70) Predatory pricing, as defined in the text, is
A) common and profitable but illegal.
B) common, profitable, and legal.
C) common but both unprofitable and illegal.
D) common and legal but unprofitable.
E) rarely observed though often alleged.
71) If a restaurant, as a regular policy, gives a morning newspaper to each customer who orders a
complete breakfast, the restaurant is
A) engaging in predatory pricing of breakfasts.
B) engaging in predatory pricing of newspapers.
C) selling breakfasts below cost.
D) distributing newspapers below cost.
E) almost certainly doing none of the above.
72) Predatory pricing
A) is extremely hard to document in the U.S. economy today.
B) is most often practiced in the retailing industry.
C) is not legal under U.S. law but is regularly practiced by foreign firms competing in the United
States.
D) is principally responsible for the decline of competition in the oil industry.
73) Which of the following pricing practices, if proved, would prove a firm engaged in predatory
pricing?
A) The firm sets prices below marginal cost per unit.
B) The firm sets prices below sunk cost per unit.
C) The firm sets prices below total cost per unit.
D) The firm sets prices low enough to drive all its competitors out of business.
E) None of the above would prove predatory pricing had occurred.
74) What is the analytically correct way to allocate joint costs or to determine the specific costs
of products produced jointly (such as the view and the food from a restaurant with an excellent
view)?
A) By comparing marginal costs
B) By comparing all costs other than sunk costs
C) By subtracting the total costs from the total revenue
D) By using the prevailing interest rate to discount the stream of expected future costs and
benefits
E) There is no analytically correct way to do so.
75) A cartel is
A) an agreement among competitors to regulate prices or output.
B) a bond with no fixed maturity date.
C) a contract between manufacturers and retailers.
D) a highly leveraged buy-out.
E) a shopping center in which all lessees pay the same percentage of common operating costs.
76) Agreements among competing sellers to maintain prices and share markets
A) are usually unenforceable in court and illegal under many state laws and under federal law
where applicable.
B) are very common because they lead to economies of scale and hence greater efficiency.
C) enable all sellers to cover their sunk costs but do not guarantee that any seller will be able to
cover marginal cost.
D) usually result in greater total output but also in higher prices to consumers.
77) An effective agreement to divide up the market among firms selling products that are close
substitutes
A) allows each firm to earn positive net revenue even though its marginal cost is greater than its
marginal revenue.
B) allows each firm to earn positive net revenue by preventing cooperation from reducing each
firm’s marginal revenue below its marginal cost.
C) tends to keep each firm’s price and marginal revenue above its marginal cost.
D) tends to result in both higher prices and larger output.
78) Which of the following is most likely to occur if a cartel does not find an acceptable way to
allocate sales among its members?
A) Output will decrease.
B) Prices will rise.
C) Selling costs will increase.
D) The marginal costs of individual members will rise above their marginal revenue.
79) Cartels rarely succeed for long because they find it difficult to
A) avoid losing the advantages from economics of scale.
B) keep marginal costs high and marginal revenue low.
C) keep members from offering discounts and new firms from entering.
D) keep members from reducing output below the optimal level.
E) prevent average cost from falling below marginal cost.
80) Cartels tend to break down unless they can obtain government assistance because cartel
members will typically try to
A) charge higher prices than the prices agreed upon.
B) include sunk costs in their prices.
C) lower their costs below the agreed-upon levels.
D) sell more than their quotas.
E) do all of the above.
81) What makes it extremely difficult for cartels to function effectively without government
assistance?
A) Cartel members cannot agree among themselves on the optimum price because all have
different costs.
B) High prices encourage cartel members to offer discounts, and they attract new entrants to the
industry.
C) Marginal cost will not equal marginal revenue except at output levels beyond the cartel’s
capacity.
D) Public interest considerations usually require an output greater than the cartel’s net revenue
maximizing output.
E) The hostility of the public to price exploitation makes it difficult for the cartel to defend itself
against the consequences of popular hostility.
