Foundations of Economics, 3e (Bade/Parkin) - Testbank 1
Chapter 17 Regulation and Antitrust Law
1) Regulation consists of rules administered by ____ to influence economic activity by determining prices,
product standards and types, and the conditions in which firms may enter an industry.
A) the Supreme Court
B) the Senate
C) the President
D) government agencies
E) the states
Answer: D
Topic: Regulation
Skill: Level 1: Definition
Objective: Checkpoint 17.1
Author: JC
2) When a government agency establishes rules to influence economic activity, this process is referred to as
A) regulation.
B) public interest theory.
C) capture theory.
D) deregulation.
E) a natural monopoly.
Answer: A
Topic: Regulation
Skill: Level 1: Definition
Objective: Checkpoint 17.1
Author: PH
3) If a utility company has to ask the Public Service Commission for a rate increase, the utility company
i. is a perfectly competitive firm.
ii. is regulated.
iii. definitely is not making an economic profit.
A) i only.
B) ii only.
C) iii only.
D) i and ii.
E) ii and iii.
Answer: B
Topic: Regulation
Skill: Level 1: Definition
Objective: Checkpoint 17.1
Author: SA
4) When a government agency removes the restrictions on prices, product standards and types, and the
conditions under which firms can enter an industry, it is referred to as
A) regulation.
B) deregulation.
C) anti-trust.
D) underallocation.
E) post-regulation.
Answer: B
Topic: Deregulation
Skill: Level 1: Definition
Objective: Checkpoint 17.1
Author: PH
5) Deregulation is defined as the
A) use of government rules to regulate business activity.
B) implementation of industry-wide restrictions on prices.
C) theory of businesses maximizing profits with government assistance.
D) removal of restrictions on business activities.
E) change from public interest to the capture theory of regulation.
Answer: D
Topic: Deregulation
Skill: Level 1: Definition
Objective: Checkpoint 17.1
Author: WM
6) The first national regulatory agency, set up in 1887, was the
A) Federal Trade Commission.
B) Interstate Commerce Commission.
C) Federal Reserve Bank.
D) Public Service Commission.
E) Atomic Energy Commission.
Answer: B
Topic: History of regulation
Skill: Level 1: Definition
Objective: Checkpoint 17.1
Author: SA
7) The first national regulatory agency to be set up in the United States was the
A) Environmental Protection Agency.
B) Interstate Commerce Commission.
C) Food and Drug Administration.
D) Federal Aviation Administration.
E) Federal Reserve System.
Answer: B
Topic: History of regulation
Skill: Level 1: Definition
Objective: Checkpoint 17.1
Author: JC
8) The purpose of the first federal regulatory agency in the United States was to
A) assure food safety.
B) assure airplane safety.
C) control prices and routes of railroads.
D) measure the efficacy of new drugs.
E) assure the safety of atomic energy plants.
Answer: C
Topic: History of regulation
Skill: Level 2: Using definitions
Objective: Checkpoint 17.1
Author: WM
9) By the 1970s approximately what percentage of the economy was subject to some form of regulation?
A) 10 percent
B) 25 percent
C) 3 percent
D) 17 percent
E) 67 percent
Answer: B
Topic: History of regulation
Skill: Level 1: Definition
Objective: Checkpoint 17.1
Author: JC
10) Regulations over economic activity peaked during what time period?
A) the 1990s
B) the 1930s
C) the 1970s
D) the 1940s
E) the 1900s
Answer: C
Topic: History of regulation
Skill: Level 1: Definition
Objective: Checkpoint 17.1
Author: JC
11) Regulation of businesses in the United States can best be described as beginning in the
A) late 1960s and growing steadily over the next 40 years.
B) early 1900s and growing steadily over the next 80 years.
C) 1930s and growing in spurts over the next 70 years.
D) late 1800s and growing in spurts until the 1970s after which it has begun to move toward more
deregulation.
E) 1930s and growing in spurts until the 1970s after which it has grown more steadily.
Answer: D
Topic: History of regulation
Skill: Level 2: Using definitions
Objective: Checkpoint 17.1
Author: WM
12) The recent U.S .regulatory history from the 1970s onward can best be described as
A) heavy regulation in the 1970s with deregulation afterward.
B) heavy regulation in the 1970s with deregulation in the 1980s and re-regulation in the 1990s and 2000s.
C) deregulation in the 1970s with re-regulation afterward.
D) deregulation in the 1970s with re-regulation in the 1980s and deregulation in the 1990s and 2000s.
E) continued increases in heavy regulation.
Answer: A
Topic: History of regulation
Skill: Level 2: Using definitions
Objective: Checkpoint 17.1
Author: WM
13) A regulatory agency gets its operating budget from
A) fines levied by firms caught breaking the law.
B) Congress or state legislatures.
C) private citizens who care about the regulatory process.
D) products such as T-shirts and coffee mugs that they sell bearing their logos.
E) taxes levied on the regulated firms.
