Chapter 15: Economic Regulation and Antitrust Policy Flashcards

Which of the following occurs if firms are able to restrict output and raise price?

a.

resources are misallocated

b.

wealth is shifted from consumers to government

c.

wealth is shifted from producers to consumers

d.

P = MC

e.

P = minimum LRAC

Which of the following is not a criticism of monopolies?

a.

They restrict output.

b.

They set price above the perfectly competitive level.

c.

They tend to be less innovative than firms in a competitive market.

d.

They exert a disproportionate amount of political influence.

e.

They reduce allocative efficiency through perfect price discrimination.

Economic regulation of business is justified if, by intervening, government can

a.

improve the allocation of resources in society

b.

create economic rents for special interest groups

c.

reduce output and increase prices for an industry

d.

increase tax revenue from the regulated industry

e.

force firms to increase their costs of production

A monopoly is likely to charge a higher price than an otherwise similar competitive industry would be.

a.

True

b.

False

Public policy can help achieve more efficient use of an economy's resources by eliminating all monopolies.

a.

True

b.

False

Government controls of price, output, entry of new firms, and quality of service in industries where monopoly appears desirable are known as

a.

antitrust regulation

b.

economic regulation

c.

social regulation

d.

antimerger regulation

e.

consumer advocacy regulation

Government attempts to prohibit monopolization of a market are known as

a.

antitrust regulation

b.

economic regulation

c.

social regulation

d.

anticompetitive regulation

e.

Herfindahl regulation

Government regulation of the prices charged by monopolies is an example of

a.

safety regulation

b.

economic regulation

c.

Herfindahl regulation

d.

antitrust regulation

e.

antimerger regulation

Government regulation of the prices and entry conditions in an industry is an example of

a.

safety regulation

b.

economic regulation

c.

Herfindahl regulation

d.

antitrust regulation

e.

Social Security legislation

Economic regulation is government policy designed to

a.

improve health and safety in products and in working conditions

b.

prevent firms from monopolizing or developing a cartel in existing competitive markets

c.

eliminate existing monopolies by breaking them apart into many smaller firms

d.

create monopolies by forcing competitive firms to merge

e.

control price and output in industries where monopoly is desirable

Public utilities are either government-owned or government-regulated firms.

a.

True

b.

False

A natural monopoly exists when, throughout the range of market demand,

a.

average cost is increasing

b.

there are diseconomies of scale

c.

there are economies of scale

d.

average cost is constant

e.

marginal cost exceeds average cost

A natural monopoly exists when, throughout the range of market demand,

a.

average cost is increasing

b.

there are diseconomies of scale

c.

average cost is decreasing

d.

average cost is constant

e.

marginal cost exceeds average cost

In a natural monopoly, throughout the range of market demand,

a.

marginal cost exceeds average cost and therefore pulls average cost upward

b.

average cost exceeds marginal cost and therefore pulls marginal cost upward

c.

marginal cost is below average cost and therefore pulls average cost downward

d.

average cost is equal to marginal cost

e.

there are diseconomies of scale

Which of the following is the best example of a natural monopoly?

a.

gold mining in the Colorado Rocky Mountains

b.

filmmaking in Hollywood

c.

electrical service to homes in Seattle

d.

production of film by Kodak

e.

production of computers by IBM

If a firm can double inputs and, thereby, more than double output over the range of output the market demands, it is a

a.

natural monopoly

b.

local monopoly

c.

price discrimination monopoly

d.

monopsony

e.

candidate for antitrust prosecution

Economies of scale throughout the range of market demand give natural monopolies

a.

downward-sloping long-run average cost curves

b.

upward-sloping long-run average total cost curves

c.

upward-sloping long-run average cost curves

d.

upward-sloping short-run average total cost curves

e.

horizontal long-run average cost curves

A natural monopoly, such as the local telephone company, is characterized by

a.

a lack of natural competitors

b.

low fixed costs and diseconomies of scale

c.

economies of scale

d.

a lack of government regulation

e.

constant costs of production

If a firm has a downward-sloping long-run average cost curve over the entire range of market demand, it is a

a.

local monopoly

b.

resource monopoly

c.

monopsony

d.

output monopoly

e.

natural monopoly

Natural monopolies are firms that

a.

have a downward-sloping long-run average cost curve over the entire range of market demand

b.

have an upward-sloping long-run average cost curve over the entire range of market demand

c.

are protected against the entry of new firms by patents, licenses, or other legal restrictions

d.

control a nonreproducible resource that is critical to production

e.

have been created over time by the mergers of many smaller firms

The average cost curve for a natural monopoly is downward sloping where it intersects the market demand curve.

a.

True

b.

False

Most local phone companies

a.

face a horizontal demand curve

b.

are regulated

c.

are called public utilities

d.

have tremendous economies of scale

e.

are natural monopolies

In order to ensure allocative efficiency on the part of a natural monopoly, regulators would set price equal to marginal cost.

a.

True

b.

False

The rail system in Metropolis is a natural monopoly. If the government regulates the system by setting the fare equal to marginal cost, which of the following will be true?

a.

Price and output will be higher than if the monopoly were unregulated.

b.

Price and output will be lower than if the monopoly were unregulated.

c.

