19) The hypothesis that regulators eventually are controlled by the regulated firms and their
special interests is the
A) share-the-gains, share-the-pains hypothesis.
B) capture hypothesis.
C) public interest theory.
D) control-group hypothesis.
20) The behavior of regulators when trying to win approval for their actions from their entire
constituency is best described by the
A) capture hypothesis.
B) law of increasing social well-being.
C) share-the-gains, share-the-pains hypothesis.
D) marginal benefit pricing hypothesis.
21) The argument that suggests that regulators balance the interests of firms, consumers, and
legislators is called
A) the capture hypothesis.
B) the creative response theory.
C) the share-the-gains, share-the-pains theory.
D) the theory of optimal regulation.
22) A theory of regulatory behavior, which states that regulators must take into account the
preferences of legislators, producers, and consumers, is the
A) capture theory.
B) share-the-gains, share-the-pains theory.
C) public interest theory.
D) general interests theory.
23) According to your text, the annual cost of regulation (federal, state and local) in the United
States is estimated to exceed ________ per year.
A) $500 million
B) $900 million
C) $50 billion
D) $1 trillion
24) The feedback effect can be thought of as a type of
A) social regulation.
B) economic regulation.
C) creative response.
D) regulatory lag.
25) Suppose a dangerous workplace is made safer through the installation of guards and other
equipment that reduce the physical hazards of the work environment. If we observe no reduction
in injuries, we might conclude that
A) the safety equipment isn’t adequate and better equipment should be installed.
B) the firm has responded by lowering wages and hiring less capable people who are more likely
to be injured.
C) the injury rate before installation of the safety equipment had been underreported.
D) workers responded to the safer environment by not exercising as much care themselves,
generating more injuries than if they had not changed their behavior.
26) Regulators often adopt policies that benefit
A) consumers and injure producers.
B) the firms regulated rather than consumers.
C) only the government.
D) no one.
27) The hypothesis that regulators eventually adopt policies that benefit the producers in the
industry is known as the
A) capture hypothesis.
B) producers’ hypothesis.
C) share-the-gains, share-the-pains hypothesis.
D) it’s-a-rip-off hypothesis.
28) Under the U.S. system of regulation, most regulars are selected from
A) politicians and their friends.
B) the industry that is to be regulated.
C) consumer advocacy groups.
D) university professors who understand the nature of the industry and who understand the true
interests of consumers.
29) According to the capture hypothesis of regulation
A) regulation favors producers over consumers because the producers were able to pay off the
regulators.
B) regulation eventually favors producers over consumers because the producers have more at
stake than individual consumers.
C) regulation benefits the regulators and the legislators who support the regulation by enabling
them to obtain favors from both producers and consumers.
D) regulation benefits the consumers over producers because the number of consumers is greater
than the number of producers, giving the consumers more political clout.
30) Economists who think the capture theory explains regulatory behavior will support their
claims by noting that
A) regulation as carried out in this country generates larger profits for the firms and does not
generate lower prices for consumers.
B) consumers actually dominate regulatory hearings through the influence of consumer advocacy
groups.
C) Congress ensured that consumers have more influence on the decisions of regulators by
setting up the agencies in ways that insulated the regulators from the regulated firms.
D) the firms that are regulated have greater incentive to try to influence regulators than do
consumers.
31) According to the ________ theory of regulation, regulators must take into account the
preferences of legislators, consumers, and producers.
A) capture
B) general interest
C) public interest
D) share-the-gains, share-the-pains
32) The “primary motive” of regulators, according to the share-the-gains, share-the-pains theory,
is to
A) maximize their income through accepting monetary payoffs from groups.
B) ensure that every group gets what it wants.
C) ensure that all customers share the benefits of regulation, and not just the wealthiest
consumers.
D) keep their jobs.
33) Suppose technical change makes it cheaper for cable television suppliers to supply their
service. The capture theory would predict that the regulators would
A) allow the firms to capture the savings and would lower price only if the firms asked them to.
B) force the firms to pass the savings on to consumers in the form of lower prices.
C) force the firms to pass the savings on to consumers in the form of better service.
D) force the firms to pass some of the savings on to consumers and permit them to keep some of
the savings for themselves.
34) Suppose technical change permits cable television companies to provide their services at
lower rates. The share-the-gains, share-the-pains theory would predict that the regulators would
A) permit the firms to keep the savings and would lower prices only if the firms were pressured
to do so.
B) force the firms to pass all the savings on to consumers in the form of lower prices.
C) force the firms to pass the savings on to consumers in the form of better service.
D) force the firms to pass some of the savings on to consumers and to permit the firms to keep
some of the savings themselves.
35) Suppose that a regulated industry experiences an increase in the price of inputs used to
produce the good. According to the capture theory, we would expect
A) prices to increase by a little immediately and profits to decrease by a lot.
B) there will be some increase in price but not immediately.
C) no increase in price.
D) a quick increase in price maintains profits in the industry.
36) Suppose that a regulated industry experiences an increase in the price of inputs used to
produce the good. According to the share-the-gains, share-the-pain theory, we would expect
A) prices to increase by a little immediately and profits to decrease by a lot.