Answer: B
Topic: Regulatory process
Skill: Level 2: Using definitions
Objective: Checkpoint 17.1
Author: WM
14) Which of the following is NOT a common part of the regulatory process?
i. appointments of people who run the regulatory agencies by the
Administration, Congress, and state and local governments
ii. price controls set by regulatory agencies
iii. regulatory determination of the production technology
iv. the establishment of operating rules for business firms
A) i only.
B) ii and iv.
C) iii only.
D) i, ii, and iii.
E) ii, iii, and iv.
Answer: C
Topic: Regulatory process
Skill: Level 2: Using definitions
Objective: Checkpoint 17.1
Author: JC
15) The public interest theory of regulation is defined as the
A) use of regulations to maximize firms' profits.
B) use of regulations to assure an efficient use of resources.
C) removal of regulations on business activities.
D) implementation and removal of regulations on the cable TV industry.
E) use of rate of return regulation.
Answer: B
Topic: Public interest theory
Skill: Level 1: Definition
Objective: Checkpoint 17.1
Author: WM
16) The public interest theory of regulation is that
A) regulators help producers maximize economic profit.
B) regulation seeks to increase the government's revenue.
C) regulation causes producers to produce at a point where they are earning normal profits.
D) regulation seeks an efficient use of resources.
E) regulation focuses on the consumers' interests and ignores producers' interests.
Answer: D
Topic: Public interest theory
Skill: Level 1: Definition
Objective: Checkpoint 17.1
Author: PH
17) Efforts by the government to regulate a firm and bring the price down to competitive levels
A) reduces the consumer surplus.
B) creates more deadweight loss.
C) is what the public interest theory of regulation predicts regulators will do.
D) is what the capture theory of regulation predicts regulators will do.
E) is why rate of return regulation is considered the most efficient type of regulation.
Answer: C
Topic: Public interest theory
Skill: Level 2: Using definitions
Objective: Checkpoint 17.1
Author: SA
18) The public interest theory of regulation asserts that the purpose of regulating a natural monopoly is to
i. minimize the deadweight loss created by a monopoly.
ii. maximize economic profit.
iii. minimize consumer surplus.
A) i only.
B) ii and iii.
C) iii only.
D) i and ii.
E) ii only.
Answer: A
Topic: Public interest theory
Skill: Level 3: Using models
Objective: Checkpoint 17.1
Author: SA
19) The theory that regulation helps producers to maximize profit is the
A) public interest theory.
B) consumer surplus theory.
C) antitrust theory.
D) capture theory.
E) oligopoly theory of regulatory bodies.
Answer: D
Topic: Capture theory
Skill: Level 1: Definition
Objective: Checkpoint 17.1
Author: JC
20) The capture theory of regulation is that regulations
A) help producers to maximize economic profits.
B) mean producers suffer losses.
C) result in diseconomies of scale.
D) benefit society, not producers.
E) benefit the regulators, not the producers or the consumers.
Answer: A
Topic: Capture theory
Skill: Level 1: Definition
Objective: Checkpoint 17.1
Author: PH
21) The capture theory of regulation predicts that
A) regulation helps producers to maximize profits.
B) regulators capture the firm's economic profit and transfer it to consumers as consumer surplus.
C) regulators eliminate the deadweight loss a monopoly can create.
D) resources are used efficiently.
E) regulators capture the firm's economic profit and transfer it to themselves.
Answer: A
Topic: Capture theory
Skill: Level 1: Definition
Objective: Checkpoint 17.1
Author: SA
22) The capture theory of regulation is defined as
A) the use of regulations to assure the efficient use of resources.
B) the constant reapplication of regulation on the cable TV industry.
C) the use of regulation to assist producers to maximize profits.
D) the removal of regulations on business activities.
E) regulation that focuses on consumers' interests and ignores producers' interests.
Answer: C
Topic: Capture theory
Skill: Level 1: Definition
Objective: Checkpoint 17.1
Author: WM
23) If the capture theory of regulation is correct, then
A) a marginal cost pricing rule is used to ensure maximum profits.
B) an average cost pricing rule is used to ensure an efficient output.
C) the regulators let the firm produce where marginal cost equals marginal revenue to ensure maximum
profits.
D) subsidies are used to allow marginal cost pricing without an economic loss.
E) regulation seeks an efficient use of resources.
Answer: C
Topic: Capture theory
Skill: Level 2: Using definitions
Objective: Checkpoint 17.1
Author: WM
24) A natural monopoly exists when
A) diseconomies of scale exist in an industry.
B) one firm can supply an entire market at a lower average total cost than can two or more firms.
C) a firm can engage in price discrimination.
D) the producers in an industry have formed a cartel.
E) a monopoly firm faces a horizontal demand curve.
Answer: B
Topic: Natural monopoly
Skill: Level 1: Definition
Objective: Checkpoint 17.1
Author: PH
25) A natural monopoly is one that arises from
A) patent law.
B) economies of scale.
C) copyright law.
D) any government-imposed barrier to entry.
E) mergers.
Answer: B
Topic: Natural monopoly
Skill: Level 1: Definition
Objective: Checkpoint 17.1
Author: JC
26) Which of the following is an example of a natural monopoly?