Price will be lower and output higher than if the monopoly were unregulated.

d.

Price will be higher and output lower than if the monopoly were unregulated.

e.

Profit will be lower than if the monopoly were unregulated, but price and output could either increase or decrease.

The rail system in Metropolis is a natural monopoly. If the government regulates the system by setting the fare equal to marginal cost, which of the following will be true?

a.

Profit will be zero under regulation.

b.

Only normal profit will be earned under regulation.

c.

Accounting profit will be zero under regulation.

d.

Economic loss will occur under regulation.

e.

Profit will be higher than if the monopoly were unregulated.

Watt Power and Light, an electric company, will suffer an economic loss

a.

even at its profit-maximizing output because marginal cost is always less than average cost

b.

even at its profit-maximizing output because average cost is always less than marginal cost

c.

if regulators insist that it produce where price equals marginal cost because marginal cost is less than average cost

d.

if regulators insist that it produce where price equals marginal cost because average cost is always less than marginal cost

e.

if regulators insist that it produce where price equals average cost because average cost is always less than marginal cost

If a regulator sets the price equal to the natural monopolist's marginal cost,

a.

the monopoly will experience a loss

b.

the monopoly will earn a profit

c.

the monopoly will earn zero profit

d.

consumers will be worse off than they would be if the firm's profit maximization activities were unregulated

e.

the monopoly will be better off than it would be if its profit maximization activities were unregulated

Compared to the profit-maximizing outcome, marginal cost pricing in natural monopoly leads to

a.

reduced demand

b.

higher price

c.

reduced consumer surplus

d.

more economic profit

e.

greater output

If government regulators force a natural monopoly to produce where price equals marginal cost, the monopoly will earn

a.

a "fair return"

b.

positive economic profit

c.

zero economic profit

d.

negative economic profit

e.

greater economic profit than if it were unregulated

Production by a monopoly would result in the socially optimal allocation of resources if

a.

price is set equal to marginal cost

b.

marginal revenue is set equal to price

c.

marginal revenue is set equal to marginal cost

d.

price is set equal to average total cost

e.

marginal revenue is set equal to average total cost

The rail system in Metropolis is a natural monopoly. If the government regulates the system by setting the fare equal to marginal cost, which of the following will be true?

a.

The managers of the rail system will be allowed to adjust marginal cost so that they can get a normal rate of return on capital.

b.

The managers of the rail system will be allowed to adjust marginal cost so that they can get a fair profit.

c.

The rail system will earn economic profit at that fare.

d.

If the government doesn't give the rail system a subsidy to supplement revenue from fares, the system will face continuous economic losses.

e.

If the government doesn't give the rail system a subsidy to supplement revenue from fares, fare increases will push marginal cost upward.

Which of the following is true when regulators require a natural monopolist to set price equal to marginal cost?

a.

This policy results in a less than socially optimal allocation of resources.

b.

The marginal cost of producing the last unit sold exceeds the consumers' marginal value for that last unit.

c.

The monopolist will face recurring losses unless a subsidy is provided.

d.

The monopolist will earn a normal profit.

e.

The monopolist will earn more than a fair return.

If the electric company is allowed by regulators to earn only a normal profit, it will produce at the point where

a.

MR = MC

b.

P = MC

c.

MC = quantity demanded

d.

P = AC

e.

MR = AC

If the government wants a natural monopoly to earn a "fair return" or zero economic profit, it will set

a.

price equal to marginal cost

b.

price equal to average total cost

c.

price equal to average revenue

d.

marginal cost equal to marginal revenue

e.

marginal cost equal to average total cost

To allow a public utility (which is a natural monopoly) to earn only a normal profit, the government should

a.

do all of the following

b.

set price equal to average cost

c.

equate marginal cost and average cost

d.

set marginal cost equal to marginal revenue

e.

set price equal to marginal cost

A regulated natural monopoly that must set price equal to average cost will

a.

suffer an economic loss

b.

earn a net economic profit

c.

earn a normal profit

d.

earn so little that it will close in the long run

e.

earn no profits of any kind

If the government wishes to provide a natural monopolist with a "fair" rate of return, it will force the firm to set

a.

P = MC

b.

P = AC

c.

P = MR

d.

P = AVC

e.

MR = MC

Compared to the profit-maximizing outcome, average cost pricing in natural monopoly leads to

a.

all of the following

b.

a higher price

c.

decreased consumer surplus

d.

the elimination of economic profit

e.

less output

If a monopolist is forced to set price equal to average total cost, economic profit

a.

will be negative, and the monopolist may go out of business

b.

will be zero

c.

will be positive

d.

will be negative, and the firm will stay in business if there are significant fixed costs

e.

may be positive, negative, or zero

When government regulations force a natural monopoly to produce where price equals average total cost, social welfare is

a.

maximized

b.

less than it would be without regulation

c.

greater than it would be without regulation, but it is not maximized

d.

exactly the same as it would be without regulation

e.

minimized

Which of the following is true of a natural monopoly?

a.

If regulated, the firm will have a higher level of output than an unregulated firm, whether the regulation is based on average cost, marginal cost, or normal profit.

b.

If regulated, the firm will have a lower level of output than an unregulated firm, whether the regulation is based on average cost, marginal cost, or normal profit.

c.

