Limiting Market Power Antitrust And Ch14 Test Bank + Answers

Indicate whether the statement is true or false.

1. Cross-subsidization implies that a loss from one product’s sales will be made up by the profit from another product’s sales.

2. The goal of all regulation is the creation of perfectly competitive markets.

3. Regulatory agencies always protect consumers by forcing regulated firms to sell at the lowest possible price.

4. Deregulation has dramatically decreased airline safety.

5. The Sherman Act was the first established antitrust law.

6. The government used the Herfindahl-Hirschman index to determine if a proposed merger will lead to excessive concentration.

7. If a firm is a natural monopoly, society will benefit if it is broken into several small companies.

8. The concept of economies of scope describes the savings acquired from simultaneous production of different products.

9. In a market with only one firm (a pure monopoly), the Herfindahl-Hirschman Index (HHI) would equal 10,000.

10. Economies of scale and scope encourage free competition.

11. Universal service means that one company provides service to all consumers, everywhere.

12. Powers of many regulatory agencies are designed to protect public health and safety.

13. Selling at a price that is only slightly above the firm’s cost of production is called predatory pricing.

14. Increasing concentration always means an industry has become effectively monopolized.

15. Firms with monopoly power tend to be more efficient than competitive firms.

16. Firms violating antitrust laws are likely to be sued by the federal government, but not by rival firms.

17. Microsoft has been accused of violating an antitrust law pertaining to bundling.

18. All large firms have monopoly power.

19. Economies of scale tend to create natural monopolies.

20. The concentration ratio of an industry is a measure that captures the share of the industry’s total output that is produced by its four largest firms.

21. Antitrust laws prohibit undesirable business practices by firms holding monopoly power.

22. The antitrust laws are sometimes used by companies to reduce competition in their markets rather than enhance it.

23. If an industry consists of five firms each with a 20 percent market share, then the Herfindahl-Hirschman index would equal 1,600.

24. Monopoly rights give inventors and entrepreneurs incentives to innovate and create new products and services.

25. Economies of scope are present when a bank also sells insurance and provides brokerage services for stocks and bonds.

26. Deregulation has led to higher prices.

27. Many industries are regulated in the United States, from railroads and electric utilities to cable TV.

28. Market power allows firms to raise prices significantly above the competitive level.

29. Regulated industries that exhibit economies of scale and marginal cost pricing will lead to losses.

30. Unrestrained monopolies are criticized because they restrict output and reduce innovation.

31. Airline deregulation led to the demise of many smaller airlines but large carriers were not materially affected.

32. The “universal service” argument often requires that some products be sold at a loss while other products be sold at profits higher than normal.

33. It is easy to discern the difference between vigorous competition and the exercise of monopoly power.

34. Firms that coordinate economic activities to reduce competition is considered illegal per se.

35. Many regulated industries are not pure monopolies.

36. The Clayton Act prohibits “all contracts, combinations and conspiracies in restraint of trade.”

37. One economically valid approach to regulation is simply to break all large firms into many smaller ones.

38. The most important advantages of bigness will be found in industries that show increasing returns to scale.

39. Google’s 88 percent market share of web search services makes it a monopolist.

40. Service to consumers of deregulated products has generally not diminished.

41. Beginning in the mid-1970s, Congress deregulated several industries including airlines and trucking.

42. Economists believe mergers can sometimes achieve greater efficiency than two companies that do not merge.

43. By definition, an industry with high concentration also is highly competitive.

44. Bottlenecks may force competitors to offer services within the same network.

45. Economists ordinarily favor setting price equal to marginal cost when this option is feasible.

46. Regulation of industry is usually carried out by special government agencies that administer and interpret the law.

47. A concentration ratio provides a better assessment of market power than the Herfindahl-Hirschman index does.

48. The antitrust laws are enforced by government agencies such as the Federal Trade Commission and the Department of Justice.