A) the Pittsburgh Penguins hockey team, a National Hockey League team
B) General Motors, the large automobile producing company
C) Florida Power and Light, an electric utility in Florida
D) Sony, the Japanese producer of the Playstation III
E) JCPenney, the large department store chain
Answer: C
Topic: Natural monopoly
Skill: Level 2: Using definitions
Objective: Checkpoint 17.1
Author: JC
27) With a natural monopoly
A) no regulation is necessary because it is a natural monopoly.
B) regulation takes the form of forcing competition from new firms.
C) regulation takes the form of forcing the company out of business.
D) regulation can take the form of average cost pricing to allow coverage of costs.
E) regulation takes the form of breaking the company into several competing firms.
Answer: D
Topic: Natural monopoly
Skill: Level 2: Using definitions
Objective: Checkpoint 17.1
Author: WM
28) A natural monopoly's average cost curve
i. intersects the demand curve while the average cost curve slopes downward.
ii. reaches its minimum before it intersects the demand curve.
iii. intersects the demand curve below the intersection of the marginal cost curve and the demand curve.
A) i only.
B) ii only.
C) iii only.
D) i and iii.
E) i, ii, and iii.
Answer: A
Topic: Natural monopoly
Skill: Level 2: Using definitions
Objective: Checkpoint 17.1
Author: SA
29) A firm that is a natural monopoly
A) can supply the entire market at a lower cost than two or more firms.
B) has very small fixed costs and very large marginal costs.
C) is infrequently regulated because having one firm serve the market is economically sound.
D) cannot make an economic profit if it is not regulated because it must serve a very large customer base.
E) produces the efficient quantity of output when it is not regulated.
Answer: A
Topic: Natural monopoly
Skill: Level 2: Using definitions
Objective: Checkpoint 17.1
Author: SA
30) For a regulated natural monopoly, the marginal cost pricing rule is a rule that sets price ____ marginal cost
and achieves an ____ amount of output.
A) equal to; efficient
B) above; inefficient
C) below; efficient
D) equal to; inefficient
E) above; efficient
Answer: A
Topic: Natural monopoly, marginal cost pricing rule
Skill: Level 1: Definition
Objective: Checkpoint 17.1
Author: JC
31) A marginal cost pricing rule sets marginal cost equal to
A) minimum average variable cost.
B) price.
C) average cost.
D) marginal revenue.
E) the smaller of price or marginal revenue.
Answer: B
Topic: Natural monopoly, marginal cost pricing rule
Skill: Level 1: Definition
Objective: Checkpoint 17.1
Author: PH
32) If a natural monopoly is regulated using
A) a marginal cost pricing rule, the firm maximizes its profit.
B) an average cost pricing rule, the firm incurs an economic loss.
C) a total cost pricing rule, the firm will exit the industry.
D) a marginal cost pricing rule, the firm incurs an economic loss.
E) an average cost pricing rule, the firm maximizes its profit.
Answer: D
Topic: Natural monopoly, marginal cost pricing rule
Skill: Level 2: Using definitions
Objective: Checkpoint 17.1
Author: WM
33) Under a marginal cost pricing rule, a natural monopoly
A) earns a reasonable profit.
B) earns large economic profits.
C) earns accounting profits, but breaks even in economic terms.
D) incurs an economic loss.
E) earns a normal profit but it cannot be determined whether or not it earns an accounting profit.
Answer: D
Topic: Natural monopoly, marginal cost pricing rule
Skill: Level 2: Using definitions
Objective: Checkpoint 17.1
Author: JC
34) To achieve efficiency in a market served by a natural monopoly, the regulatory agency must
i.
use an average cost pricing rule
ii. require the firm to charge a price equal to marginal cost.
iii. allow the firm to maximize its profit.
A) i only.
B) ii only.
C) iii only.
D) i and ii.
E) ii and iii.
Answer: B
Topic: Natural monopoly, marginal cost pricing rule
Skill: Level 2: Using definitions
Objective: Checkpoint 17.1
Author: SA
35) For a natural monopoly, the efficient quantity is produced when
A) P = ATC.
B) P > ATC.
C) P = MC.
D) P > MC.
E) P < MC.
Answer: C
Topic: Natural monopoly, marginal cost pricing rule
Skill: Level 2: Using definitions
Objective: Checkpoint 17.1
Author: SA
36) Regulated natural monopolies can obey a marginal cost pricing rule and still earn a normal profit by
engaging in
A) least cost pricing and average cost pricing.
B) price discrimination and two-part tariff pricing.
C) zero profit pricing.
D) profit-maximizing pricing.
E) None of the above answers is correct because a natural monopoly regulated using a marginal cost
pricing rule always incurs an economic loss.
Answer: B
Topic: Natural monopoly, marginal cost pricing rule
Skill: Level 2: Using definitions
Objective: Checkpoint 17.1
Author: PH
37) If a regulatory agency sets the price equal to marginal cost for a natural monopoly, the
A) government might have to provide a subsidy to the firm to keep it in business.