If regulated, the firm that is only allowed a normal profit will be allowed to charge a price in excess of its average cost.

d.

If regulated, the firm that is only allowed a normal profit will be allowed to produce more than a firm that must set a price equal to its marginal cost.

e.

If regulated, the firm that is only allowed a normal profit will be allowed to produce more than a firm that must set a price equal to its average cost.

Suppose the local government is considering using marginal cost pricing to set rates for a cable TV company. Which of the following arguments supports marginal cost pricing?

a.

Marginal cost pricing gives the monopoly economic profit and a reason to stay in business.

b.

Marginal cost pricing gives the firm a normal economic profit and a reason to stay in business.

c.

Marginal cost pricing is allocatively efficient.

d.

Average cost pricing requires subsidies, which can be costly.

e.

Average cost pricing forces monopolies to operate at a loss.

Which of the following is likely to result from the regulation of taxicabs in Mexico City?

a.

The price of taxi rides will decrease.

b.

The price of taxi rides will increase.

c.

The income of taxi owners will increase.

d.

Taxi owners will have greater monopoly power.

e.

The supply of taxis will decrease.

Producers play a disproportionately large role in influencing public regulation because they have a strong interest in matters that affect their specialized source of income.

a.

True

b.

False

If producers support proposed regulation of their industry, then

a.

it is likely that consumers will benefit from the regulation

b.

it is likely that producers are looking out for the interests of the consumers

c.

it is likely that both producers and consumers will be adversely affected by the legislation

d.

it is possible that consumers will be adversely affected by the legislation

e.

it is likely that prices will fall

The capture theory of regulation, espoused by George Stigler, asserts that

a.

consumers "capture" regulatory agencies so that regulation favors consumers

b.

producers "capture" regulatory agencies so that regulation favors producers

c.

regulators "capture" producers and limit their market power

d.

consumers "capture" some consumer surplus lost to monopoly

e.

consumers and producers work together to "capture" regulatory agencies in order to achieve more desirable regulation

According to the special interest theory, the licensing of beauticians would be

a.

desired by consumers in order to promote the public interest

b.

desired by beauticians in order to promote the public interest

c.

discouraged by all beauty salons, large or small

d.

desired by some beauticians in order to restrict entry into their profession

e.

done strictly at the initiative of the government

Which of the following groups benefits from regulation, according to the special interest theory of regulation?

a.

all consumers

b.

all producers

c.

only certain consumers

d.

only certain producers

e.

society as a whole

The government often enacts regulation that benefits producers because

a.

the government seeks to regulate in the best interest of the public

b.

consumers have less information than producers and therefore seek government protection

c.

consumers have a strong interest in matters that affect their standard of living

d.

producers have a strong interest in matters that affect their specialized source of income

e.

producers seek to act in the best interest of the public

A physicians' professional association supports legislation seeking higher quality medical care. According to the special interest theory of regulation, who likely will benefit most from this legislation?

a.

Government, through decreased regulation of physician quality.

b.

Patients, through reduced prices for medical care.

c.

Physicians, through increased prices for medical care.

d.

Hospitals, through decreased for physicians' services.

e.

Government, since higher quality health care is clearly in the public interest.

If ball-bearing producers support proposed regulation of their industry, then it is likely that

a.

ball-bearing prices will decrease under regulation

b.

profits of firms in the ball-bearing industry will decrease after regulation

c.

ball-bearing producers are concerned about the best interests of the public

d.

ball-bearing producers will not attempt to influence the adoption of the regulation

e.

consumers of ball-bearings will suffer from the proposed regulation

A monopoly or group of firms acting together as a monopoly

a.

cannot perform the economic task of resource allocation

b.

allocates resources in the most efficient way possible

c.

misallocates resources by producing more output than a competitive industry would

d.

misallocates resources by producing where the marginal benefit of the final unit produced exceeds its marginal cost

e.

misallocates resources by producing where the marginal benefit of the final unit produced is less than its marginal cost

According to the special interest theory,

a.

economic regulation is designed to promote social welfare

b.

producers may be able to influence regulators to impose restrictions favorable to producers

c.

groups of consumers with special interests may be able to control a regulatory agency to their own benefit

d.

foreign lobbyists may be able to control a regulatory agency to their own benefit

e.

the fighting between special interest groups over economic regulation may cancel out effects of such regulation

Antitrust laws attempt to promote competition by controlling

a.

market structure only

b.

market conduct only

c.

market structure and performance

d.

market structure and conduct

e.

market structure, conduct, and performance

The purpose of antitrust laws is to

a.

reduce anticompetitive activities

b.

increase anticompetitive activities

c.

guarantee worker safety

d.

promote quality products

e.

prevent large-scale production

Antitrust policy is designed to

a.

improve health and safety in products and in working conditions

b.

regulate the firms in industries where "cut-throat" competition is potentially damaging

c.

create monopolies by forcing competitive firms to merge

d.

control price and output in industries where monopoly is desirable

e.

promote competition and reduce anticompetitive behavior

The Sherman Antitrust Act makes it unlawful for firms to collude to restrain trade.

a.

True

b.

False

The Clayton Act prohibits all horizontal mergers, regardless of their economic consequences.

a.

