The Economic Way of Thinking, 13e (Heyne)
Chapter 9 Competition and Government Policy
1) Which conditions must be present for “perfect competition” to occur?
A) A large number of buyers and sellers, and all of them enjoy full and complete information.
B) Sellers produce identical products.
C) There is a costless mobility of resources.
D) Everybody behaves as a price taker.
E) All of the above.
2) Which of the following is necessary for a market to be deemed “perfectly competitive”?
A) All firms are price searchers.
B) All participants enjoy full and complete information.
C) Sellers produce of different quality, durability, and desirability.
D) All of the above are necessary.
E) None of the above are necessary.
3) Fill in the blank. A(n) ________ market requires perfect and complete information among all
participants.
A) monopolized
B) oligopolized
C) perfectly competitive
D) effective
4) Fill in the blank: Firms in a so-called perfectly competitive market would face a(n) ________
demand curve for their product.
A) horizontal
B) upward-sloping
C) vertical
D) downward sloping
5) Zero economic profits would most likely exist in which market environment?
A) Pure monopoly
B) Oligopoly
C) Perfect competition
D) Any market structure riddled with uncertainty
E) None of the above.
6) A necessary condition for “perfect competition” is
A) price searchers.
B) price takers.
C) legal restrictions on entry into the market.
D) a small number of huge firms.
E) widespread and long-run economic profits.
7) In the model of perfect competition,
A) all firms earn zero economic profit in the long run.
B) all firms use the lowest-cost technologies.
C) all firms take the prevailing market price as given.
D) all participants fully exhaust any potential gains from trade.
E) all of the above occur.
8) All possible gains from specialization and exchange would be fully exploited only under
which market structure?
A) Pure monopoly
B) Perfect competition
C) Oligopoly
D) Structures allowing for price-searching activity
E) Structures where entry is restricted
9) Pick the producer who would come closest to operating in a perfectly competitive
environment.
A) Grim, the mortician
B) Green, the barley farmer
C) Gristle, the butcher
D) Grippe, the doctor
10) Pick the producer who would come closest to operating in a perfectly competitive
environment.
A) An automobile manufacturer
B) A public utility
C) A pig farmer
D) A crack cocaine manufacturer
E) A movie theater
11) Fill in the blank: Firms under perfect competition would enjoy ________ market power.
A) absolutely no
B) some
C) much
D) total
12) Fill in the blank: A producer in a ________ market environment would enjoy total market
power.
A) perfectly competitive
B) oligopolistic
C) pure monopoly
D) price-taking
13) According to your text, the plans of all buyers and sellers would always be perfectly
coordinated under
A) perfectly competitive market conditions.
B) imperfectly competitive market conditions.
C) monopolized market conditions.
D) oligopolized market conditions.
E) any market condition.
14) According to your authors, the model of perfect competition
A) is an accurate description of real-world markets.
B) obscures how plan coordination occurs in the real world.
C) explains how economic profits can exist over time.
D) explains economic losses better than economic profits.
15) Fill in the blank: Your authors argue that focusing on the market as a ________ process
helps to better explain the haggling and negotiation activities, which are at the core of our
production and consumption plans in the real world.
A) monopolized
B) oligopolized
C) perfectly competitive
D) competitive
16) Competition exists among sellers only if they
A) all set price equal to marginal cost.
B) are price takers.
C) are so numerous that no one of them can affect the price by restricting output.
D) receive no special privileges from government.
E) struggle to satisfy potential buyers.
17) A reduction in the price charged for luncheon specials by a downtown cafeteria will
A) affect the demand (curve) for that cafeteria’s luncheons if its competitors react.
B) have no effect on the demand for lunch at other downtown restaurants.
C) increase the cafeteria’s gross revenue from lunch business.
D) increase the cafeteria’s net revenue from lunch business if the demand is elastic.
E) increase the cafeteria’s net revenue from lunch business if the demand is inelastic.
18) The word oligopoly means
A) elastic demand.
B) few sellers.
C) independent action.
D) interdependent selling.
E) predatory pricing.
19) The term oligopoly is highly ambiguous in the absence of
A) a clear and defensible definition of the product.
B) a clear price structure.
C) a definition of marginal cost.
D) accounting rules adequately defining net revenue.
E) clear distinctions between competitive and noncompetitive industries.
20) If price changes by one firm induce rival firms selling close substitutes to alter their prices,
A) firms will be able to raise their prices without fear of losing sales.
B) the demand curve will shift in response to a change in price.
C) the original firm faces an elastic demand curve.
D) the original firm faces an inelastic demand curve.