B) price is the same as the unregulated monopoly price.
C) firm earns an economic profit, though not the maximum economic profit.
D) firm earns the maximum economic profit.
E) firm earns a normal profit.
Answer: A
Topic: Natural monopoly, marginal cost pricing rule
Skill: Level 3: Using models
Objective: Checkpoint 17.1
Author: SA
38) A natural monopoly's output is less if it faces
A) a marginal cost pricing rule than if it is unregulated.
B) an average cost pricing rule than if it is unregulated.
C) an average cost pricing rule than if it faces a marginal cost pricing rule.
D) a marginal cost pricing rule than if it faces an average cost pricing rule.
E) More information about the firm's demand is needed to determine how its output depends on what
pricing rule it faces.
Answer: C
Topic: Natural monopoly, marginal cost and average cost pricing rules
Skill: Level 2: Using definitions
Objective: Checkpoint 17.1
Author: WM
39) If we compare regulating a natural monopoly using marginal cost pricing to that using average cost pricing,
we see that output is
A) greater with marginal cost pricing but average cost pricing allows for costs to be covered.
B) the same under both cases but the profit is greater with average cost pricing.
C) greater under average cost pricing but profits are greater with marginal cost pricing.
D) the same but profits are greater with marginal cost pricing.
E) greater with marginal cost pricing and the firm's profit is larger with marginal cost pricing.
Answer: A
Topic: Natural monopoly, marginal cost and average cost pricing rules
Skill: Level 3: Using models
Objective: Checkpoint 17.1
Author: WM
40) When a firm is regulated so it uses an average cost pricing rule, the price
A) exceeds average total cost.
B) equals marginal cost.
C) is less than marginal cost.
D) equals average total cost.
E) equals marginal revenue.
Answer: D
Topic: Natural monopoly, average cost pricing rule
Skill: Level 1: Definition
Objective: Checkpoint 17.1
Author: PH
41) An average cost pricing rule is a rule that sets price ____ average total cost to enable a regulated firm to cover
its costs.
A) slightly above
B) far above
C) below
D) equal to
E) None of the above answers is correct because an average cost pricing rule does not have any
relationship between the price and the average total cost.
Answer: D
Topic: Natural monopoly, average cost pricing rule
Skill: Level 1: Definition
Objective: Checkpoint 17.1
Author: JC
42) With an average cost pricing rule, the total output of a natural monopoly is ____ the total output that occurs
with a marginal cost pricing rule.
A) greater than
B) less than
C) equal to
D) greater than in the long run and less than in the short run than
E) not comparable to
Answer: B
Topic: Natural monopoly, average cost pricing rule
Skill: Level 1: Definition
Objective: Checkpoint 17.1
Author: JC
43) The above figure represents the market for cable television in Oakland, Florida. Time Warner
Communications (TWC) is the sole provider of cable television to the residents of this Central Florida
community. If TWC is left unregulated, how many households in Oakland are served?
A) 20,000
B) 30,000
C) 40,000
D) 50,000
E) 10,000
Answer: A
Topic: Natural monopoly, marginal cost pricing rule
Skill: Level 3: Using models
Objective: Checkpoint 17.1
Author: MR
44) The above figure represents the market for cable television in Oakland, Florida. Time Warner
Communications (TWC) is the sole provider of cable television to the residents of this Central Florida
community. If TWC is left unregulated, what is the price of cable television in Oakland?
A) $40
B) $30
C) $20
D) $10
E) $50
Answer: B
Topic: Natural monopoly, average cost pricing rule
Skill: Level 3: Using models
Objective: Checkpoint 17.1
Author: MR
45) The above figure represents the market for cable television in Oakland, Florida. Time Warner
Communications (TWC) is the sole provider of cable television to the residents of this Central Florida
community. If TWC operated under a marginal cost pricing rule, how many households in Oakland are
served?
A) 20,000
B) 30,000
C) 40,000
D) 50,000
E) 10,000
Answer: C
Topic: Natural monopoly, marginal cost pricing rule
Skill: Level 3: Using models
Objective: Checkpoint 17.1
Author: JC
46) The above figure represents the market for cable television in Oakland, Florida. Time Warner
Communications (TWC) is the sole provider of cable television to the residents of this Central Florida
community. If TWC operated under a marginal cost pricing rule, what is the price of cable television in
Oakland?
A) $40
B) $30
C) $20
D) $10
E) $0
Answer: D
Topic: Natural monopoly, marginal cost pricing rule
Skill: Level 3: Using models
Objective: Checkpoint 17.1
Author: JC
47) The above figure represents the market for cable television in Oakland, Florida. Time Warner
Communications (TWC) is the sole provider of cable television to the residents of this Central Florida
community. If TWC operated under an average cost pricing rule, how many households in Oakland are
served?
A) 20,000
B) 30,000
C) 40,000
D) 50,000
E) None of the above answers is correct.