True

b.

False

Price discrimination that substantially lessens competition is prohibited by the Clayton Act.

a.

True

b.

False

When were the first federal antitrust laws enacted in the United States?

a.

around the turn of the twentieth century

b.

after World War II

c.

after World War I

d.

during the Great Depression

e.

with the U.S. Constitution, in 1787

The first federal antitrust law enacted in the United States was:

a.

The Clayton Act

b.

Thr Sherman Antitrust Act

c.

The Robinson Patman Act

d.

The Federal Trade Commission Act

e.

The Herfindahl-Hirschman Act

In the late nineteenth century, technological improvements and cheaper transportation in the United States led to

a.

a decrease in minimum efficient scale in many industries

b.

an increase in minimum efficient scale in many industries

c.

an overall reduction in productive efficiency

d.

a narrowing of markets

e.

price increases in many industries

U.S. manufacturers formed trusts in the late 1880s because

a.

booms in the economy made trusts highly profitable and allowed them to expand

b.

economies of scale allowed larger firms to prosper

c.

the rapid growth of the railroads allowed firms to reach a wider market

d.

technological breakthroughs increased capital use and optimal firm size

e.

they wanted to avoid price wars during depressions

The Sherman Antitrust Act of 1890

a.

immediately reduced the number of trusts and the incidence of anticompetitive behavior

b.

established the Antitrust Division of the Department of Justice

c.

did not apply to farmers

d.

was not fully enforced at first

e.

prohibited price discrimination

The Sherman Act

a.

prohibited restraint of trade

b.

created the Federal Trade Commission

c.

prohibited fraudulent advertising

d.

regulated the railroads

e.

exempted insurance companies from antitrust law

The Sherman Act

a.

created the Federal Trade Commission

b.

established the Department of Justice Guidelines

c.

regulated railroad and trucking industries

d.

outlawed restraints of trade

e.

forbade price discrimination

Which of the following practices is not prohibited by the Clayton Act?

a.

merger through the acquisition of assets, which substantially lessens competition

b.

price discrimination that substantially lessens competition

c.

tying contracts that substantially lessen competition

d.

exclusive dealing that substantially lessens competition

e.

interlocking directorates that substantially lessen competition

The Clayton Act of 1914

a.

was too vaguely worded to reduce anticompetitive behavior significantly

b.

prohibited conspiracies in restraint of trade

c.

prohibited price discrimination that reduces competition and cannot be justified based on cost differences

d.

created the Federal Trade Commission

e.

prohibited firms from reducing prices too far

The purchase of the assets of one steelmaker by another steelmaker might be a violation of the

a.

Clayton Act

b.

Federal Trade Commission Act

c.

Wheeler-Lea Act

d.

Celler-Kefauver Anti-Merger Act

e.

Robinson-Patman Act

Which of the following best states the main criticism of the Sherman Act?

a.

It was overly harsh.

b.

It was unnecessary at the time.

c.

It was too vague.

d.

It duplicated existing law.

e.

It came too late in the Industrial Revolution.

What act of Congress declared restraint of trade illegal and declared any attempt at monopolizing unlawful?

a.

the Celler-Kefauver Anti-Merger Act

b.

the Sherman Antitrust Act

c.

the Clayton Act

d.

the Wheeler-Lea Act

e.

the Clayton-Celler Act

Which agency was created by Congress in 1914 to investigate and regulate unfair methods of competition?

a.

the Department of Justice

b.

the Federal Trade Commission

c.

the Interstate Commerce Commission

d.

the General Accounting Office

e.

the Council on Competitiveness

Which law was passed to outlaw certain practices not prohibited by the Sherman Antitrust Act?

a.

the Clayton Act

b.

the Smoot-Hawley Act

c.

the Celler-Kefauver Anti-Merger Act

d.

the Wheeler-Lea Act

e.

the Federal Trade Commission Act

Which act of Congress declared tying contracts, exclusive dealing, and price discrimination illegal?

a.

the Wheeler-Kefauver Act

b.

the Sherman Antitrust Act

c.

the Clayton Act

d.

the Wheeler-Lea Act

e.

the Celler-Kefauver Anti-Merger Act

Which act of Congress extended the government's authority to block horizontal and vertical mergers?

a.

the Clayton Act

b.

the Sherman Antitrust Act

c.

the Wheeler-Lea Act

d.

the Celler-Kefauver Anti-Merger Act

e.

the Herfindahl-Hirschmann Act

The Clayton Act is an example of

a.

social regulation

b.

economic regulation

c.