E) there is no competition between the rival firms.
21) When firms in an industry are selling similar products, and they agree to share the market,
A) each firm earns a profit even though marginal cost is greater than marginal revenue.
B) each firm secures a net revenue about as large as it would have received if it were the only
seller.
C) they try to keep each firm’s price above its marginal cost.
D) they tend to produce higher prices and larger output.
E) the agreement will enforce itself because none of the firms will have an interest in triggering a
competitive struggle.
22) Government licensing of occupations or trades
A) has usually been established over the objections of sellers in the licensed industry.
B) is often controlled by firms in the licensed industry to prevent competition.
C) is prohibited by the U.S. Constitution.
D) usually protects the public against poor quality products.
E) will not reduce competition if it merely imposes higher costs on prospective entrants into the
industry.
23) The uncertainty and ambivalence surrounding government policies toward competition stems
from
A) conflict between the goals of preserving competition and protecting competitors.
B) the influence producers are able to exert on agencies charged with enforcing laws governing
business practices.
C) uncertainty about the actual effects of various measures intended to promote competition.
D) all of the above.
E) none of the above but from uncertainty about federal, state, or local jurisdiction.
24) A highly profitable cartel arrangement among sellers contains the seeds of its own
disintegration because
A) a monopoly arrangement is more unstable than an oligopoly arrangement.
B) a price maintained above each cartel member‘s marginal cost is an incentive to offer secret
price reductions to attract additional business.
C) monopoly agreements will, in the long run, reduce net revenue to zero.
D) net revenue for the cartel as a whole could be increased by producing at the level where
marginal revenue equals marginal cost for each cartel member.
E) the cartel members will have a strong incentive to reduce quality.
25) A successful cartel must divide the market among its members to prevent members’
A) marginal cost from exceeding their individual marginal revenues.
B) output from decreasing.
C) prices from rising above the cartel price.
D) selling costs from rising.
26) If competing price searchers adjust their own prices on the basis of a close monitoring of
their rival’s prices,
A) all prices will tend to be the same, which proves prices are not competitive.
B) all prices will tend to be the same, which proves sellers are not competing on price.
C) each price searcher’s demand curve will be indeterminate.
D) prices will fluctuate regularly.
E) prices will rise when costs increase but will not fall when costs decrease.
27) A cartel arrangement is likely to be successful for its members only if it can
A) assign sales to specific members.
B) keep new firms from entering the industry.
C) prevent firms not in the cartel from marketing close substitutes.
D) do all of the above.
28) Members of a cartel who refrain from selling at prices below the prices established by the
cartel will usually
A) continue indefinitely to receive a high net revenue.
B) discover other ways to attract additional customers.
C) have no incentive to improve the quality of their products.
D) not compete against one another.
E) want to attract additional firms into the industry to increase the size of the cartel.
29) When laws and regulations prohibit firms from selling at “prices less than cost,”
A) consumers benefit.
B) they are rarely enforced; therefore, competition is allowed to decline in the retailing industry.
C) they help maintain competition by eliminating one important advantage of large firms.
D) they must define “cost” arbitrarily since no firm has an incentive to sell below cost.
E) they serve as our most effective defense against predatory pricing.
30) Government actions to compel more competition in an industry
A) always entail costs, which must be compared to any gains created by the policy.
B) always have the effect of lowering prices to consumers.
C) cannot benefit anyone if they result in greater inefficiency.
D) will result in lower prices but cannot bring about a larger output.
E) will not succeed because competition, like morality, cannot be legislated.
31) Competition among sellers occurs
A) when marginal revenue equals marginal cost.
B) when price equals marginal cost.
C) when price equals marginal revenue.
D) whenever sellers try to attract customers from one another.
32) Reducing prices below cost in order to eliminate competitors (with the intention of later
raising prices to recoup all losses) is
A) an empirical impossibility in a free society.
B) called induced competition.
C) called predatory price cutting.
D) increasingly common in the American economy.
33) Minimum-price laws designed to preserve competition
A) offer the certainty of lower prices in order to eliminate the possibility of higher prices.
B) offer the certainty of higher prices in order to eliminate the possibility of higher prices.
C) offer the possibility of higher prices in order to eliminate the certainty of higher prices.
D) offer the sellers more competition among themselves.
34) Anti-competitive policies are often enforced by government because the public seems to
think price cutting by large sellers
A) creates monopolies by reducing competition.
B) increases competition among sellers.
C) raises prices at the wholesale but not at the retail level.
D) reduces the elasticity of margins.
35) From the price-setter’s point of view, the appropriate cost of a good is
A) the inventory cost.