Answer: B
Topic: Natural monopoly, marginal cost pricing rule
Skill: Level 3: Using models
Objective: Checkpoint 17.1
Author: JC
48) The above figure represents the market for cable television in Oakland, Florida. Time Warner
Communications (TWC) is the sole provider of cable television to the residents of this Central Florida
community. If TWC operated under an average cost pricing rule, what is the price of cable television in
Oakland?
A) $40
B) $30
C) $20
D) $10
E) $50
Answer: C
Topic: Natural monopoly, average cost pricing rule
Skill: Level 3: Using models
Objective: Checkpoint 17.1
Author: JC
49) The above figure represents the market for cable television in Oakland, Florida. Time Warner
Communications (TWC) is the sole provider of cable television to the residents of this Central Florida
community. Compared to a marginal cost pricing rule, under an average cost pricing rule, TWC ____ output
by ____ households.
A) increases; 20,000
B) decreases; 10,000
C) increases; 30,000
D) decreases; 50,000
E) decreases; 40,000
Answer: B
Topic: Natural monopoly, marginal cost and average cost pricing rule
Skill: Level 3: Using models
Objective: Checkpoint 17.1
Author: JC
50) A regulation that sets the price at a level that enables a regulated firm to earn a specified target percent
return on its capital is called
A) consumer surplus regulation.
B) producer surplus regulation.
C) capital regulation.
D) rate of return regulation.
E) rate of profit regulation.
Answer: D
Topic: Natural monopoly, rate of return regulation
Skill: Level 1: Definition
Objective: Checkpoint 17.1
Author: JC
51) Rate of return pricing
A) forces regulated firms to suffer losses.
B) allows regulated firms to set price equal to marginal cost.
C) forces regulated firms to use marginal cost pricing.
D) allows a regulated firm to earn a specified target rate of return.
E) allows a regulated firm to choose whether it will be regulated using a marginal cost pricing rule or an
average cost pricing rule.
Answer: D
Topic: Natural monopoly, rate of return regulation
Skill: Level 1: Definition
Objective: Checkpoint 17.1
Author: PH
52) A natural monopoly
A) faces more competition after regulation.
B) might exaggerate its costs if it is regulated using rate of return regulation.
C) might falsely minimize its costs if it is regulated using rate of return regulation.
D) might falsely minimize its costs if it is regulated using a marginal cost pricing rule.
E) is allowed to maximize its profit under a marginal cost pricing rule.
Answer: B
Topic: Natural monopoly, rate of return regulation
Skill: Level 2: Using definitions
Objective: Checkpoint 17.1
Author: SA
53) One of the tendencies that is common among firms regulated using rate of return regulation is to
A) increase production to an inefficient level.
B) exaggerate the costs of production.
C) incur losses.
D) understate the costs of production.
E) overstate their total revenue.
Answer: B
Topic: Natural monopoly, rate of return regulation
Skill: Level 2: Using definitions
Objective: Checkpoint 17.1
Author: JC
54) If a natural monopoly exaggerates its costs, then
A) it earns a normal profit.
B) its average cost curve shifts downward.
C) with rate of return regulation, the price it is allowed to charge rises.
D) with price cap regulation, the price it is allowed to charge rises.
E) the firm definitely incurs an economic loss.
Answer: C
Topic: Natural monopoly, rate of return regulation
Skill: Level 2: Using definitions
Objective: Checkpoint 17.1
Author: SA
55) Regulation that motivates firms to reduce costs so that they can make and keep all or part of an economic
profit is called
A) price cap regulation.
B) exaggerated cost regulation.
C) capturing the regulator.
D) rate of return regulation.
E) marginal profit regulation.
Answer: A
Topic: Price cap regulation
Skill: Level 1: Definition
Objective: Checkpoint 17.1
Author: SA
56) Price cap regulation is defined as regulation that
A) motivates the firm to operate efficiently and keep costs under control.
B) encourages firms to exaggerate costs to increase profits.
C) uses marginal cost pricing to ensure efficient output.
D) uses average cost pricing to ensure costs are covered.
E) is essentially the same as rate of return regulation.
Answer: A
Topic: Price cap regulation
Skill: Level 1: Definition
Objective: Checkpoint 17.1
Author: WM
57) Price cap regulation
A) does not provide incentives to firms to minimize their costs because firms cannot change prices.
B) sets the maximum price these firms can charge.
C) gives firms the incentive to exaggerate their costs.
D) Both answers A and C are correct.
E) Both answers A and B are correct.
Answer: B
Topic: Price cap regulation
Skill: Level 2: Using definitions
Objective: Checkpoint 17.1
Author: SA
58) Under earnings-sharing regulation, if a firm's profits ____ above a certain level, they must be shared with the
firm's ____.
A) rise; customers
B) fall; customers
C) rise; suppliers
D) fall; suppliers
E) rise; competitors
Answer: A
Topic: Price cap regulation
Skill: Level 1: Definition
Objective: Checkpoint 17.1
Author: JC
59) A cartel is a collusive agreement among a number of firms that is designed to
A) expand output and lower prices but not to a predatory level.
B) restrict output and lower prices to a predatory level.
C) restrict output and raise prices.
D) expand output and raise prices.