82) What would be the most likely effect in the market for OPEC oil if the U.S. were to impose a
legal ceiling price on crude petroleum produced domestically? Assume their price is far below
the current world price?
A) The demand would decrease.
B) The demand would increase.
C) The supply would decrease.
D) The supply would increase.
E) Only the quantity would change, not the demand or the supply.
83) The brief success of the OPEC cartel in the 1970s can most plausibly be attributed to
A) the dependence of industrial economies on oil.
B) the fact that OPEC was a cartel formed by national governments.
C) the inelastic demand for oil.
D) the misguided policies of the U.S. government.
E) the widespread expectation of much higher prices in the future.
84) OPEC was able to function as an extremely successful cartel in the last half of the 1970s
because
A) it was an association of governments rather than of private individuals.
B) it was able to separate OPEC oil from non-OPEC oil and to engage in price discrimination.
C) the increasing scarcity of oil produced an upward-sloping marginal revenue curve.
D) the widespread expectation of much higher future prices discouraged current production.
E) wars in the Middle East raised the marginal cost of producing oil.
85) The federal courts are increasingly willing to tolerate resale price maintenance agreements
between manufacturers and retailers
A) when they are necessary to prevent predatory pricing.
B) when they enable small businesses to survive more profitably.
C) when they provide retailers with incentive to supply customer services desired by
manufacturers.
D) whenever both parties voluntarily agree on them.
E) whenever they are necessary to cover sunk costs.
86) A horizontal merger is a merger between firms
A) earning roughly the same amount of profit.
B) producing roughly the same products.
C) regularly doing business of any sort with each other.
D) standing in a supplier-purchaser relationship.
E) that were previously independent.
87) An example of a horizontal merger would be a merger between firms
A) approximately the same size.
B) growing at approximately the same rate.
C) located in the same geographic area.
D) selling approximately the same products.
E) supplying one another with inputs.
88) The Sherman Act of 1890
A) established the corporate income tax.
B) prohibited price-setting agreements among sellers.
C) required employers to bargain collectively with labor unions.
D) set maximum prices railroads could charge interstate shippers.
E) set minimum prices railroads could charge without being guilty of unfair trade practices.
89) Competition is best characterized as
A) a fully regulated set of market activities.
B) a fair and just set of outcomes.
C) a process of bids and offers.
D) a necessary evil.
90) Fill in the blank: According to your textbook authors, ________ is a key condition for
competition to occur.
A) government regulation of price
B) government regulation of output
C) preservation of profit
D) freedom of entry
91) Freedom of entry into a market tends to preserve
A) competition.
B) abnormal profits.
C) social justice.
D) the gap between the price of a good and marginal cost.
92) According to your text, competition generally requires
A) fixed costs.
B) fixed prices.
C) fixed profits.
D) detailed government regulation.
E) none of the above.
93) The economic way of thinking would approach the question “Is this industry competitive?”
by
A) counting the number of firms in the industry.
B) comparing the ratio of prices to costs across the industry.
C) assessing the freedom of entry into the industry.
D) evaluating the actual structure of the industry to the competitive standards articulated in
antitrust legislation.
94) According to your authors, the following is a necessary condition for a competitive market:
A) Large numbers of buyers and sellers
B) Full and complete information
C) Freedom of entry
D) Identical products
E) All of the above.
95) How does the textbook’s notion of competition as a process differ from the model of perfect
competition?
A) The process notion allows for uncertainty and incomplete information; perfect competition
doesn’t.
B) The process notion allows for price searching activity; perfect competition doesn’t.
C) The process notion allows for product differentiation; perfect competition doesn’t.
D) The process notion allows for a small number of participants; perfect competition doesn’t.
E) For all of the above reasons.
96) Pick the true statement regarding the notion of competition as a process versus the model of
perfect competition.
A) The process notion allows for uncertainty and incomplete information; perfect competition
doesn’t.