Herfindahl regulation

d.

antitrust regulation

e.

public utility regulation

Which of the following is not prohibited by the Clayton Act, even if it reduces competition?

a.

merger accomplished through the acquisition of another firm's stock

b.

merger accomplished through the acquisition of another firm's assets

c.

price discrimination that cannot be justified on the basis of cost differences

d.

exclusive dealing contracts

e.

interlocking directorates

A camera manufacturer will sell its cameras only to retailers who agree to buy its brand of film. This is an example of

a.

price discrimination

b.

exclusive dealing

c.

a tying contract

d.

interlocking directorates

e.

a trust

Ersatz Kreme will sell its filling to Hunky Donuts only if Hunky Donuts agrees not to buy filling from other suppliers. This is an example of

a.

price discrimination

b.

exclusive dealing

c.

a tying contract

d.

interlocking directorates

e.

a trust

An example of exclusive dealing occurs when

a.

one individual serves on more than one board of directors

b.

one individual serves on only one board of directors

c.

a producer sells spark plugs to a car manufacturer with the understanding that the manufacturer will buy spark plugs only from that producer

d.

the seller offers a good for sale to an individual (or a limited group) on substantially better terms than is available to the general public

e.

a producer of spark plugs requires that customers also purchase rotors when they buy spark plugs

A requirement that buyers of one service also purchase another service from the same seller is called

a.

exclusive dealing

b.

an interlocking merger

c.

a second good contract

d.

a tying contract

e.

a legal agreement

Which of the following U.S. antitrust laws prohibits mergers through the acquisition of a firm's assets if the merger would lessen competition?

a.

the Sherman Antitrust Act

b.

the Clayton Act

c.

the Robinson-Patman Act

d.

the Celler-Kefauver Anti-Merger Act

e.

the Federal Trade Commission Act

Which of the following U.S. antitrust laws prohibits mergers through the acquisition of a firm's stock if the merger would lessen competition?

a.

the Sherman Antitrust Act

b.

the Clayton Act

c.

the Robinson-Patman Act

d.

the Celler-Kefauver Anti-Merger Act

e.

the Federal Trade Commission Act

U.S. antitrust policy is focused primarily on market conduct.

a.

True

b.

False

When a court uses the per se rule to interpret the Sherman Antitrust Act, its ruling is based on market conduct alone.

a.

True

b.

False

Under the rule of reason, no firm with a large market share could be found guilty of violating the Sherman Antitrust Act.

a.

True

b.

False

"Mere size is no offense" is an antitrust ruling based on the rule of reason.

a.

True

b.

False

Price fixing is illegal in the United States.

a.

True

b.

False

Which U.S. government agencies handle antitrust matters?

a.

the Department of Justice and Congress

b.

the Federal Trade Commission and Congress

c.

the Federal Trade Commission and the Securities and Exchange Commission

d.

the Department of Justice and the Council of Economic Advisors

e.

the Department of Justice and the Federal Trade Commission

Under U.S. antitrust law, a consent decree allows a firm to

a.

admit to an antitrust violation without penalty

b.

admit to an antitrust violation without a lawsuit

c.

challenge the government's accusation in court

d.

cease the alleged wrongdoing without admitting guilt

e.

cease the alleged wrongdoing only by admitting guilt

If those accused of antitrust violations sign a consent decree, they have

a.

agreed to stop doing what they are accused of doing

b.

admitted to guilt

c.

agreed to a court trial

d.

contested the charges against them

e.

charged the government with wrongdoing

If firms accused of antitrust violations sign a consent decree, they have

a.

admitted guilt and accept the lawful penalties

b.

admitted guilt, but are relieved of any penalties by agreeing to cease the violations

c.

agreed to cease the alleged wrongdoing, without admitting guilt

d.

denied the accusation and requested a formal hearing or trial

e.

denied the accusation and given proof that it is untrue

The "rule of reason"

a.

applies to business practices that are illegal regardless of their economic rationale or their consequences

b.

applies to business practices that are legal, regardless of their consequences

c.

means that business practices cannot be proven to be illegal, and a consent decree is required to halt the practices

d.

considers why a certain business practice was adopted and what the effects on competition are, before determining whether the practice is illegal

e.

focuses on market structure rather than on the behavior of firms in determining whether antitrust violations have occurred

Antitrust action in the United States

a.

has followed an inconsistent pattern of enforcement

b.

has always provided specific guidelines for acceptable behavior

c.

applies only to natural monopolies

d.

involves suing a competitive firm for changing its prices

e.

provides protection to those in regulated industries

Which of the following would not violate the Sherman Antitrust Act if the rule of reason was used to interpret the act?

a.

conspiring to monopolize

b.

formation of a trust company

c.

conspiring to restrain trade

d.

a single firm supplying all of a market with no close substitutes and some barriers to entry

e.

attempting to restrain trade with a foreign nation

When ruling on a price-fixing case under the per se rule, the U.S. courts need only examine

a.

market structure

b.

market conduct

c.

market performance

d.

market structure and conduct

e.

market structure, conduct, and performance

Under the rule of reason, a U.S. firm with an 80 percent market share

a.

will always be found in violation of the Sherman Antitrust Act

b.

will never be found in violation of the Sherman Antitrust Act

c.

may be found in violation of the Sherman Antitrust Act, depending on the firm's conduct

d.

will always be found in violation of the Sherman Antitrust Act if there is only one other firm in the industry

e.

will be found in violation of the Sherman Antitrust Act only if there is only one other firm in the industry

According to the U.S. Supreme Court's 1920 ruling on U.S. Steel,

a.

all monopolies are illegal

b.

all oligopolies violate the Sherman Antitrust Act

c.

large firms cannot be found to be in violation of the Sherman Antitrust Act

d.