E) expand output and lower prices to a predatory level.
Answer: C
Topic: Cartel regulation
Skill: Level 1: Definition
Objective: Checkpoint 17.1
Author: JC
60) If public interest regulation is used to regulate an oligopoly,
A) it is done so in order to insure that the oligopoly is able to maximize profits.
B) the output is equal to the monopoly output.
C) the output is equal to the perfectly competitive output.
D) producer's interests will be met.
E) the output is the same as if the industry was not regulated.
Answer: C
Topic: Cartel regulation
Skill: Level 2: Using definitions
Objective: Checkpoint 17.1
Author: SA
61) Regulation over the taxicab industry in New York City is designed to maintain a safe fleet of cabs and a highquality pool of drivers by limiting the number of cabs. Ignoring the presence of illegal cabs, the consequences
of this regulation have been to ____ cab fares and ____ the number of cabs rides per day.
A) raise; increase
B) raise; decrease
C) lower; increase
D) lower; decrease
E) raise; not change
Answer: B
Topic: Cartel regulation
Skill: Level 5: Critical thinking
Objective: Checkpoint 17.1
Author: JC
62) Suppose the government decides to re-regulate the airline market. The above figure represents a possible
situation at the Ronald Reagan International Airport in Washington, D.C. Under producer interest
regulation, how many flights leave this airport each day?
A) 0
B) 400
C) 600
D) 1,000
E) 800
Answer: B
Topic: Cartel regulation
Skill: Level 3: Using models
Objective: Checkpoint 17.1
Author: JC
63) Suppose the government decides to re-regulate the airline market. The above figure represents a possible
situation at the Ronald Reagan International Airport in Washington, D.C. Under producer interest
regulation, what is the average price per flight?
A) $1,000
B) $600
C) $400
D) $200
E) $800
Answer: B
Topic: Cartel regulation
Skill: Level 3: Using models
Objective: Checkpoint 17.1
Author: JC
64) Suppose the government decides to re-regulate the airline market. The above figure represents a possible
situation at the Ronald Reagan International Airport in Washington, D.C. Under public interest regulation,
how many flights leave this airport each day?
A) 0
B) 400
C) 600
D) 1,000
E) 800
Answer: C
Topic: Cartel regulation
Skill: Level 3: Using models
Objective: Checkpoint 17.1
Author: JC
65) Suppose the government decides to re-regulate the airline market. The above figure represents a possible
situation at the Ronald Reagan International Airport in Washington, D.C. Under public interest regulation,
what is the average price per flight?
A) $1,000
B) $600
C) $400
D) $200
E) $0
Answer: C
Topic: Cartel regulation
Skill: Level 3: Using models
Objective: Checkpoint 17.1
Author: JC
66) Antitrust law is defined, in part, as law that
A) forces customers to trust companies' intentions.
B) forces perfectly competitive firms to produce an adequate quantity of output.
C) prohibits certain kinds of market behavior.
D) regulates firms that work in the medical industry where trust is essential.
E) limits the amount of output that firms can produce.
Answer: C
Topic: Antitrust law
Skill: Level 1: Definition
Objective: Checkpoint 17.2
Author: WM
67) The focus of antitrust legislation is to
A) encourage cartels to form because they are easier to regulate.
B) maintain competition.
C) force society to act in the best interest of producers.
D) limit the power of regulatory bodies.
E) ensure that producers earn enough profit to stay in business so that consumers are not harmed by too
many businesses closing.
Answer: B
Topic: Antitrust law
Skill: Level 1: Definition
Objective: Checkpoint 17.2
Author: PH
68) The first antitrust law in the United States was the
A) Sherman Act, passed in 1960.
B) Clayton Act, passed in 1914.
C) Clayton Act, passed in 1830.
D) Sherman Act, passed in 1890.
E) Sherman Act, passed in 1933.
Answer: D
Topic: Sherman Act
Skill: Level 1: Definition
Objective: Checkpoint 17.2
Author: WM
69) The first antitrust law to be enacted in the United States was the
A) Robinson-Patman Act.
B) Celler-Kefauver Act.
C) Sherman Act.
D) Clayton Act.
E) Bade-Parkin Act.
Answer: C
Topic: Sherman Act
Skill: Level 1: Definition
Objective: Checkpoint 17.2
Author: PH
70) Section 1 of the Sherman Antitrust Act declares what to be illegal?
A) every contract, combination in the form of trust or otherwise, or conspiracy, in restraint of trade or
commerce among the several States, or with foreign nations
B) mergers of a horizontal nature
C) any attempt to monopolize an industry
D) sharing of technology among competing firms or mergers where the effect is to lessen competition
E) exiting an industry if the remaining firm or firms have a market share that is too large.
Answer: A
Topic: Sherman Act
Skill: Level 1: Definition
Objective: Checkpoint 17.2
Author: JC
71) According to Section 2 of the Sherman Act, which of the following is a felony?