B) the marginal cost.
C) the sunk cost.
D) the wholesale cost.
36) Selling a newspaper at retail for ten cents when it cost twenty cents wholesale may be
profitable if
A) people who come in to buy a newspaper often make other purchases also.
B) the wholesaler is also losing money.
C) there are no substitutes for newspapers available.
D) there is about to be a newspaper strike.
37) The most immediate and direct effect of minimum price laws designed to prevent predatory
pricing is to
A) guarantee profits to all sellers, large or small.
B) guarantee profits to large sellers exclusively.
C) guarantee profits to small sellers exclusively.
D) preserve competition without guaranteeing profits.
E) prevent competition without guaranteeing profits.
38) The basic federal “antitrust” law prohibiting combinations in restraint of trade and attempts
to monopolize is the
A) Clayton Act.
B) Miller-Tydings Act.
C) Robinson-Patman Act.
D) Sherman Act.
E) Taft-Hartley Act.
39) The federal law prohibiting mergers when the merger reduces competition substantially is
the
A) Clayton Act.
B) Miller-Tydings Act.
C) Robinson-Patman Act.
D) Sherman Act.
E) Taft-Hartley Act.
40) When two companies that produce the same product merge, it is called a
A) conglomerate merger.
B) diagonal merger.
C) horizontal merger.
D) vertical merger.
41) Mergers between companies producing widely divergent goods is called a
A) conglomerate merger.
B) diagonal merger.
C) horizontal merger.
D) vertical merger.
42) Mergers between companies that previously existed in a supplier-buyer relationship are
called
A) conglomerate mergers.
B) diagonal mergers.
C) horizontal mergers.
D) vertical mergers.
43) The merger of two daily New York City newspapers would be an example of a
A) conglomerate merger.
B) diagonal merger.
C) horizontal merger.
D) vertical merger.
44) State legislators who wanted to eliminate state regulation of the trucking industry would be
most likely to find support among
A) business owners who must pay higher prices for deliveries as a result of the regulations.
B) owners and managers of large trucking concerns.
C) owners of small trucking concerns.
D) unions that represent truck drivers.
45) Sellers turn so frequently to government in efforts to protect themselves from competition
because government
A) can be influenced by monetary payments.
B) can use coercion against competitors.
C) has rather consistently forced firms to compete when they preferred not to.
D) is charged with protecting the public interest.
E) is under the thumb of monopolists.
46) Who gains from a law requiring people who want to enter the taxicab business to prove they
are thoroughly competent, honest, and reliable before they can obtain a license?
A) Local people who use taxicabs frequently and regularly
B) Local people who use taxicabs only occasionally
C) Out-of-town visitors who use taxicabs
D) Owners of taxicab licenses
E) Potential owners and operators of taxicabs who are members of minority races
47) If there are 1000 different sellers of a particular good, and they are all charging exactly the
same price, that the sellers are probably
A) colluding.
B) making a profit.
C) oligopolists.
D) price takers.
E) securing government assistance.
48) Agreements among competing sellers to maintain a certain minimum price or to divide up
the market in a particular way
A) are evidence of a cooperative rather than competitive spirit in business.
B) are illegal under federal law where it is applicable.
C) benefit business firms and their customers, but at the expense of employees.
D) increase the number of job opportunities in the economy.
49) Predatory pricing occurs when a firm sells
A) above cost to any customers who have no good alternative.
B) above cost to low-income customers who have no good alternative.
C) at whatever prices the market will bear.
D) below cost in order to eliminate competitors.
E) only to customers who agree to rebate a portion of the price.
50) A cartel is
A) a chain of retail stores.
B) a consent decree prohibiting specific anti-competitive practices.
C) an automatic mark-up policy frequently used by retail establishments.
D) an organization of sellers or buyers aiming to control competition.
51) Cartels display a pronounced tendency to disintegrate over time because
A) increased profits induce laziness and carelessness among cartel members.
B) nobody benefits in the long run from their operation since they merely redistribute wealth.
C) their operation is so blatantly contrary to the public interest.
D) there are so many margins on which competition can occur.
52) A clear effect of deregulating the airline industry has been to
A) eliminate price competition between airlines.
B) make fewer flights available at popular times.
C) raise average fares.
D) reduce airline safety.
E) reduce the average wage of pilots.
53) The economist George Stigler offered support for the Sherman Act when he said
A) competition can only be preserved by protecting competitors from cutthroat competition.
B) conglomerate mergers could not be prevented or regulated if it were not for the Sherman Act’s
prohibition of combinations in restraint of trade.