B) The process notion allows for price searching activity; perfect competition doesn’t.
C) The process notion allows for product differentiation; perfect competition doesn’t.
D) The process notion allows for a small number of participants; perfect competition doesn’t.
E) All of the above are true.
97) Pick the true statement, regarding the notion of competition as a process versus the model of
perfect competition.
A) The process notion allows for full and complete information; perfect competition doesn’t.
B) The process notion allows for price taking activity; perfect competition doesn’t.
C) The process notion allows for identical products; perfect competition doesn’t.
D) The process notion allows for a small number of participants; perfect competition doesn’t.
E) All of the above are true.
98) Which of the following is a necessary feature of the notion of the market as a competitive
process and the model of perfect competition?
A) Freedom of entry
B) Price taking behavior
C) Perfect and complete information
D) All firms produce identical products.
E) All of the above.
99) According to your textbook authors, laws restricting competitors
A) restrict competition.
B) reduce greed.
C) promote economic fairness.
D) improve the alternatives available to customers.
100) Fill in the blank: Your textbook authors wrote, “A law that restricts competitors ________
competition.”
A) preserves
B) restricts
C) promotes
D) repairs
101) According to your authors, which action below clearly restricts competition?
A) A large firm raises its price.
B) A large firm lowers its price.
C) Government deregulates an industry.
D) Antitrust legislation restricting other suppliers from entering into a market.
102) Which of the following clearly restricts competition?
A) A firm sets price above marginal cost.
B) A firm sets price below marginal cost.
C) A firm sets price equal to marginal cost.
D) None of the above clearly restricts competition.
103) Which of the following clearly restricts competition?
A) A government policy restricting entry into the market
B) A government policy that reduces tariffs on foreign imports
C) A business sets price below cost.
D) A business sets price above cost.
E) Any business pricing scheme that successfully draws customers away from its rivals
104) Which of the following clearly restricts the competitive market process?
A) Selling below cost
B) Selling above cost
C) Selling at cost
D) Setting a price above marginal cost
E) None of the above.
105) Which of the following clearly restricts the competitive market process?
A) Predatory pricing tactics
B) Legal restrictions on entry
C) Hostile takeovers
D) Selling below cost
E) All of the above.
106) Which of the following clearly restricts the competitive market process?
A) Price searching behavior
B) Price taking behavior
C) Predatory pricing
D) Cost-plus-markup pricing
E) None of the above.
107) Which of the following would be consistent with the notion of a competitive market
process, but would be inconsistent with the notion of perfect competition?
A) Cost-plus-markup pricing
B) Freedom of entry
C) Price taking behavior
D) Large numbers of buyers and sellers
E) All of the above.
108) Which of the following would be inconsistent with the notion of a competitive market
process and the notion of perfect competition?
A) Price searching behavior
B) Predatory pricing
C) Advertising
D) Licenses and other legal restrictions on entry
E) Hostile takeovers
109) When your textbook authors say competition “can be recognized only in motion pictures,
not in still photographs,” they mean
A) Hollywood is a competitive industry; portrait photography is non-competitive.
B) competition is better described as a process, rather than a fixed state of affairs.
C) competitors don’t sit still.
D) competition didn’t exist before the advent of motion picture technology.
110) Suppose all producers in a given industry charge exactly the same price for their product.
Uniform prices across an industry proves
A) industry competetitiveness.
B) industry monopolization.
C) producers cannot be earning monopoly profits.
D) absolutely nothing about whether the industry is adequately competitive.
111) According to the text, in the absence of uncertainty, no one can obtain a profit from the
exclusive ownership of a scarce resource, such as a patent or a franchise, because
A) demand curves will be perfectly elastic.
B) marginal cost will equal marginal revenue.
C) profit requires active production rather than static ownership.
D) the cost of retaining ownership will rise to eliminate any profit.
E) the tax on capital gains will eliminate any profit.