49. Deregulation of the airline and trucking industries was followed by the creation of many new firms.

50. From 1992 to 2012, many industries have increased in concentration.

51. Regulation began in the United States in the 1950s.

52. In most industries, deregulation has led to lower prices.

53. Regulating firms so that they always receive a guaranteed profit rate will lead to greatest efficiency.

54. In regulated industries, the optimal regulation is to set price such that MC=P.

55. Universal service may require making a service available in small communities where the limited scale of operations may make costs extremely high.

56. Monopoly pricing reduces consumer surplus.

57. An exclusive supply contract is a contract between a firm and its input suppliers that requires the suppliers to sell only to that firm, not anyone else.

58. Major firms charged with predatory pricing defend by saying that their prices are low because of superior efficiency.

59. The Department of Justice and the Federal Trade Commission enforce antitrust laws.

60. Serious concern for deregulation began to appear in Congress in the 1970s.

61. Prices that maximize the public interest will always allow reasonable profits for firms.

62. Highly concentrated markets have a large number of price-taking firms.

Indicate the answer choice that best completes the statement or answers the question.

63. Government agencies may fail to identify anticompetitive behavior if 

64. Price discrimination by a firm is

65. Railroads have received significant attention from regulators because

66. A home appliances supplier offers substantial discounts to customers if they buy several of the firm’s products. When bought together, these items cost considerably less than the sum of the prices of the items if they were bought separately. Which pricing arrangement is being discussed here?

67. Which of the following would not lead to higher concentration in an industry?

68. Archer Daniels Midland (ADM) was convicted for this anticompetitive practice in the lysine market.

69. Which form of price regulation increases consumer well-being and allows the firm to stay in business?

70. Under a tying contract,

71. Economies of scope are savings acquired by

72. Which of the following would not occur if all large firms in the economy were broken into smaller firms?

73. Looking at the record of concentration in the United States from 1992 to 2012, one finds concentration has

74. If the four-firm concentration ratio in an industry increases, the industry

75. A regulatory agency that requires a firm to provide “universal service” must

76. What would the Herfindahl-Hirschman Index equal for an industry consisting of 20 firms with each holding a 5 percent market share?

77. Following deregulation in the airline industry,

78. Before the breakup of AT&T several years ago, profits on long-distance calls offset losses on basic residential service. This practice is known as

79. For the two industries with market shares listed below, which of the following would be true?

Table 14-1

80. When firms have had to defend themselves against the charge that they have adopted unjustifiably low prices either to drive a competitor out of business or to prevent the entry of a rival, they have been accused of

81. The Justice Department and the Federal Trade Commission are likely to oppose mergers

82. Policies that preclude the deliberate creation of monopoly and undesirable practices are called

83. Following mergers that raised the market shares of two airlines to 79 and 82 percent, respectively, of traffic in their hub cities, prices of service rose and the quantities of service fell, even though in most other markets, prices fell and quantities increased. The result suggests that 

84. Which statement about market power is incorrect?

85. “Economies of scope” occur when

86. What would the Herfindahl-Hirschman Index equal for an industry consisting of six firms with market shares of 5 percent, 10 percent, 15 percent, 20 percent, 25 percent, and 25 percent?

87. If a firm’s average cost is declining, setting price equal to marginal cost will

88. When one firm can supply many goods through simultaneous production at higher savings,

89. Modern antitrust policy began in response to

90. As an apparent result of airline deregulation,

91. The prices that are in the public’s best interest will

92. The government considers a market to be unconcentrated if its HHI number is less than ____, and highly concentrated if that number exceeds ____.

93. When it is cheaper for one firm to produce a particular product, ____ exist(s).

94. What is not a limitation of antitrust legislation?

95. Unions typically ____ deregulation because it generally makes pricing ____ competitive.

96. What does the Herfindahl-Hirschman Index value near 10,000 imply about the market?

97. If there are strong economies of scale and scope, then society

98. The Department of Justice generally

99. Regulators often raise prices instead of lowering them. This is designed to

100. Which is not considered an “anticompetitive practice”?

101. Which of the following acts prohibited false advertising?

102. In many regulated industries, marginal cost will be

103. One reason regulators push for higher prices in an industry is to

104. Economies of scale imply: (i) a continuously falling AC curve or (ii) a larger output is more efficient than a smaller output.

