Ch11 Monopoly Antitrust Policy.docx

Ch11 Monopoly Antitrust Policy Multiple Choice Questions 1. A business ________________ occurs when, for practical purposes, one firm purchases another. A. merger B. loss C. acquisition D. antitrust violation Answer: C Reference: Explanation: 2. ______________ give government the power to block certain mergers, and in some cases, to break up large firms into smaller ones. A. Market regulations B. Antitrust laws C. Nationalization policies D. Restrictive practices Answer: B Reference: Explanation: 3. The four-firm ___________________ measures the percentage share of the total sales in the industry that is accounted for by the largest four firms. A. coordination ratio B. market share ratio C. concentration ratio D. production ratio Answer: C Reference: Explanation: 4. The term ____________ refers to the percentage share of a firm's total sales in the market. A. market share B. concentration ratio C. total market ratio D. market cap Answer: A Reference: Explanation: 5. The Herfindahl-hirschman index is calculated by taking ___________________, squaring it, and adding them up to get a total. A. concentration ratio of each firm in the industry B. total revenues of each firm in the industry C. market share of each firm in the industry D. market capitalization of each firm in the industry Answer: C Reference: Explanation: 6. Practices that reduce competition without actual documented agreements between firms to raise price are commonly referred to as ______________________ . A. legal practices B. competitive practices C. regulated practices D. restrictive practices Answer: D Reference: Explanation: 7. A minimum resale price maintenance agreement requires a dealer who buys from a manufacturer ______________________________ . A. to sell for at least a certain minimum price B. to avoid engaging in restrictive practices. C. to guarantee a certain percentage of market share D. to sell for at least a certain maximum price Answer: A Reference: Explanation: 8. An agreement between a manufacturer and a distributor stipulating that a dealer will only distribute that manufacturer's products would be classified as a form of A. predatory pricing. B. tie-in-sales arrangement. C. exclusive dealing. D. price maintenance. Answer: C Reference: Explanation: 9. A manufacturer that only allows a consumer to purchase one product if they also buy another product is using ____________ to increase its profits. A. exclusive dealing B. tie-in sales C. predatory pricing D. bundle dealing Answer: B Reference: Explanation: 10. The term "tie-in sales" is synonymous with A. price maintenance B. exclusive dealing C. bundling D. predatory pricing Answer: C Reference: Explanation: 11. Regulations that permit a regulated firm to cover its costs and to make a normal level of profit are commonly referred to as A. cost-plus regulation. B. price cap regulations. C. regulatory capture. D. profit regulation. Answer: A Reference: Explanation: 12. When the regulator sets a price that a firm cannot exceed over the next few years, the regulator is enforcing A. deregulation. B. price cap regulation. C. cost-plus regulation D. regulatory capture rules. Answer: B Reference: Explanation: 13. The term ______________ refers to a situation where the firms supposedly being regulated end up playing a large role in setting the regulations that they will follow. A. regulatory tie-in B. deregulation C. privatization D. regulatory capture Answer: D Reference: Explanation: 14. The term _______________ is used to describe circumstances where government takes over ownership of a business. A. privatization B. regulatory capture C. nationalization D. deregulation Answer: C Reference: Explanation: 15. _____________ has occurred if a government-owned firm becomes privately owned. A. Privatization B. Nationalization C. Deregulation D. Regulatory capture Answer: A Reference: Explanation: 16. If an industry is perfectly competitive or monopolistically competitive, then the government has relatively little reason for concern about A. regulatory recapture. B. taking advantage of economies of scale. C. new ways of pleasing customers. D. the extent of competition. Answer: D Reference: Explanation: 17. In competitive settings, profits will lead firms to _________________ and losses will lead firms ___________, so the incentives for producing at low cost and coming up with new ways of pleasing customers are strong. A. privatize; nationalize B. enter the market; to exit C. monopolize; to lower costs D. reduce output; increase price Answer: B Reference: Explanation: 18. Government policy-makers often must decide how to balance the potential benefits of ______________ against the potential benefits of _____________ . A. competition; nationalization B. corporate size; competition C. corporate size; predatory pricing D. nationalization; privatization Answer: B Reference: Explanation: 19. If two companies are seeking regulatory approval to merge their respective businesses, which of the following will most likely be the focus of the arguments that they will present in favor of the merger? A. consumers can purchase better quality goods or services at a lower price B. the newly created firm is able to take advantage of economies of scale C. the newly created firm could eliminate duplicative investments D. the new firm will produce more efficiently and all of the above Answer: D Reference: Explanation: Category: Analyze 20. Which of the following concerns would groups like the Consumer Federation of America and Public Knowledge most likely raise with regulators considering a merger application? A. the merger would reduce competition B. the merger would create regulatory capture C. the merger would lead to future decades of lower prices D. the merger would increase output and all of the above Answer: A Reference: Explanation: 21. In order to analyze the effects of a particular business merger, economists typically measure whether the competitive change has A. helped consumers. B. hurt consumers. C. made much difference. D. all of the above. Answer: D Reference: Explanation: Category: Analyze 22. What role does the US government play with respect to market competition? A. policing anticompetitive behavior and prohibiting contracts that restrict competition B. preserving competition by regulating price and/or quantity of output C. intervening in the price and output decision of businesses D. maintaining abundant government-owned firms to ensure consumer friendly pricing Answer: A Reference: Explanation: 23. Since the Margaret Thatcher era of the 1970s, many countries have sold off vast numbers of government-owned firms to _________________ . A. private monopolies B. private ownership C. decrease regulation capture D. increase output Answer: B Reference: Explanation: 24. Which of the following typically leads to two formerly separate firms being under common ownership? A. government regulation B. business mergers C. business acquisitions D. mergers and acquisitions Answer: D Reference: Explanation: Category: Analyze 25. Which of the following is a valid criticism of the reduction of competition that results from corporate mergers? A. merged firms generally are as efficient and innovative as they can be B. consumers will have greater access to lower priced goods and services C. merged firms can increase price and maintain permanently higher profits D. merged firms are better positioned to take advantage of economies of scale Answer: C Reference: Explanation: Category: Evaluate 26. In the closing decades of the nineteenth century, many industries in the U.S. economy were dominated by a single firm that had most of the sales for the entire country. In many cases these large firms were ___________________ . A. as efficient and innovative as they could be B. organized in the legal form of a trust C. able to provide consumers with the lowest price products D. using illegal practices to dominate the US economy Answer: B Reference: Explanation: 27. Antitrust laws were created to give government the power to A. block certain mergers and break up large firms into smaller ones. B. block cartels, and break up regulatory capture. C. force the firm to sell off the profitable parts of its operation. D. block certain mergers that are determined to be uncompetitive. Answer: A Reference: Explanation: 28. Government passed the ______________________ to limit the power of large, consolidated firms that were run by trustees as if they were a single firm. A. Sherman Act in 1890 B. Thatcher Act in 1980 C. Antitrust Act in 1890 D. Competition Act in 1980 Answer: A Reference: Explanation: 29. What was created by the U.S. government in 1914 to specifically define what types of competition were legally unfair? A. Department of Justice B. Antitrust Act C. Federal Trade Commission D. Supreme Court Answer: C Reference: Explanation: 30. Which of the following government institutions bears the responsibility of enforcing US antitrust laws? A. Federal Trade Commission B. Department of Justice C. Supreme Court D. Congress and Senate Answer: B Reference: Explanation: 31. In the U.S., about __________ of all reported merger and acquisition transactions in 2008 exceeded $500 million, while about _________ exceeded $1 billion. A. 80%; 20% B. 99%; 1% C. 60%; 40% D. 25%; 10% Answer: D Reference: Explanation: 