B) there will be some increase in price but not immediately.
C) no increase in price.
D) a quick increase in price maintains profits in the industry.
37) Suppose that a regulated industry experiences an increase in the price of inputs used to
produce the good. Which of the following statements is TRUE?
A) Under both the capture theory and the share-the-gains, share-the-pain theory profits will
decrease.
B) An increase in price will occur quicker in the share-the gains, share-the-pain theory than the
capture theory.
C) An increase in price will occur quicker in the capture theory than the share-the-gains, share-
the-pain theory.
D) In the capture theory there will be an increase in price but not in the share-the-gains, share-
the-pain theory.
38) The costs of regulation
A) include increased taxes and increased prices of the products being regulated.
B) are paid entirely by the regulated industries.
C) are more than covered by the benefits gained from the regulation.
D) are relatively small.
39) The total costs of regulation
A) include increased taxes and increased prices of the products being regulated.
B) are paid entirely by the regulated industries.
C) are much higher than just the explicit government outlays to fund the administration of
various regulations.
D) are paid entirely by the consumers of regulated industries.
40) The total costs of federal regulation
A) encompasses only explicit costs of satisfying regulatory demands.
B) also includes the explicit costs associated with regulations issued by 50 different state
governments.
C) encompasses only opportunity costs of satisfying regulatory demands.
D) encompasses both explicit and opportunity costs of satisfying regulatory demands..
41) One undesirable effect of social regulation is that it
A) affects smaller firms disproportionately, creating anticompetitive effects.
B) destroys incentives for firms to engage in marginal cost pricing.
C) raises prices of goods to consumers, while lowering prices to business and special interest
groups.
D) reduces the effectiveness of economic regulation.
42) The Interstate Commerce Commission (ICC) regulates railroads, barges and trucks. Suppose
technical change lowers the costs of railroads. As a result, the ICC permits railroads to lower
prices some but also alters the rates of barges and trucks so they get additional business. The ICC
would be acting consistently with
A) the capture theory of regulation.
B) the public interest theory of regulation.
C) the share-the-gains, share-the-pains theory of regulation.
D) None of the theories presented in the text since economic regulation is specific to a single
industry and not to agencies that cover more than one industry. That is the province of social
regulation.
43) Behavior on the part of the firm that allows it to comply with the law but violate the spirit
reducing the law’s effect is
A) a dominant strategy.
B) a creative response.
C) the lemons problem.
D) a positive-sum effect.
44) Which of the following is FALSE with respect to regulation?
A) Regulated firms commonly try to avoid the effects of regulation whenever they can.
B) Firms engage in creative responses which conform to the letter of the law but undermine its
spirit.
C) Regulation has resulted in state laws that have made creative response illegal in many states.
D) Recent regulations have generated feedback effects that undermined the key aim of the rules.
45) The theory of regulatory behavior that predicts that the “regulators” eventually will become
controlled by the “regulated” is called
A) the capture hypothesis.
B) the the share-the-gains, share-the-pains hypothesis.
C) the asymmetric information hypothesis.
D) the market failure hypothesis.
46) U.S. securities firms recently agreed to pay a record amount of $1.4 billion in settlement
charges brought by government regulators. Regulators claimed that firms had abused investors
during the market boom of the 1990s. Abuses included analysts tailoring their research reports
and ratings on the stocks they covered in order to win more business for their firm. If this
settlement causes Wall Street firms to comply with the letter of the law but they violate the spirit
of the law, the firms are engaging in
A) elimination of conflicts of interest.
B) creative response.
C) the capture hypothesis.
D) deregulation.
47) Acme Inc. found a tricky way to conform to the letter of the law with respect to new EPA
regulations, even though they violated the spirit of the law. This is called
A) the capture theory.
B) collusive response.
C) share-the-gains, share-the-pains theory.
D) creative response.
48) The theory of regulatory behavior that suggests that regulators must consider the demands of
legislators, consumers, and members of the regulated agency is called
A) the capture theory.
B) share-the-gains, share-the-pains theory.
C) the natural theory.
D) the creative theory.
49) When regulators identify with the special interests of the industry they regulate, this behavior
conforms with the
A) share-the-gains, share-the-pains hypothesis.
B) rate-of-return hypothesis.
C) lemon market hypothesis.
D) capture hypothesis.
50) The theory that regulators’ behavior will eventually be compromised by the special interests
they regulate is known as the
A) capitulation hypothesis.
B) creative hypothesis.
C) captive hypothesis.
D) capture hypothesis.
51) When a dog is guarding the henhouse, that is an example of the
A) share-the-gains, share-the-pains theory.
B) regulatory hypothesis.
C) capture hypothesis.
D) creative theory.
52) When a regulator is concerned about pleasing different groups in order to keep employed,
this is known as the
A) share-the-gains, share-the-pains theory.
B) regulatory hypothesis.
C) capture hypothesis.
D) creative theory.
53) The cost of complying with regulation
A) shifts the ATC curve upward.
B) shifts the MC curve downward.
C) shifts the demand curve to the right.