105. “Cream skimming” usually results in

106. The Herfindahl-Hirschman Index measures

107. Airline deregulation has led to (i) lower prices or (ii) a deterioration of service to isolated communities.

108. Average cost pricing is permitted

109. What does the Herfindahl-Hirschman Index value near zero imply about the market?

110. Which of the following acts prohibits directors of one company from sitting on the board of a competitor?

111. Which of the following events would increase the four-firm concentration ratio in a milk industry with six firms?

112. What is not true if a firm exhibits decreasing average cost as quantity increases?

113. Bigness, or large firms, may benefit consumers in which of the following ways?

114. A firm that charges a very low price would be practicing predatory pricing if

115. What would the Herfindahl-Hirschman Index equal for an industry consisting of six firms with market shares of 40 percent, 30 percent, 20 percent, 5 percent, 3 percent, and 2 percent?

116. Regulatory capture exists when

117. The federal government has the power to investigate and to try to block

118. Regulating an industry to remove all economic profit

119. Deregulation of the airline and trucking industry has (i) resulted in considerable entry of new firms or (ii) has forced workers in these industries to make large concessions on wages and working conditions.

120. Changes in the rate charged by electric power companies are subject to government control because

121. Critics of price regulation suggest that some firms

122. Which of the following acts prohibited predatory pricing?

123. The federal government is most likely to oppose

124. What is defined as the ability of a firm to earn high profits by raising and keeping the prices of its products substantially above the levels at which those products would be priced in competitive markets?

125. The current deregulatory movement began to change laws to deregulation in the

126. What is not an effect of deregulation in the airline and trucking industries?

127. Microsoft is accused of which anticompetitive practice?

128. The four-firm concentration ratio for an industry is

129. Setting price equal to marginal cost in a natural monopoly will lead to

130. The share of industry output sold by the top four steel producers in the country are 19 percent, 15 percent, 12 percent, and 9 percent, respectively. The four-firm concentration ratio for the steel industry is

131. Which of the following is a valid effect of monopoly power?

132. Firm A’s motive in filing an antitrust suit against Firm B may be to

133. When it is cheaper for one firm to produce a number of different commodities together than it is for a group of small firms to produce those commodities, ____ exist(s).

134. ____ occur(s) when an X percent increase in input use raises output by more than X percent, so that the more the firm produces, the lower its per-unit costs become.

135. If the automobile industry has become highly concentrated and cartelized. To maintain profits, firms may

136. A monopoly firm operates with declining average cost. If regulators impose marginal cost pricing, the market will

137. Compare the advantages and disadvantages of marginal and average cost pricing for natural monopolies.

138. Economists cite some beneficial effects of price discrimination. What are these benefits and how do the antitrust laws treat price discrimination?

139. Briefly review the history of antitrust legislation in the United States.

140. The Antitrust Division of the Department of Justice carefully scrutinizes mergers. Why?

141. While monopoly power can be abused, it can also be used beneficially. What are the major pros and cons of largeness in business?

142. Consider an industry consisting of four firms with market shares of 30 percent, 25 percent, 25 percent, and 20 percent. Calculate the Herfindahl Hirschman Index and interpret your result.

143. Discuss the advantages of the Herfindahl-Hirschman Index compared with the four-firm concentration ratio.

144. Why are the prices of some regulated industries often higher than they would be if there were no regulation?

145. Discuss some of the reasons why monopoly power is considered undesirable.

146. Explain why firms that enjoy economies of scale or scope are candidates for regulation.

147. The declared purpose of antitrust policy is to promote competition, yet some would say it actually may prevent competition. Explain the two sides of the debate.

148. Why is regulation necessary to achieve “universal service“?

149. Briefly and concisely define the following terms:

150. List appropriate criteria for deciding whether a merger of two firms producing similar products should be permitted.

151. Define the following terms and explain their importance to the study of economics:

152. What are the reasons that are usually given to justify regulation?

153. On balance, does market power promote or retard technological innovation?

154. List and discuss the importance of the major effects of the deregulation that occurred in the 1980s.

155. Distinguish between predatory pricing strategy and bundling strategy.