32. Which of the following has the power to allow a merger, prohibit it, or allow it if certain conditions are met? A. antitrust regulators at the FTC B. Department of Justice C. Congress and/or Senate D. Supreme Court Answer: B Reference: Explanation: 33. Which of the following has become a common condition for allowing a merger of large firms? A. commitment to operate in a market-oriented economy B. commitment to open a new factory C. commitment to sell off certain parts of the firms D. commitment to hire more workers Answer: C Reference: Explanation: Category: Analyze 34. Which of the following is a true statement? A. The government approves most proposed mergers. B. Government regulators agree that few mergers are beneficial to consumers. C. Government regulators agree that all mergers are beneficial to consumers. D. The government disapproves most proposed mergers. Answer: A Reference: Explanation: Category: Evaluate 35. A government sanctioned merger between two companies can sometimes lead to a clash _______________________ that makes both firms worse off. A. with government regulators B. other market participants C. of corporate personalities D. with market-oriented economy fundamentals Answer: C Reference: Explanation: 36. The fundamental belief behind the market-oriented US economy is that firms are in the best position to know if their actions will A. contravene antitrust regulations. B. lead to attracting more customers. C. let them produce more efficiently. D. the right answer is both b and c. Answer: D Reference: Explanation: 37. The US Federal Trade Commission justifies their record of approval of most mergers by asserting that, even though competition is diminished by consolidating two firms into one, mergers actually benefit A. competition and consumers by forcing firms to lower consumer pricing. B. competition and consumers in the short-run. C. competition and consumers by allowing firms to operate more efficiently. D. competition and consumers at the outset. Answer: C Reference: Explanation: Category: Analyze 38. Why would regulators find that a proposed merger is likely to lessen competition? A. it can lead to lower prices B. it can increase availability of goods C. it can enhance innovation D. it can lead to lower quality products Answer: D Reference: Explanation: 39. A merger will likely lessen competition if A. they are very beneficial to consumers. B. less concentration in the market results. C. it enables the new single firm to raise price. D. both b and c above are correct answers. Answer: C Reference: Explanation: 40. The main challenge for antitrust regulators is A. to figure out how to best benefit consumers. B. to facilitate privatization of government assets. C. to promote the concept of a market-oriented economy. D. to determine when a merger may hinder competition. Answer: D Reference: Explanation: 41. Antitrust regulations would most likely require one of the following in order to determine whether or not a merger may enhance competition. Which one is it? A. analysis using numerical tools. B. obvious objective judgments. C. readily qualified judgments. D. highly complex analytical tools. Answer: A Reference: Explanation: Category: Analyze 42. If the largest four firms in an industry control less than half the market, their competitive concentration ratio A. would be considered to be especially high. B. would not be considered particularly high C. would not be considered particularly low. D. would be considered to be especially low. Answer: B Reference: Explanation: Category: Analyze 43. If the two smallest firms in a competitive market merged, the four-firm concentration ratio _______________ because ____________________________ . A. would change; the degree of competition is notably diminished B. would not change; especially high concentration ratios can benefit consumers C. would change; the largest firms high concentration ratio is diminished D. would not change; the degree of competition isn't notably diminished Answer: D Reference: Explanation: 44. What is the maximum value that can be reached using the HHI? A. 100 B. 1,000 C. 10,000 D. 100,000 Answer: C Reference: Explanation: 45. Which of the following would a market competition regulator be most likely to assign the maximum HHI valuation to? A. a perfect competitor B. a monopoly C. an oligopoly D. a monopolistic competitor Answer: B Reference: Explanation: Category: Analyze 46. For the restaurant industry in Seattle, with dozens or hundreds of extremely small competitors, the value of the HHI A. might drop as low as 100, but not less. B. might reach as low as 1,000, but not less. C. might reach as high as 