"mere size is no offense"

e.

possession of market power is sufficient for a firm to be found in violation of the Sherman Antitrust Act

According to the U.S. Supreme Court's 1945 ruling on Alcoa,

a.

all monopolies are illegal

b.

price fixing agreements are illegal under the rule of reason

c.

small firms can be found to be in violation of the Sherman Antitrust Act

d.

"mere size is no offense."

e.

possession of market power is sufficient for a firm to be found in violation of the Sherman Antitrust Act

Business conduct that is illegal per se is illegal

a.

only if there is no economic rationale for it

b.

only if it results in a monopoly

c.

without regard to its economic rationale or consequences

d.

only if it is prohibited by the Clayton Act

e.

whether or not Congress has passed legislation prohibiting the practice

If it is employing the rule of reason when considering an antitrust case, the court

a.

considers why the offending practice was adopted and its effect on competition

b.

does not consider why the offending practice was adopted or its effect on competition

c.

ignores the economic rationale for the offending practice and its consequences

d.

needs only determine that the offending practice took place

e.

considers only whether the firm has market power, not whether it used that power unreasonably

The Herfindahl index is the sum of the squared market shares of the four largest firms in an industry.

a.

True

b.

False

If the premerger Herfindahl index is less than 1,000, the Department of Justice is likely to challenge a merger.

a.

True

b.

False

If the value of the Herfindahl index is 10,000, there must be exactly one firm in the industry.

a.

True

b.

False

If there are only two firms in an industry, the value of the Herfindahl index must be 5,000.

a.

True

b.

False

As concentration in an industry increases, the value of the Herfindahl index falls.

a.

True

b.

False

As concentration in an industry increases, the Herfindahl index falls.

a.

True

b.

False

The Herfindahl index would be 5000 if the only two firms in an industry have equal market shares.

a.

True

b.

False

Which of the following most accurately describes the type of mergers that the antitrust laws are intended to prohibit?

a.

mergers that tend to reduce competition

b.

horizontal mergers

c.

both vertical and horizontal mergers

d.

conglomerate mergers

e.

vertical mergers

Holey Doughnuts and Clair's Eclairs want to merge. Each has 2 percent of the local pastry market. It is most likely that

a.

the Department of Justice would challenge the merger but the Federal Trade Commission would not

b.

the Federal Trade Commission would challenge the merger but the Department of Justice would not

c.

the merger will go unchallenged because it will not tend to reduce competition

d.

the government will successfully challenge the merger because it is a horizontal merger

e.

the government will successfully challenge the merger because it is a vertical merger

Which of the following markets would have the highest Herfindahl index? A market with

a.

ten firms of widely different sizes

b.

ten firms of approximately the same size

c.

five firms of widely different sizes

d.

five firms of approximately the same size

e.

eight firms exactly the same size

To calculate the Herfindahl index,

a.

add the market shares of all firms in an industry

b.

add the market shares of any four firms in an industry and then square them

c.

add the market shares of the four largest firms in an industry

d.

square the market shares of all firms in an industry and then add them

e.

square the market shares of the four largest firms in an industry and then add them

If the Herfindahl index is the same in two industries, we can conclude that

a.

the number of firms in each industry is the same

b.

there must not be the same number of firms in the two industries

c.

the sum of the squared market shares of all firms is the same in the two industries

d.

there must be an identical distribution of market share among firms in the two industries

e.

there must be a different distribution of market share among firms in the two industries

There are five firms in the cresset industry. The market shares of the five firms are 60 percent, 15 percent, 15 percent, 6 percent, and 4 percent. The Herfindahl index is

a.

96

b.

4,086

c.

10,000

d.

4,102

e.

4,100

There are six firms in the cresset industry. The market shares of the four largest firms are 50 percent, 20 percent, 10 percent, and 7 percent. The Herfindahl index is

a.

87

b.

4,149

c.

10,000

d.

3,081

e.

impossible to calculate because data for the fifth and sixth firms are not given

Market shares of all eight firms in an industry are 50 percent, 20 percent, 14 percent, 6 percent, 4 percent, 3 percent, 2 percent, and 1 percent. What is the Herfindahl index?

a.

90

b.

90²

c.

50² + 20² + 14² + 6²

d.

50² + 20² + 14² + 6² + 4² + 3² + 2² + 1²

e.

the sum of the market shares of the four largest firms

If an industry consists of only four firms with equal market shares, then the Herfindahl index

a.

is 25

b.

is 10,000

c.

is 100

d.

is 2,500

e.

cannot be calculated without additional information

If an industry consists of only two firms with equal market shares, then the Herfindahl index is

a.

50

b.

100

c.

2,500

d.

5,000

e.

10,000

The largest value the Herfindahl index can have is

a.

100, which would indicate a monopoly

b.

100 for firms equal in size

c.

100,000

d.

10,000, which would indicate a pure monopoly

e.

infinity

If an industry currently has a Herfindahl index of 900 and a merger would raise that to 950, then the Department of Justice would generally

a.

challenge the merger because the index would become too large

b.

challenge the merger because the change in the index is too large

c.

not challenge the merger because the postmerger index is less than 1,800

d.

not challenge the merger if it is a horizontal merger

e.

challenge the merger if it is a vertical merger

The index that the U.S. government currently uses to determine whether a merger should be allowed is the

a.