C) predatory pricing costs businesses more than it saves consumers.
D) the ghost of Senator Sherman is an ex officio member of the board of directors of every large
company.
E) the Sherman Act is essential if the Clayton act is to be enforceable in any way.
54) How can we separate the cost of the electricity that generates the heat from a light bulb and
the cost of the electricity that generates that same bulb’s light?
A) By comparing the wattage of the bulb with the change in air temperature
B) By distinguishing sunk costs from marginal costs
C) By dividing the total cost in two
D) We cannot do it in any defensible way.
55) If Safeway reduced its grocery prices below cost in a particular metropolitan area and kept
them there until all other grocery stores in the area had been forced into bankruptcy, Walmart
would almost certainly sustain huge net losses
A) in the short run and the long run because grocery stores would reappear quickly when
Walmart subsequently set high prices.
B) in the short run but not in the long run because it could charge very high prices afterward.
C) in the short run but not in the long run because the policy would lower Walmart’s costs of
buying from suppliers.
D) only if the government enforced the antitrust laws in a fair and even-handed way.
56) The Federal Trade Commission was created by Congress as an expert body to
A) help small businesses compete by offering technical advice and assistance.
B) help small businesses compete by providing low-interest start-up loans.
C) prevent insider trading.
D) promote competition by preventing trade practices held to be unfair.
E) regulate prices on spot and futures markets.
57) According to the text, a government policy of promoting competition must
A) assure small businesses they won’t fail because of below-cost pricing or other predatory
practices by larger businesses.
B) assure small businesses they won’t fail under any circumstances.
C) equate profit margins among competing suppliers.
D) maintain a process rather than some state of affairs.
E) work toward making sellers’ demand curves completely elastic.
58) A merger between a firm manufacturing radios and a firm manufacturing paper products is a
A) conglomerate merger.
B) diagonal merger.
C) horizontal merger.
D) vertical merger.
59) A merger between a firm extracting petroleum and a firm refining petroleum is a
A) conglomerate merger.
B) diagonal merger.
C) horizontal merger.
D) vertical merger.
60) A merger between two commercial airlines is a
A) conglomerate merger.
B) diagonal merger.
C) horizontal merger.
D) vertical merger.
61) When competing firms set prices with attention to the prices set by their competitors, the
demand curve faced by each firm
A) becomes indeterminate.
B) becomes less elastic.
C) becomes more elastic.
D) shifts toward the northeast.
E) shifts toward the southwest.
62) If a pizza seller reduces its prices, the price cut will
A) have no effect on the demand for competing sellers’ pizza.
B) increase the seller’s gross revenue.
C) increase the seller’s net revenue.
D) shift the seller’s demand curve if competing pizza sellers match the price decreases.
63) Who is likely to complain to state regulatory authorities about unlicensed movers defrauding
customers?
A) Consumer organizations
B) Individual customers who are planning to move
C) Individual customers who have already used unlicensed movers and have not been thoroughly
satisfied
D) Licensed movers
E) Unlicensed movers
64) Government licensing of occupations or trades
A) has usually been created over the objections of sellers in the licensed industry.
B) is more often supported than opposed by the persons and firms to be regulated.
C) is usually supported by legislators because they want to protect consumers against inferior-
quality products.
D) will not reduce competition if it merely imposes higher costs on potential entrants into the
occupation or trade.
65) Supermarkets will frequently not carry the products of food processors unless the processors
pay fees to the supermarkets because
A) supermarkets are cartels.
B) supermarkets often dominate the geographic areas in which they sell.
C) supermarkets stand between the food processors and the ultimate consumers.
D) supermarket shelves are scarce goods.
E) supermarkets typically have more bargaining power than food processors.
66) One major consequence of the federal government’s deregulation of the trucking industry
was
A) a sudden and large financial loss for owners of trucking firms.
B) fewer jobs for truck drivers.
C) higher prices paid by shippers.
D) less competition for railroads and barge lines.
E) predatory pricing in the trucking industry.
67) Complaints about predatory pricing usually originate with
A) competitors.
B) consumers.
C) economists.
D) government regulators.
E) suppliers.
68) The term “predatory pricing” is usually used by people who are objecting to
A) extremely unpredictable prices.
B) low prices.
C) prices unrelated to costs of production.
D) speculative pricing policies.
E) very high prices.
69) When firms accuse competitors of predatory pricing, they almost always use as evidence
A) arbitrarily allocated joint costs.
B) the disappearance of competitors.
C) the profits of their competitors.
D) their own losses.
E) the gap between price and marginal cost.