1,000, but not more. D. might drop as low as 100 or even less. Answer: D Reference: Explanation: Category: Analyze 47. In the 1980s, the FTC followed guidelines stipulating that, should a proposed merger result in an HHI of less than 1,000, A. the FTC would probably challenge it. B. the FTC would scrutinize the proposal. C. the FTC would probably approve it. D. the FTC make a case-by-case decision. Answer: C Reference: Explanation: 48. In the 1980s, the FTC followed guidelines stipulating that, should a proposed merger result in an HHI between 1,000 and 1,800, then it would A. make a case-by-case decision on the proposal. B. probably challenge the proposal. C. probably approve the proposal. D. scrutinize the proposal prior to doing a above. Answer: D Reference: Explanation: Category: Analyze 49. Which of the following denotes a weakness that is common to both the four firm concentration ratio and the HHI? A. assuming the subject market is poorly defined relative to measuring its concentration of competition B. case-by-case analysis of the extent of competition is highly subjective. C. assuming the subject market is well-defined relative to measuring how sales are divided within it. D. case-by-case analysis of the extent of competition is highly objective. Answer: C Reference: Explanation: 50. The implicit assumption that competitive conditions across industries are similar enough to make a decision about the effects of a merger is A. fundamental to case-by-case analysis of how sales are divided in a particular market. B. fundamental to antitrust regulators for conducting case-by-case competitive analysis. C. a fundamentally sound principle found in all antitrust law. D. a weakness of the concentration ratio analysis method. Answer: D Reference: Explanation: 51. A narrowly defined market will tend to make concentration appear _________, while a broadly defined market will tend to make it appear _________. A. concerning; less concerning B. higher; smaller C. less concerning; concerning D. smaller; higher Answer: B Reference: Explanation: 52. There have been two especially important shifts in how markets are defined in recent decades: one involves _________________ and the other involves _____________. A. technology; globalization B. the Internet; technology C. communication technologies; the Internet D. globalization; communication technologies Answer: A Reference: Explanation: 53. In the US, which of the following has likely been the most influential with respect to the increased level of competition faced by many local retail businesses? A. vast improvement in communications technologies B. development of the Internet C. global business-to business websites D. globalization and all of the above Answer: D Reference: Explanation: Category: Analyze 54. Prior to the onset of deregulation in the US during the 1970s, it was common for measurements of concentration ratios and HHIs A. to exceed 1,000 B. to exceed 10,000 C. to stop at national borders. D. to extend past national borders. Answer: C Reference: Explanation: 55. Because attempting to define a particular market can be difficult and controversial the Federal Trade Commission has begun to look less at market share and more at the data on actual ______________________________. A. competition in the overall economy B. selective anti-competitive industry practices C. competition between businesses D. market definition Answer: C Reference: Explanation: 56. Currently, the approach to antitrust regulation involves A. defining a market and counting up total sales. B. market concentration ratio. C. HHI and concentration ratio. D. detailed analysis of specific markets and companies. Answer: D Reference: Explanation: 57. Today, a common starting point is for US antitrust regulators to use statistical tools and real-world evidence to_______________________ faced by firms proposing a merger of their respective businesses. A. define the market and count up total sales B. estimate the demand and supply curves C. preserve competition in certain local markets D. analyze companies and narrowly defined markets Answer: B Reference: Explanation: 58. Why would a competition regulator need details relating to how firms are competing to cut prices, raise output levels, or build a high quality reputation? A. to be able to determine and specify how competition occurs in an industry B. to build a statistical model to estimate the likely outcome of a merger C. to block mergers that would reduce competition and harm consumers D. to permit competitive mergers to proceed, as well as all of the above Answer: D Reference: Explanation: 59. The statistical models currently used by competition