Herfindahl index

b.

Schumpeter index

c.

Dow Jones average index

d.

consumer price index

e.

four-firm concentration ratio

Under current guidelines, the U.S. Department of Justice usually challenges

a.

all mergers

b.

mergers in industries that would have a postmerger Herfindahl index greater than 1,800

c.

mergers in industries that would have a postmerger Herfindahl index greater than 1,800 if the Herfindahl index increases by more than 100 points

d.

mergers in industries that would have a postmerger Herfindahl index greater than 1,000

e.

mergers in industries that would have a postmerger Herfindahl index greater than 1,000 if the Herfindahl index increases by more than 100 points

If a firm with a 20 percent market share merges with a firm with 5 percent of the market, by how much will the Herfindahl index change? The other firms have 40 percent, 15 percent, 10 percent, and 10 percent shares.

a.

It rises by 100.

b.

It rises by 200.

c.

It falls by 100.

d.

It falls by 200.

e.

It rises by 25.

If a firm with a 10 percent market share merges with a firm with 15 percent of the market, by how much will the Herfindahl index change? The other firms have 40 percent, 15 percent, 10 percent, and 10 percent shares.

a.

It rises by 100.

b.

It rises by 300.

c.

It falls by 200.

d.

It falls by 250.

e.

It rises by 25.

According to current Justice Department guidelines, mergers in an industry are seldom challenged if the industry

a.

would have a postmerger Herfindahl index greater than 1,800

b.

would have a postmerger Herfindahl index less than 1,000

c.

has a premerger Herfindahl index greater than 1,800

d.

has a premerger Herfindahl index less than 1,000

e.

has a premerger Herfindahl index equal to 10,000

If there are only three firms in an industry with 50 percent, 40 percent, and 10 percent of the market, respectively, the Herfindahl Index is

a.

40

b.

100

c.

200

d.

33

e.

4,200

If two large firms from different industries merge,

a.

industry concentration rises

b.

industry concentration falls

c.

the total assets of the top 200 firms in the country will stay the same

d.

industry concentration rises in one market and falls in the other

e.

industry concentration is not affected

The 100 largest U.S. firms currently control

a.

about half of all manufacturing assets in the United States, which represents a decrease since World War II

b.

about half of all manufacturing assets in the United States, which represents an increase since World War II

c.

about half of all manufacturing assets in the United States, which represents no change since World War II

d.

about 40 percent of all manufacturing assets in the United States, which represents a decrease since World War II

e.

about 40 percent of all manufacturing assets in the United States, which represents an increase since World War II

According to William Shepherd, the total assets of the top 100 firms in the United States have been declining, mostly in response to increased imports.

a.

True

b.

False

The United States economy has experienced a decrease in competition over the last three decades.

a.

True

b.

False

The research of William Shepherd suggests that since World War II, the three main reasons for increased competition in U.S. industries are international trade, deregulation, and antitrust activity.

a.

True

b.

False

According to William Shepherd's examination of competitive trends in the U.S. economy, a dominant firm

a.

is a pure monopoly

b.

is a firm with over half the market share and no close rival

c.

is one of four firms that together supply more than 60 percent of the market

d.

is a single firm that controls the entire market and can block entry

e.

is one of four firms that work together to block entry into the market

According to William Shepherd's examination of competitive trends in the U.S. economy, a tight oligopoly

a.

is a single firm that controls the entire market and can block entry

b.

is an industry in which the top four firms supply more than 60 percent of the market, have stable market shares, and cooperate with each other

c.

is an industry in which the top four firms supply more than 60 percent of the market, have unstable market shares, and do not cooperate with each other

d.

is an industry in which a single firm has over half the market share and no close rival

e.

is an industry in which a single firm has over one-third of the entire market, the market share is stable, and the firm cooperates with other firms in the industry

According to William Shepherd's examination of competitive trends in the U.S. economy, a market is effectively competitive if

a.

the top four firms supply more than 60 percent of the market, have stable market shares, and cooperate with each other

b.

the top four firms supply more than 60 percent of the market, have stable market shares, and compete with each other

c.

the industry exhibits low concentration, few barriers to entry, and little or no collusion

d.

the industry exhibits low concentration and little or no collusion, despite significant barriers to entry

e.

the dominant firm has two close rivals

The increase in competition in the United States between 1958 and 1988 was not a result of

a.

increased imports

b.

deregulation

c.

antitrust activity

d.

penetration of markets by foreign producers

e.

import quotas

Which of the following did not contribute to the increase in competition in the United States between 1958 and 1988?

a.

antitrust activity

b.

deregulation of transportation industries

c.

deregulation of banking

d.

increased imports

e.

conglomerate mergers

According to William Shepherd, in the U.S. economy

a.

Herfindahl indexes have been increasing, indicating a decrease in competitiveness

b.

Herfindahl indexes have been decreasing, indicating a decrease in competitiveness

c.

the market share of the largest manufacturing firms has increased, indicating a decrease in competitiveness

d.

competition has decreased because of exports, regulation, and insufficient antitrust activity

e.

competition has increased because of more imports, deregulation, and antitrust activity

According to William Shepard, the growth in competition from 1958 to 1988 in the United States can be attributed to

a.

imports, efficient economic regulation, and antitrust activity

b.

the rise of the global market and inflation

c.

the fall of communism

d.

imports, deregulation, and antitrust activity

e.

exports, deregulation, and technological improvement

According to Shepherd, the percentage of industries that were effectively competitive in 1988 is approximately

a.