A) mergers of a vertical nature
B) horizontal mergers
C) attempts to monopolize an industry
D) price increases among competing firms that occur simultaneously
E) using the HHI to justify a merger
Answer: C
Topic: Sherman Act
Skill: Level 1: Definition
Objective: Checkpoint 17.2
Author: JC
72) As a result of a wave of mergers in the early part of the twentieth century, which act was passed?
A) the Anti-Merger Act of 1900
B) the Sherman Act
C) the Clayton Act
D) the Horizontal Merger Act of 1919
E) the Pro-Competition Act of 1912
Answer: C
Topic: Clayton Act
Skill: Level 1: Definition
Objective: Checkpoint 17.2
Author: JC
73) In the United States, antitrust laws
A) do not allow one person to be a director of two competing firms if it lessens competition.
B) break up a company if it is too large because "size itself is an offense."
C) do not always prosecute firms if they have fixed their prices.
D) regard excess competition as a felony under Section 3 of the Sherman Act.
E) place a maximum limit of 125 firms that are allowed to compete in any market.
Answer: A
Topic: Clayton Act
Skill: Level 1: Definition
Objective: Checkpoint 17.2
Author: SA
74) Under the Clayton Act and its amendments, if it creates monopoly, which of the following activities is
illegal?
A) exit of a firm from a market with 4 or fewer surviving firms
B) price hikes among competing firms
C) price discrimination
D) patents that result in price hikes
E) entry of a firm into a new market
Answer: C
Topic: Clayton Act
Skill: Level 1: Definition
Objective: Checkpoint 17.2
Author: JC
75) Under the Clayton Act and its amendments, if it creates monopoly, which of the following activities is
illegal?
i. contracts that require other goods to be bought from the same firm
ii. contracts that prevent a buyer from reselling a product outside a specified area
iii. becoming a director of a competing firm
A) i only.
B) ii only.
C) ii and iii.
D) i and iii.
E) i, ii, and iii.
Answer: E
Topic: Clayton Act
Skill: Level 1: Definition
Objective: Checkpoint 17.2
Author: JC
76) If a firm, Best Computer Buys, requires its customers to buy software exclusively from it when the customers
purchase a computer, the company's policy is called
A) an exclusive deal.
B) a territorial confinement.
C) a tying arrangement.
D) pricing discrimination.
E) predatory pricing.
Answer: C
Topic: Clayton Act
Skill: Level 1: Definition
Objective: Checkpoint 17.2
Author: SA
77) Under what conditions would it be legal for two bakeries in Minneapolis to explicitly agree to raise their
prices by 5 percent?
A) if the price rise was not predatory
B) if the price rise did not measurably increase producer surplus
C) never
D) if the price rise did not harm consumers in the long run by reducing competition
E) if the price rise was necessary to keep one or both bakeries from closing.
Answer: C
Topic: Price fixing
Skill: Level 2: Using definitions
Objective: Checkpoint 17.2
Author: JC
78) The government believes that which entry barrier has allowed Microsoft to gain monopoly power?
A) ownership of the entire supply of a resource
B) patents
C) trademarks
D) economies of scale and network economies
E) territorial confinement
Answer: D
Topic: United States versus Microsoft
Skill: Level 1: Definition
Objective: Checkpoint 17.2
Author: JC
79) When an oligopoly reduces its price with the intent of driving away its competitors, it is said to be engaging
in
A) pricing differential.
B) predatory pricing.
C) price fixing.
D) a price-tying agreement.
E) price discrimination.
Answer: B
Topic: Predatory pricing
Skill: Level 2: Using definitions
Objective: Checkpoint 17.2
Author: SA
80) If the Herfindahl-Hirschman Index in an industry is above 1,800, a merger that increases the HerfindahlHirschman Index by over 50 points will
A) be allowed by the government.
B) be challenged by the government.
C) be encouraged by the government.
D) increase competition in that industry.
E) never be allowed to happen.
Answer: B
Topic: Merger rules
Skill: Level 1: Definition
Objective: Checkpoint 17.2
Author: JC
81) Which of the following indices does the Department of Justice use to determine whether or not to examine a
merger?
A) the Clayton Index of market concentration
B) the producer concentration index
C) the Herfindahl-Hirschman index
D) the Sherman antitrust index
E) the index of prices
Answer: C
Topic: Merger rules
Skill: Level 1: Definition
Objective: Checkpoint 17.2
Author: PH
82) If the Herfindahl-Hirschman Index (HHI) for a market is between 1,000 and 1,800, the Department of Justice
will examine
A) all mergers.
B) no mergers.
C) mergers that raise the HHI by 100 or more points.
D) mergers that raise the HHI by 100 or fewer point.
E) mergers that lower the HHI by 100 or more points.
Answer: C
Topic: Merger rules
Skill: Level 2: Using definitions
Objective: Checkpoint 17.2
Author: SA
83) Suppose there are 6 firms in an industry with the following market shares. If the two smallest firms want to
merge, how will the Department of Justice reply?
Firm 1:
30
Firm 2:
25
Firm 3:
25
Firm 4:
10
Firm 5:
7
Firm 6:
3
A) The firms will be allowed to merge and compete with the larger firms.