regulators do require some degree of ___________________, and can become the subject of ___________ between the antitrust authorities and the companies that wish to merge. A. objective judgment; legal disputes B. subjective judgment; legal disputes C. subjective judgment; expertise D. objective judgment; expertise Answer: B Reference: Explanation: 60. The application of current US antitrust law A. extends its long reach to block mergers that reduce competition. B. reaches beyond the subjective judgments of antitrust regulators. C. includes a wide arrange of anticompetitive practices. D. includes a narrow range of anticompetitive practices. Answer: C Reference: Explanation: 61. The FTC and the Department of Justice guidelines state that, in the US market-driven economy, firms will be forbidden to A. agree to rig bids or allocate lines of commerce. B. agree to let the market set prevailing prices or output. C. refuse to share customers, suppliers or territories. D. refuse to share or divide markets. Answer: A Reference: Explanation: Category: Analyze 62. Antitrust law includes specific rules against restrictive practices in particular because A. they're effective in creating natural monopolies. B. they're very disruptive and controversial practices. C. their effects can reduce competition. D. their specific contracts are complicated. Answer: C Reference: Explanation: 63. For the past two years, a cellphone manufacturer has been selling to a group of distributors, who then sell the products to retailers to sell to the general public. The firm has now informed its distributors that each of them must sell the cellphones for a minimum price the manufacturer has set. In these circumstances, A. any resulting minimum resale price maintenance agreements will be illegal. B. the purpose of this contract is to encourage competition between the distributors. C. any resulting agreement to give dealers exclusive distribution rights is illegal. D. these tie-in sales encourage competition between the manufacturer's distributors. Answer: A Reference: Explanation: Category: Analyze 64. Which of the following may be legal and even common practice in a market economy? A. making the ability to buy one product conditional on also buying another B. bundling several products together and selling them as a package C. deterring new market entrants with short term predatory pricing D. selling product for less than the average variable cost of producing same. Answer: B Reference: Explanation: 65. The most famous restrictive practices case of the last several decades involved a series of lawsuits by the U.S. government against Microsoft. These particular lawsuits were encouraged by A. all of Microsoft's competitors. B. U.S. consumers. C. some of Microsoft’s competitors. D. U.S. antitrust regulators. Answer: C Reference: Explanation: 66. The concept of restrictive practices in the U.S. market economy is ____________________. A. set out in law that remains relatively constant B. continually evolving C. useful and fair D. closed to interpretation Answer: B Reference: Explanation: 67. Which of the following poses a difficult challenge for U.S. competition policy? A. monopoly B. monopolistic competition C. perfect competition D. natural monopoly Answer: D Reference: Explanation: 68. Splitting up a the natural monopoly held by a public utility that produces and provides electricity would A. raise the total cost of production for all and force their profits to zero. B. raise the average cost of production and force consumers to pay more. C. evolve the structure of costs and demand to make competition less costly. D. evolve the structure of costs and demand to make competition more likely. Answer: B Reference: Explanation: Category: Analyze 69. A local regulator has calculated the average cost of production for the public water utility. The regulator has allowed an adjustment for the normal rate of profit the firm should expect to earn, and then set the price that consumers can be charged accordingly. In this instance, the regulator has used which of the following? A. cost-plus regulation B. cost-plus analysis C. price-cap regulation D. market-price analysis Answer: A Reference: Explanation: Category: Analyze 70. Firms operating under cost-plus regulation have an incentive to generate high costs by building huge factories or employing lots of staff, A. because doing so creates efficiencies and innovation. B. because the market changes dramatically and they have incentive to meet new demand. C. because this will reduce the firm's costs more quickly and it can make a high level of profit. D. because what they can charge is linked to the costs they