn a fair rate of
return, it would sell the product at the price ________.
A) A B) C C) B D) F
7) If regulators force a natural monopoly to price as a perfectly competitive firm would, the natural
monopolist
A) will earn higher economic profits.
B) will earn an economic loss.
C) will expand its output.
D) will experience a rise in long term average costs.
8) If a public service commission requires a natural monopoly to set its price equal to the long run
marginal cost, this will result in
A) excessive economic profits to the monopoly.
B) normal economic profits to the monopoly.
C) losses to the monopoly.
D) either economic profits or losses, depending on the efficiency of the monopoly.
9) Suppose that a regulatory agency has imposed marginal cost pricing on a natural monopolist.
We expect that
A) the firm will earn only a normal profit.
B) the firm s average total cost of production is rising over the relevant range of production.
C) the firm will earn economic profits.
D) the firm will eventually go out of business.
10) Regulators usually encourage natural monopolists to engage in
A) marginal cost pricing.
B) average cost pricing.
C) marginal cost pricing, with subsidies from the government offsetting the losses.
D) inefficient pricing.
11) In a natural monopoly situation,
A) there are large economies of scale relative to demand.
B) the firm has an upward sloping average cost curve.
C) producers try to differentiate their product with advertising.
D) there is no need for government regulation.
12) In average cost pricing, the natural monopoly would have to set price equal to
A) AFC. B) AVC. C) ATC. D) MC.
13) In marginal cost pricing, the natural monopoly would have to set price equal to
A) AFC. B) AVC. C) ATC. D) MC.
14) A natural monopoly owes its existence to
A) control of a key input.
B) persistently declining long run average costs as scale increases.
C) patents.
D) increasing marginal returns and the ability to obtain quantity discounts from suppliers.
15) A firm that has taken advantage of economies of scale and expanded to become the only
producer in the market is
A) a cartel. B) a natural monopoly.
C) a monopolistic competitor. D) an oligopolist.
16) For a natural monopoly, long run average costs
A) fall as output increases. B) rise as output increases.
C) fall as output falls. D) rise as output falls.
17) The price charged by a monopolist is socially inefficient because the price
A) exceeds the true marginal cost of the resources used.
B) is less than the opportunity cost of the resources used.
C) puts the monopolist into a higher tax bracket.
D) is too low.
18) An unregulated natural monopolist would produce to the point at which
A) P AC. B) MR AC. C) MR MC. D) P MR.
19) A regulated natural monopolist allowed to earn a fair rate of return would produce to the
point at which
A) P LAC. B) MR LAC. C) MR MC. D) P MR.
20) Without any regulation, the natural monopolist will
A) not produce any output.
B) produce to the point at which P ATC.
C) produce less output than it would if the industry was purely competitive.
D) have an upward shifting average cost curve.
21) A natural monopoly that is not regulated will choose to produce at the
A) minimum point of the long run average cost curve.
B) point at which marginal cost is above average total cost.
C) point at which the demand curve intersects the long run average cost curve.
D) point at which marginal revenue equals marginal cost.
22) In the above figure, which of the following statements is FALSE if the firm is operating at output
level Q2?
A) The output is equivalent to an unregulated monopolist.
B) Economic profits are positive.
C) The price is lower than at an equivalent firm forced by regulators to charge ATC pricing.
D) Average costs would be lowered by expanding output.
23) One goal of rate of return regulation is the prevention of
A) free market entry. B) positive economic profits.
C) poor quality service. D) environmental degradation.
24) The primary purpose of economic regulation of an industry is to
A) control the prices charged by the regulated industry.
B) increase taxes across the board.
C) reduce output.
D) control hiring and firing within the industry.
25) If regulators disallow price increases requested by a natural monopoly that is currently earning
an economic loss, quality of service will
A) increase rapidly. B) likely fall.
C) remain unchanged. D) none of the above.
26) Which of the following statements regarding economic regulation is TRUE?
A) Economic regulation has failed by insisting that firms must be allowed to earn a normal
rate of return.
B) Rate of return regulation has been much more effective than cost of service regulation.
C) Economic regulation deals only with rates of return, and not with prices.
D) Economic regulation deals mainly with prices firms charge, but firms can alter their return
by altering quality of service, effectively raising the price per constant quality unit.
27) With average cost pricing, the monopolist
A) earns no accounting profit.
B) produces where P MC.
C) earns a normal rate of return for its shareholders.
D) does not cover opportunity costs.
28) When promoting average cost pricing, regulators
A) include what they consider to be a normal rate of return on investment.
B) encourage firms to produce at the output level where price equals marginal cost.
C) fail to consider a return to investors, so regulated firms often have a hard time raising
investment funds.
D) inflate costs so much that price ends up as large as would prevail under unregulated
monopoly.
29) Regulators employ average cost pricing instead of marginal cost pricing because
A) average cost pricing is more efficient than marginal cost pricing.
B) price must be high enough to cover all opportunity costs if the firm is to stay in business.
C) the price is lower with average cost pricing.
D) average cost pricing is simpler to compute than marginal cost pricing.
30) A natural monopoly exists when
A) control of a key input leads to a single firm industry.
B) increasing marginal returns and the ability to obtain quantity discounts from suppliers
leads to a single firm industry.
C) economies of large scale production are substantial, leading to a single firm industry.
D) the government restricts entry that leads to a single firm industry.
31) When production is characterized by persistently declining long run average costs as output
increases,
A) the costs of production are greater when competition exists than when a single firm
produces a good.
B) it is impossible for two firms to compete in the market.
C) the costs are lower if a single firm exists, and even if the firm is unregulated, price will still
be lower with a single firm.
D) there is no need for the government to limit competition by licensing requirements.
32) An unregulated natural monopolist will produce the quantity at which
A) average total costs are minimized.
B) marginal cost equals marginal revenue.
C) marginal cost equals the long run average cost curve.
D) the long run average cost curve intersects the demand curve.
33) Which of the following statements about natural monopoly is correct?
A) Governments regulate natural monopolies in order to ensure that costs of production are
minimized.
B) Governments regulate natural monopolies in order to ensure that the firm earns a normal
profit.
C) Governments regulate natural monopolies in order to prevent them from making profits.
D) Governments regulate natural monopolies in order to keep their workers from earning
wages that are too high.
34) If a natural monopolist is unregulated, then
A) the monopoly will produce efficiently from society s point of view.
B) the monopoly will produce inefficiently from society s point of view.
C) the monopolist will be earning just a normal rate of return on investment.
D) the monopolist will determine the profit maximizing quantity by equating marginal cost to
the demand curve.
35) The reason an unregulated natural monopolist will produce at an economically inefficient
quantity is
A) due to the fact that the monopolist will equate marginal cost with price to determine the
output level.
B) due to the fact that the monopolist will equate average total cost with price to determine
the output level.
C) that the price does not equal the true marginal cost of producing the good.
D) that the monopolist will produce a quantity greater than the minimum of the average total
cost curve.
36) For a firm to be economically efficient from society s point of view, it should produce to the
point at which
A) marginal cost equals marginal revenue. B) marginal cost equals average total cost.
C) marginal cost equals price. D) average total cost equals price.
37) Refer to the above figure. An unregulated natural monopolist would choose
A) output rate of Q1and price P2. B) output rate Q1and price P5.
C) output rate Q3and price P3. D) output rate Q4and price P1.
38) Refer to the above figure. If the government requires the natural monopolist to charge the
efficient price, it will charge price
A) P5and sell Q1units. B) P2and sell Q1units.
C) P3and sell Q3units. D) P1and sell Q4units.