25 percent

b.

50 percent

c.

64 percent

d.

77 percent

e.

89 percent

As imports rose in 13 major industries studied by Shepherd, these U.S. producers, finding themselves at a cost and quality disadvantage relative to imported goods, initially responded by

a.

improving technology

b.

exiting the industry

c.

seeking trade barriers

d.

asking that quotas and tariffs be removed

e.

raising prices to recoup their losses

Increased international trade and deregulation have resulted in

a.

increased competition in the U.S. economy

b.

greater monopolization of industries in the U.S. economy

c.

more oligopolies and cartels in the U.S. economy

d.

greater government intervention in the U.S. economy

e.

no changes in the U.S. economy

According to research by William Shepherd, competition has increased in U.S. industries since World War II due to

a.

both c and d

b.

all of the following

c.

international trade

d.

deregulation

e.

antitrust activity

Airlines are __________ than they were before deregulation.

a.

more dangerous

b.

more concentrated

c.

higher priced

d.

flying fewer miles

e.

much more profitable

A private firm that sustains a financial loss because of an antitrust violation may be able to recover three times the actual damages.

a.

True

b.

False

With the growth of international trade, U.S. antitrust law has become

a.

more vague

b.

more necessary

c.

less necessary

d.

stricter

e.

more likely to enhance consumer welfare

Because of the rise of global competition and free trade,

a.

antitrust policy serves no purpose

b.

antitrust policy may be less necessary than previously thought

c.

U.S. industrial concentration poses more of a threat to consumers

d.

U.S. markets are becoming less contestable

e.

U.S. manufacturers are seeking fewer trade barriers

The government's court case against Microsoft is an example of

a.

predatory pricing

b.

antitrust enforcement

c.

economic regulation

d.

social regulation

e.

the regulatory dilemma

In its case against Microsoft, the government contended that Microsoft

a.

engaged in a pattern of predatory behavior designed to extend its monopoly power

b.

had attempted to engineer a conglomerate merger

c.

was seeking treble damages

d.

was attempting to foreclose foreign competition

e.

was using interlocking directorates

In its case against Microsoft, the government contended that Microsoft

a.

was engaging in exclusive dealing

b.

was integrating its browser into Windows 98 as a way of boosting the browser's market share

c.

was integrating its browser into Windows 98 as a form of predatory pricing

d.

had attempted to engineer a vertical merger

e.

was using tying contracts

In defending itself against the government's antitrust action, Microsoft

a.

offered to sign a consent decree

b.

claimed that it integrated Internet Explorer into Windows 98 in order to make life easier for its customers

c.

admitted that it had practiced predatory pricing

d.

denied that its market share exceeded 50 percent

e.

claimed that it was employing the rule of reason

In defending itself against the government's antitrust action, Microsoft

a.

argued that its high market share would rapidly deteriorate unless the firm continued to innovate

b.

argued that it did not have a high market share

c.

admitted that it had used tying contracts

d.

offered to sign a consent decree

e.

offered to split itself into three separate firms

The ability of a firm to raise the price without losing all its sales to rivals is called

a.

market power

b.

social regulation

c.

economic regulation

d.

antitrust policy

e.

natural monopoly

The government of your state wants Gigantic Software Corp., which is a natural monopoly, to stay in business yet still produce where price equals marginal cost. The government might choose to

a.

set a price ceiling 10 percent lower than its previous level

b.

impose a tax on the company for each dollar of sales

c.

establish regulations that raise the company's cost of doing business

d.

provide a subsidy to the company to cover the loss and ensure a normal profit

e.

replace the company's top management

Over time, regulatory machinery may shift toward the special interests of producers, who, in effect, "capture" the regulating agency.

a.

True

b.

False

Antitrust policy has no relationship to socially desirable market performance.

a.

True

b.

False

Individuals serving on the boards of directors of competing firms is called

a.

interlocking directorates

b.

tying contracts

c.

the rule of reason

d.

exclusive dealing

e.

predatory pricing

The Justice Department generally challenges any merger that meets the following two conditions: (1) the post-merger HHI exceeds 1,800 and (2) the merger increases the index by more than 100 points.

a.

True

b.

False

Firm size alone is not the same as market power, as illustrated by

a.

a large automaker raising its prices without concern about competition

b.

a movie theater in an isolated community facing stiff competition

c.

wheat farmers selling their commodity product to farm cooperatives

d.

the only newspaper in a metropolitan area facing competition for advertising sales from TV, radio, and the Internet

e.

None of the answers is correct

In defending itself against the government's antitrust action, Microsoft argued that it did not have a high market share.

a.

True

b.

False

Technological change is decreasing competition in the market for media.

a.

True

b.

False

Which of the following is a problem with or a limit on antitrust policy?

a.

Competition may not require that many firms

b.

Abuse of antitrust

c.

Growth of international markets

d.

Growing doubt about the economic value of lengthy antitrust court cases

e.

All of the answers are correct