incur. Answer: D Reference: Explanation: 71. The result of regulatory capture is that government price regulation can often become a way for existing competitors to work together to A. reduce output. B. limit competition. C. keep prices high. D. all of the above. Answer: D Reference: Explanation: Category: Analyze 72. Which of the following completes the argument against deregulation of U.S. banks that began with the phrase: "if banks competed to pay higher rates of interest", A. they might also compete to make riskier loans, potentially imperiling the safety of the banking system. B. they might also compete to make less riskier loans, potentially imperiling the U.S. consumers' reliance on credit. C. they will end up playing a large role in setting the regulations that they will follow. D. they will send lobbyists to offer well-paid jobs to some of the retiring members of the regulatory board Answer: A Reference: Explanation: Category: Evaluate 73. Following the commencement of deregulation of US airline industry in the 1970s, reduced airfares saved consumers billions of dollar a year however, the more recent string of airline mergers has A. government safety regulators increasing employment opportunities for safety inspectors every year. B. doubled the number of high-paying jobs in the airline industry year after year. C. raised new concerns over how competition in the industry can once again be strengthened. D. encouraged deregulators to push further and consider industries where deregulation needs are not obvious. Answer: C Reference: Explanation: Category: Analyze 74. If the U.S. electricity and the telecommunications industry are deregulated, the challenge that will need to be met will involve A. injecting competition into industries where the arguments for deregulation are not obvious. B. combining competition where possible with regulation where necessary. C. focusing on the grid of wires that bring electricity to all categories of consumers. D. plans for aiding the concealment of Enron-style antitrust activities. Answer: B Reference: Explanation: Category: Analyze 75. Norway's government nationalized the country's oil resources, and it has been accumulating a massive sovereign wealth fund worth billions of dollars ever since. This sovereign fund is used as a monetary source for government funded national education and healthcare. This is because the wealth generated by nationalized industries A. is used to serve the citizens of the country. B. is used to serve the interests of oil industry. C. always charge high prices and reduce output. D. never return value to citizens of the country. Answer: A Reference: Explanation: Category: Analyze 76. The information below sets out the estimated market shares for the cellular phone manufacturing market. Firm Market Share Nokia 36% Fujitsu 3% Kyocera 3% LG 6% Motorola 16% Samsung 6% Sanyo 4% Siemens 7% Sony Ericsson 11% Plus 8 more firms with 1% each Based on this information, the four-firm concentration ratio is A. 70 B. 68 C. 65 D. 73 Answer: A Reference: Explanation: 77. The information below sets out the estimated market shares for the cellular phone manufacturing market. Firm Market Share Nokia 36% Fujitsu 3% Kyocera 3% LG 6% Motorola 16% Samsung 6% Sanyo 4% Siemens 7% Sony Ericsson 11% Plus 8 more firms with 1% each Based on this information, the Herfindahl-Hirschman Index is A. 1,272 B. 2,216 C. 1,836 D. 1,800 Answer: C Reference: Explanation: 78. The information below sets out the estimated market shares for the cellular phone manufacturing market. Firm Market Share Nokia 36% Fujitsu 3% Kyocera 3% LG 6% Motorola 16% Samsung 6% Sanyo 4% Siemens 7% Sony Ericsson 11% Plus 8 more firms with 1% each If Samsung were to acquire Sanyo, the four-firm concentration ratio would be A. 70 B. 68 C. 65 D. 73 Answer: D Reference: Explanation: 79. The information below sets out the estimated market shares for the cellular phone manufacturing market are given in the table below. Firm Market Share Nokia 36% Fujitsu 3% Kyocera 3% LG 6% Motorola 16% Samsung 6% Sanyo 4% Siemens 7% Sony Ericsson 11% Plus 8 more firms with 1% each If Samsung were to acquire Sanyo, the Herfindahl-Hirschman Index would be A. 1,272 B. 1,884 C. 1,836 D. 2,216 Answer: B Reference: Explanation: 80. The information below sets out the estimated market revenue for the television manufacturing market is given in the table below. Firm Revenue (in millions of $) Hitachi 525 Philips/Magnavox 1,270 JVC 630 Matsushita/Panasonic 840 Mitsubishi 520 Samsung 650 Sharp 615 Sony 1,930 Toshiba 950 10 more firms 1,120 Based on this information, the four-firm concentration ratio is A. 45.3 B. 50 C. 55.1 D. 62.5 