B) The firms will be challenged because the merger will raise the HHI by more than 50 points.
C) The firms will not be allowed to merge.
D) The firms will be challenged because the merger will raise the HHI by more than 100 points.
E) The firms will be challenged because the merger will raise the HHI by more than 250 points.
Answer: A
Topic: Merger rules
Skill: Level 4: Applying models
Objective: Checkpoint 17.2
Author: CD
84) The assumption that regulation relentlessly seeks out deadweight loss and seeks to eliminate it is called the
A) public interest theory of regulation.
B) capture theory of regulation.
C) Coase theory of regulation.
D) socially optimal theory of regulation.
E) predatory theory of regulation.
Answer: A
Topic: Integrative
Skill: Level 1: Definition
Objective: Integrative
Author: PH
85) ____ regulation of a natural monopoly results in an efficient level of output.
A) Efficient resale price maintenance
B) Marginal cost pricing
C) Average cost pricing
D) Predatory pricing
E) Tying
Answer: B
Topic: Integrative
Skill: Level 2: Using definitions
Objective: Integrative
Author: CD
86) If a natural monopoly is regulated so it uses a marginal cost pricing rule, the firm
A) must have violated the Sherman Act.
B) earns zero economic profit.
C) might be able to use a two-part tariff to avoid incurring an economic loss.
D) also faces earnings share regulation.
E) finds that its HHI must fall.
Answer: C
Topic: Integrative
Skill: Level 2: Using definitions
Objective: Integrative
Author: CD
87) ____ regulation of a natural monopoly results in an efficient level of output.
A) Producer interest
B) Predatory pricing
C) Public interest
D) Rate of return
E) Sherman rate cap
Answer: C
Topic: Integrative
Skill: Level 2: Using definitions
Objective: Integrative
Author: CD
88) If a firm has become a natural monopoly,
A) it has violated the Clayton Act.
B) the Department of Justice approved its merger.
C) regulators will require that it produce the efficient level of output.
D) it might be regulated using price cap regulation.
E) it cannot be charged with any violation of the antitrust laws.
Answer: D
Topic: Integrative
Skill: Level 2: Using definitions
Objective: Integrative
Author: CD
89) The figure above shows a natural monopoly that the government must regulate. If the government uses ____,
the firm produces ____ units per week.
A) the HHI; 50
B) an average cost pricing rule; 30
C) rate of return regulation; 40
D) the Sherman Act; 30
E) a marginal cost pricing rule; 20
Answer: B
Topic: Integrative
Skill: Level 3: Using models
Objective: Integrative
Author: CD
90) The figure above shows a natural monopoly that the government must regulate. Which of the following
pairs most likely results in similar outcomes?
A) resale price maintenance and rate of return regulation
B) marginal cost pricing and a two-part tariff
C) average cost pricing and rate of return regulation
D) predatory pricing and price caps
E) marginal cost pricing and price cap regulation
Answer: C
Topic: Integrative
Skill: Level 3: Using models
Objective: Integrative
Author: CD
91) Earnings share regulation occurs when
A) the HHI for an industry exceeds 1,800.
B) price cap regulation allows a firm's profits to rise above a target level.
C) firms are regulated using marginal cost pricing.
D) a firm violates the Sherman Act.
E) a firm violates any antitrust law.
Answer: B
Topic: Integrative
Skill: Level 2: Using definitions
Objective: Integrative
Author: CD
92) Tying arrangements are
A) illegal if they substantially lessen competition.
B) used by regulators to force a monopoly to produce an efficient amount of production.
C) used by regulators to force a monopoly to charge an efficient price.
D) illegal according to the Sherman Act.
E) necessary in order for a firm to price discriminate.
Answer: A
Topic: Integrative
Skill: Level 2: Using definitions
Objective: Integrative
Author: CD
93) Resale price maintenance is a form of
A) regulation.
B) marginal cost pricing.
C) average cost pricing.
D) agreeing about the price that will be charged.
E) setting the price cap under price cap regulation.
Answer: D
Topic: Integrative
Skill: Level 2: Using definitions
Objective: Integrative
Author: CD
94) If a firm engages in predatory pricing, it
A) is following marginal cost pricing.
B) is following average cost pricing.
C) sets a low price to drive rivals out of business.
D) has been regulated using a price cap.
E) is guilty of price fixing.
Answer: C
Topic: Integrative
Skill: Level 2: Using definitions
Objective: Integrative
Author: CD
95) Because it was found guilty of violating the Sherman Act, Microsoft will be subject to
A) rate of return regulation.
B) marginal cost pricing.
C) price cap regulation.
D) predatory pricing.
E) None of the above answers is correct.
Answer: E
Topic: Integrative
Skill: Level 1: Definition
Objective: Integrative
Author: CD
96) When the Department of Justice decides whether to allow firms in an industry to merge, it uses the ____ to
guide its decision.
A) public interest theory
B) HHI
C) capture theory
D) Sherman Act
E) predatory pricing theory
Answer: B
Topic: Integrative
Skill: Level 1: Definition
Objective: Integrative
Author: CD