112) Why would irrigated farming not become more profitable if the federal government
lowered the price farmers had to pay for irrigation water?
A) Farmers would have to pay more for electricity to pump the water.
B) The cost of owning or renting land that could be irrigated would rise.
C) The prices of irrigated crops would not rise.
D) Water is a marginal cost in farming.
E) Water is a sunk cost in farming.
113) Profits resulting from luck can be distinguished from profits attributable to shrewd
predictions by
A) calculating the opportunity cost of earning the profits.
B) comparing the profits with interest rates.
C) finding out whether they lead to reduced revenue or increased costs.
D) no known empirical test.
E) whether or not they were generally anticipated.
114) Someone who owns stock in a drug company that suddenly and unexpectedly reveals it has
found an effective vaccine against AIDS will make a profit on the stock
A) at once.
B) only if she hangs on to the stock for a number of years.
C) only if she sells the stock.
D) only when the dividends actually start to increase.
E) when total revenue exceeds all costs, including research and development costs.
115) If oil refiners expect the government to tax away any profits created by international supply
disruptions, refiners will choose to
A) carry smaller inventories of crude petroleum.
B) leave the oil refining business.
C) prevent the price of crude petroleum from rising.
D) raise their prices to cover their added risks.
E) take a higher percentage of their profits as windfalls.
116) If a city suddenly and unexpectedly abolishes all property taxes on residential property,
which consequence is most likely to be observed first?
A) Higher rents for residential space
B) Higher sale prices for residential property
C) Lower rents for residential space
D) Lower sale prices for residential property
E) More conversion of apartments to condominiums
117) Even if the City Council fixed high minimum taxi fares and gave licenses to operate to only
a few cab owners, license holders would not earn large profits from operating taxis in the city
because
A) people would drive their own cars.
B) people would substitute buses for taxis.
C) taxis are not a necessity of life.
D) the cost of owning a license would eat up the potential profits from operating a taxi.
E) the demand would fall as taxi fares rose.
118) An increase in the level of government price supports for wheat will not make wheat
farming more profitable because
A) by definition government actions cannot affect profits.
B) it raises the cost of growing wheat as well as the revenue.
C) profit is the consequence of certainty and government policies are inherently uncertain.
D) the demand for wheat is inelastic.
E) wheat farmers are price takers, not price searchers.
119) Are the owners of taxicabs in New York City earning large profits because the city severely
restricts the number of licenses?
A) No, because the city also regulates fares.
B) No, because the cost of owning a license absorbs the potential profit.
C) Yes, because the number of licenses has not been increased for 50 years.
D) Yes, because if they were not the number of taxicabs would decline and profits would rise.
E) We cannot tell because profit arises from uncertainty.
120) When local governments ignore all other considerations and award cable TV franchises to
the firms that offer the highest money bids, they
A) discriminate against the poor.
B) encourage corruption.
C) introduce delay into the system but increase its efficiency.
D) reduce the likelihood of illegal bribes.
E) increase the likelihood the winning firm will be incompetent.
121) A business cost is always
A) a sunk cost.
B) a marginal cost.
C) a consequence of managerial decisions.
D) measurable if we use sophisticated accounting techniques.
122) How can we determine separately the cost of producing ham hocks from the cost of
producing bacon?
A) By separately estimating the labor time it takes to butcher the hocks and the bacon
B) By separately calculating the weight of the hocks and the bacon as percentages of total
useable meat
C) By consulting the average industry costs of ham hocks and bacon
D) There is no way to determine the specific costs of joint products.
123) Which combination is a clear example of “joint products”?
A) Steel and cars
B) Cars and tires
C) Tires and air
D) All of the above.
E) None of the above.
124) Which combination is a clear example of “joint products”?
A) Pine paneling and cherry wood
B) Cherry wood and cherries
C) Cherries and apples
D) Apples and crackers
125) From the economic point of view, “joint costs” are problematic because
A) they can only be determined in markets for illicit drugs.