Answer: C Reference: Explanation: 81. The information below sets out the estimated market revenue for the television manufacturing market. Firm Revenue (in millions of $) Hitachi 525 Philips/Magnavox 1,270 JVC 630 Matsushita/Panasonic 840 Mitsubishi 520 Samsung 650 Sharp 615 Sony 1,930 Toshiba 950 10 more firms 1,120 Based on this information, the Herfindahl-Hirschman Index is A. 896.73 B. 1,074.04 C. 1,505.13 D. 1,742.10 Answer: B Reference: Explanation: 82. City Gas is a natural monopoly that supplies natural gas to a particular city. Its cost and demand information are given below. Quantity (Millions of therms) Price ($ per therm) Total Cost (million $) 1 48 35 2 44 64 3 38 90 4 30 113 5 20 133 6 8 150 The marginal cost of going from a production of 4 million therms to a production of 5 million therms is A. $133 million B. $113 million C. $23 million D. $20 million Answer: D Reference: Explanation: 83. City Gas is a natural monopoly that supplies natural gas to a particular city. Its cost and demand information are given below. Quantity (Millions of therms) Price ($ per therm) Total Cost (million $) 1 48 35 2 44 64 3 38 90 4 30 113 5 20 133 6 8 150 An unregulated monopoly will produce ____ million therms of natural gas and sell each therm for ____. A. 3; $38 B. 2; $44 C. 38; $3 D. 44; $2 Answer: A Reference: Explanation: 84. City Gas is a natural monopoly that supplies natural gas to a particular city. Its cost and demand information are given below. Quantity (Millions of therms) Price ($ per therm) Total Cost (million $) 1 48 35 2 44 64 3 38 90 4 30 113 5 20 133 6 8 150 An unregulated monopoly will have a ____ of ____. A. loss, $24 million B. loss, $7 million C. profit, $24 million D. profit, $7 million Answer: C Reference: Explanation: 85. City Gas is a natural monopoly that supplies natural gas to a particular city. Its cost and demand information are given below. Quantity (Millions of therms) Price ($ per therm) Total Cost (million $) 1 48 35 2 44 64 3 38 90 4 30 113 5 20 133 6 8 150 If the government decides to regulate this natural monopoly by forcing them to produce at the point where the demand curve intersects marginal cost, then the firm will make a ____ and ____ continue in the long run. A. loss of $24 million, will not B. loss of $33 million, will not C. profit of $33 million, will D. profit of $24 million, will Answer: B Reference: Explanation: 86. City Gas is a natural monopoly that supplies natural gas to a particular city. Its cost and demand information are given below. Quantity (Millions of therms) Price ($ per therm) Total Cost (million $) 1 48 35 2 44 64 3 38 90 4 30 113 5 20 133 6 8 150 If the government decides to regulate this natural monopoly by forcing them to produce at the point where the demand curve intersects average cost, then compared to the unregulated natural monopoly, the price will ____ and the quantity will ____. A. rise, rise B. rise, fall C. fall, rise D. fall, fall Answer: C Reference: Explanation: 87. JustMeInc., is the only provider of high speed internet in Tinytown. The firm charges its customers on an annual basis. The firm's cost and demand information are given below. Quantity (Millions of subscribers) Price ($ per subscriber) Total Cost (million $) 1 300 200 2 260 380 3 233.33 540 4 210 680 5 180 800 6 150 900 7 100 980 8 60 1040 An unregulated monopoly will have ____ million subscribers and charge each of them ____. A. 3; $233.33 B. 4; $210 C. 5; $180 D. 6; $150 Answer: B Reference: Explanation: 88. JustMeInc. is the only provider of high speed internet in Tinytown. The firm charges their customers on an annual basis. Its cost and demand information are given below. Quantity (Millions of subscribers) Price ($ per subscriber) Total Cost (million $) 1 300 200 2 260 380 3 233.33 540 4 210 680 5 180 800 6 150 900 7 100 980 8 60 1040 An unregulated monopoly will have profits of A. $120 million B. $140 million C. $160 million D. $180 million Answer: C Reference: Explanation: 89. JustMeInc. is the only provider of high speed internet in Tinytown. The firm charges their customers on an annual basis. Its cost and demand information are given below. Quantity (Millions of subscribers) Price ($ per subscriber) Total Cost (million $) 1 300 200 2 260 380 3 233.33 540 4 210 680 5 180 800 6 150 900 7 100 980 8 60 1040 If the government decides to regulate this natural monopoly by forcing them to sell the quantity and price where the market demand curve crosses average cost, then the market price would be A. $233.33 B. $210 C. $180 D. $150 Answer: D Reference: Explanation: Essay Questions 1. Briefly discuss the background of laws and regulations all market-based economies operate against. Reference: Explanation: All market-based economies operate against a background of laws and regulations, including laws about enforcing contracts; collecting taxes, and protecting health and the environment. 