D) increases the products’ price elasticity of demand.
54) Regarding the costs of regulation, which is a FALSE statement?
A) Airline safety standards have increased the price of air travel.
B) Automobile safety standards raise the price of cars.
C) Regulatory spending by federal agencies has decreased since 1970.
D) Pharmaceutical manufacturing safety standards raise the price of drugs.
55) The total cost of federal regulation includes
A) the funding of government agencies overseeing compliance, the compliance cost for the
regulated firms, and the opportunity cost of regulation for the firms.
B) the funding of government agencies overseeing compliance less the compliance cost for the
regulated firms and the opportunity cost of regulation for the firms.
C) only the cost of compliance by the regulated firms.
D) only the funding of the regulatory agencies.
56) Explain the share-the-gains, share-the-pains theory. How does it differ from the capture
hypothesis?
57) Explain the capture hypothesis.
58) A common feature of regulated industries is cross-subsidization, which is a situation when
one group of customers pays prices above costs while another group of customers pays prices
below costs. The one group is subsidizing the other group. Is this practice more consistent with
the capture hypothesis or the share-the-gains, share-the-pains theory? Explain.
59) “Regulations do not always have the intended result.” Do you agree or disagree? Why?
60) “As compared to the benefits of economic and social regulation, the costs are minimal.” Do
you agree or disagree? Why?
61) Suppose OSHA requires a factory to install specific safety equipment to reduce the number
of injuries in the factory. Would the number of accidents necessarily decline? Why or why not?
27.5 Antitrust Policy
1) Government policy that attempts to prevent collusion among the sellers of a product and
attempts to prevent restraint of trade is known as
A) social policy.
B) antitrust policy.
C) inherent policy.
D) goodwill policy.
2) The first major law created to control the growth of monopoly power was the
A) Sherman Act.
B) Clayton Act.
C) FTC Act.
D) Robinson-Patman Act.
3) Which of the following is NOT an antitrust law?
A) the Robinson-Patman Act
B) the Smoot-Hawley Act
C) the FTC Act
D) the Sherman Act
4) One weakness of the Sherman Act is that
A) it fails to clearly define restraint of trade.
B) it applies only to foreign monopolies.
C) it applies only to the steel and railroad industries.
D) none of the above.
5) The U.S. Justice Department prosecuted Microsoft under the terms of
A) the Sherman Act.
B) the Kefauver amendment.
C) the 1933 amendment to the Federal Trade Commission Act.
D) none of the above.
6) A major shortcoming of the Sherman Act was that
A) when it was passed, there were no violations, so the Supreme Court ruled it unnecessary.
B) it failed to explicitly state which specific activities were illegal.
C) violators of the Act were forced out of business.
D) it was not enforced by the courts.
7) The first antitrust law in the United States was the
A) FTC Act.
B) Clayton Act.
C) Sherman Act.
D) Robinson-Patman Act.
8) The primary antitrust statute in the United States is the
A) NLRA of 1935.
B) SEC Act of 1933.
C) Sherman Antitrust Act of 1890.
D) Federal Reserve Act of 1913.
9) Which of the following would most likely promote competitive pricing of products?
A) Robinson-Patman Act
B) Wheeler-Lea Act
C) Federal Trade Commission Act
D) Clayton Act
10) The Federal Trade Commission regulates which of the following?
A) unfair trade practices by businesses
B) financial markets
C) trade with third world countries
D) the banking industry
11) The Federal Trade Commission Act was designed to
A) prohibit bundling.
B) increase foreign trade.
C) prohibit cutthroat pricing.
D) limit company profits from foreign sales.
12) The Federal Trade Commission Act, as amended, prohibits
A) horizontal mergers.
B) price-fixing agreements.
C) unfair competitive practices and deceptive acts.
D) price discrimination.
13) The Federal Trade Commission was established in 1914 to
A) regulate trade of public goods.
B) promote competition in interstate commerce.
C) investigate unfair competitive practices.
D) prevent non-price competition.
14) The regulatory agency most concerned with false advertising is the
A) Antitrust Division of the Justice Department.
B) National Labor Relations Board.
C) Federal Deposit Insurance Corp.
D) Federal Trade Commission.
15) Which antitrust act was passed to protect independent retailers from “unfair discrimination”
by chain stores?
A) Federal Trade Commission Act
B) Robinson-Patman Act
C) Sherman Act
D) Wheeler-Lea Act
16) Which antitrust law is sometimes called the “Chain Store Act”?
A) Sherman Act
B) Clayton Act
C) Robinson-Patman Act
D) Federal Trade Act
17) All of the following are exempt from antitrust laws EXCEPT
A) labor unions.
B) professional baseball.
C) oil companies.
D) public utilities.
18) Which of the following is NOT exempt from antitrust laws?
A) professional baseball
B) labor unions
C) airlines
D) public transit systems
19) Which of the following is exempt from antitrust laws?
A) professional football
B) petroleum companies
C) airlines
D) hospitals
20) Which of the following is exempt from antitrust laws?
A) professional basketball
B) suppliers of military equipment
C) telephone companies
D) automobile companies