B) there is no way to correctly allocate joint costs.
C) they can be measured only by the most sophisticated accounting techniques.
D) there is no way to discuss the concept meaningfully.
126) Suppose a Chinese restaurant routinely provides free fortune cookies to its customers. The
economic way of thinking suggests the restaurant is
A) engaging in predatory pricing of its meals.
B) attempting to increase its total profit.
C) selling Chinese food below cost.
D) doing all of the above.
E) almost certainly doing none of the above.
127) Suppose a Chinese restaurant provides free tea to its customers. In the economic way of
thinking, the restaurant is
A) engaging in predatory pricing of its meals.
B) engaging in predatory pricing of tea.
C) selling Chinese food below cost.
D) doing all of the above.
E) almost certainly doing none of the above.
128) At a Mufflers-R-Us repair shop customers have the opportunity to wait in a room with
chairs, a television, magazines, coffee and donuts. The economic way of thinking suggests the
muffler shop is
A) selling mufflers below cost.
B) selling the additional goods and services below cost.
C) attempting to increase its total profit
D) engaging in unfair trade practice because it provides the goods and services free of charge.
E) almost certainly doing none of the above.
129) A national taco chain offers in-house customers free refills on drinks. It is
A) attempting to increase total profit.
B) selling its meals below cost.
C) selling drinks below cost.
D) engaging in predatory pricing.
E) doing all of the above.
130) A local bar provides free pretzels and peanuts. Once a week it even provides chicken wings
for only ten cents each. It is
A) selling drinks below cost.
B) selling pretzels, peanuts and wings below cost.
C) unfairly competing against other local bars who are unable to do the same.
D) almost certainly doing none of the above.
131) Several national fast-food chains offer “kids’ meals” with free giveaway toys, something
many independent, local establishments cannot afford to do. The national chains are
A) engaging in predatory pricing.
B) selling meals below cost.
C) distributing toys below cost.
D) engaging in anti-competitive behavior because the independents cannot afford to give away
toys.
E) almost certainly doing none of the above.
132) Suppose early Friday morning the economics club buys 200 donuts at 25 cents each, and
plans to sell all of them later in the day on campus for 50 cents each. Only 60 donuts are sold at
50 cents, however, and by early afternoon the club is seen trying to unload the remaining donuts
for 10 cents each. What can we conclude?
A) The club was clearly engaging in predatory pricing of donuts.
B) The club was clearly selling below cost.
C) The club clearly misjudged the demand for donuts.
D) All of the above are true.
133) Suppose early one Friday morning the economics club buys 200 donuts at 25 cents each,
and plans to sell all of them later in day on campus for 50 cents each. Only 60 donuts are sold at
50 cents, however, and by early afternoon the club is seen trying to unload the remaining donuts
for 10 cents each. What is the correct price of one of donut?
A) 10 cents
B) 25 cents
C) 50 cents
D) Stated this way, the question is meaningless.
134) Which of the following is clearly being sold below cost?
A) Commercial television programs
B) Public radio programs
C) A surprise opening act at a sold-out concert
D) Concert t-shirts sold at discount prices at the end of a band’s major world tour
E) None of the above.
135) Which of the following is clearly being sold below cost?
A) 2-for-the-price-of-one theatre tickets
B) Senior-citizens discounts on meals at the local diner
C) The free software included in the purchase of a new personal computer
D) The magazine subscription offering 30% off the regular newsstand price
E) None of the above.
136) In 2002 some politicians and many representatives of the steel and iron-ore mining
industries in the U.S. complained foreign steel producers were illegally “dumping” steel and
contributing to a potential unemployment problem. According to the economic way of thinking,
their argument is questionable because
A) it is not at all clear what the appropriate or correct price of steel is.
B) it is not at all clear what the appropriate or correct cost of steel is.
C) it is not at all clear that such an activity increases total unemployment in the U.S.
D) all of the above are true.