2. List the various types of U.S. government competition policies relating to market competition and public policy. Reference: Explanation: The government competition policies discussed in this chapter include: blocking certain anticompetitive mergers, ending restrictive practices, imposing price cap regulation on natural monopolies, and deregulation. 3. Briefly compare and contrast a corporate merger and a corporate acquisition. Reference: Explanation: A corporate merger involves two private firms joining together. An acquisition refers to one firm buying another firm. In either case, two formerly independent firms become one firm. 4. Briefly discuss the purpose of antitrust laws, including a brief description of how they work. Include a brief explanation of what is meant by the term "regulatory capture". Reference: Explanation: Antitrust laws seek to ensure active competition in markets, sometimes by preventing large firms from forming through mergers and acquisitions, sometimes by regulating business practices that might restrict competition, and sometimes by breaking up large firms into smaller competitors. Regulatory capture occurs when the industries being regulated end up having a strong influence over what regulations exist. 5. Briefly discuss a four-firm concentration ratio, including an explanation of what it is used for and how it is calculated. Reference: Explanation: A four-firm concentration ratio is one way of measuring the extent of competition in a market. It is calculated by adding the market shares, which is the percentage of total sales, of the four largest firms in the market. 6. Briefly discuss the Herfindahl-Hirschman Index (HHI ), including an explanation of what it is used for and how it is calculated. Reference: Explanation: A is a way of measuring the extent of competition in a market. It is calculated by taking the market shares of all firms in the market, squaring them, and then summing the total. 7. Briefly discuss the forces that have increased the level of competition faced by firms in the modern day U.S. economy and elsewhere. Reference: Explanation: The forces of globalization and new communications and information technology have increased the level of competition faced by many firms by increasing the amount of competition from other regions and countries. 8. Briefly discuss the role of antitrust authorities with respect to collusion, and identify the particular type of offence that antitrust cases involve. Reference: Explanation: In the U.S., firms are blocked by antitrust authorities from openly colluding to form a cartel that will reduce output and raise prices, many antitrust cases involve restrictive practices that can reduce competition in certain circumstances, like tie-in sales or bundling, and predatory pricing. 9. Briefly explain regulation in the case of a natural monopoly. Provide 3 common examples of regulation. Briefly discuss the benefits of privatization set out in the text and explain what is required for privatization of a nationalized asset in order for privatization to work well. Reference: Explanation: In case of a natural monopoly, market competition will not work well, and so rather than allowing an unregulated monopoly to raise price and reduce output, the government may wish to regulate price and/or output. Common examples of regulation are public utilities, the regulated firms that often provide electricity and water service. Privatization can increase the level of market competition and efficiency through the selling of previously nationalized assets to private owners. However, if privatization is to work well, it must provide incentives for a firm to be operated more efficiently, not just replace government ownership with an unregulated private monopoly. 10. Briefly compare and contrast cost-plus regulation and price cap regulation. Reference: Explanation: Cost-plus regulation refers to government regulation of a firm, which sets the price that a firm can charge over a period of time, like a year, by looking at the firm’s accounting costs and then adding a normal rate of profit. Price cap regulation refers to government regulation of a firm where the government sets a price level several years in advance, and the firm can either make high profits by producing at lower costs or selling a higher quantity than expected, or it can suffer low profits or losses by producing at higher costs or selling a lower quantity than expected.