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This Document Contains Chapters 11 to 12 Chapter 11 Monopolistic Competition and Oligopoly MULTIPLE CHOICE 1. A monopolistically competitive market is characterized by: A. one firm selling a homogeneous product. B. many firms selling identical products. C. many firms selling similar but differentiated products. D. few firms selling identical products. E. few firms selling similar but differentiated products. Answer: C 2. Why is each firm in a monopolistically competitive industry considered as a “mini” monopoly? A. There is a large number of sellers in the market B. Each firm in monopolistic competition is a price taker C. The product of each firm is unique in some way or the other D. Each firm faces a perfectly elastic demand curve E. There exists a large number of close substitutes of the products Answer: C 3. The major similarity between a monopolist and a monopolistically competitive firm is: A. both are price takers. B. both face a horizontal demand curve. C. both are the sole producers of a particular good. D. both face a negatively sloped demand curve. E. both are affected by the decision of their rivals. Answer: D 4. The market structure called monopolistic competition is named using both monopoly and perfect competition. Why? A. There are few firms in the market all producing the same product. B. There is just one firm whose product can be easily differentiated. C. There are a huge number of firms selling identical products at a constant price. D. There are many firms with easy entry and exit but each firm sells a unique product. E. Firms spend very little on advertising and promotion and thus are price takers. Answer: D 5. Monopolistic competition is similar to perfect competition in that: A. there are only a few firms in the market. B. entry into and exit from the market is easy. C. there are significant barriers to entry in the market. D. each firm sells a homogeneous product. E. each firm differentiates its product through advertising. Answer: B 6. In the context of market structure, the characteristic that best describes a monopolistically competitive market is that: A. there are few firms in the market. B. the products produced cannot be easily differentiated. C. entry and exit are both difficult. D. firms spend a great deal on advertising and promotion. E. firms spend very little on advertising and promotion. Answer: D 7. A monopolistically competitive firm’s demand curve slopes downward because: A. other firms are free to enter the market. B. there are a large number of firms in the market. C. a differentiated product gives the firm some monopoly power. D. the firm has complete information about the market. E. the firm sells a standardized product. Answer: C 8. In a certain monopolistically competitive market that is characterized by high prices and equally high-quality merchandise, if a firm’s competitors begin to successfully introduce new products that cut into the firm’s market share, the firm’s best counter-strategy is to: A. raise price in order to increase the revenue. B. introduce its own new products in order to meet competitors head on. C. reduce its advertising budget in order to save costs. D. ignore its competitors and hope its customers’ loyalty carry it through the threat. E. look to the government for protection. Answer: B 9. In the short run, a monopolistically competitive firm: A. can earn only a normal profit. B. will produce at the point where marginal revenue is greater than marginal cost, in order to maximize profits. C. will produce at the point at which price equals minimum ATC to maximize profits. D. will be able to enter another monopolistically competitive industry. E. will shut down temporarily if price is less than AVC. Answer: E 10. If a monopolistically competitive industry is in long-run equilibrium and suddenly the cost of resources increases, then: A. the demand and average-revenue curves will shift to the right. B. the demand and average-revenue curves will shift to the left. C. some firms will eventually leave the industry. D. new firms will eventually enter the industry. E. the cost structure of the firm will shift down. Answer: C 11. Which of the following statements about the monopolistically competitive market in the long run is true? A. The resources are efficiently utilized. B. Consumers have a greater variety of products to choose from than under perfectly competitive market conditions. C. The marginal-revenue curve coincides with the demand curve facing the firm. D. The firms produce the output level that is less than the output corresponding to the minimum of average total cost. E. The firms operate in the upward-sloping portion of the long run average cost curve. Answer: D 12. When the existing firms in a monopolistically competitive industry earn above-normal profit: A. new firms enter the market, and entry continues until firms earn normal profit. B. new firms have no incentive to enter the market. C. new firms have an incentive to enter the market but are legally barred from doing so. D. they increase their production and lower the price level. E. their cost structure automatically changes, eliminating the additional profit. Answer: A 13. As new firms enter a monopolistically competitive industry, the demand for a typical firm’s product will most likely: A. increase and become less elastic. B. decrease and become more elastic. C. increase and become more elastic. D. decrease and become less elastic. E. remain unaffected. Answer: B 14. In long-run equilibrium, the monopolistically competitive firm: A. will break even. B. will cease to advertise. C. will earn a positive economic profit. D. will face a perfectly elastic demand curve. E. will no longer need to engage in non-price competition. Answer: A NARRBEGIN: Figure 11. 1 The figure given below shows revenue and cost curves of a monopolistically competitive firm. Figure: 11. 1 In the figure, MR: Marginal revenue curve ATC: Average total cost curve AVC: Average variable cost curve MC: Marginal cost curve NARREND 15. Consider the monopolistically competitive firm described in the Figure 11. 1. The profit-maximizing output level and price are, respectively: A. 0 and 0. B. H and D. C. I and A. D. J and C. E. J and E. Answer: B 16. According to Figure 11. 1, the firm: A. will shut down temporarily at any price below A. B. will operate at a price below A as long as it is greater than marginal cost. C. will shut down at a price below A only in the long run. D. will break-even at the price level C. E. will shut down if the price falls below E. Answer: A 17. According to Figure 11. 1, the profit-maximizing firm is making an average: A. profit on each unit produced equal to the distance BG. B. loss on each unit produced equal to the distance BG. C. profit on each unit produced equal to the distance CE. D. loss on each unit produced equal to the distance DG. E. loss on each unit produced equal to the distance AC. Answer: D 18. The short-run equilibrium position for a firm in monopolistic competition is the point at which: A. price equals average variable cost. B. marginal revenue equals rising marginal cost. C. price equals marginal cost. D. marginal revenue equals average revenue. E. the firm’s marginal-cost curve intersects its marginal-revenue curve from above. Answer: B NARRBEGIN: Figure 11. 2 The figure below shows the revenue and cost curves of a monopolistically competitive firm. Figure: 11. 2 In the figure, D: Demand curve MR: Marginal revenue curve ATC1 and ATC2: Average total cost curves MC: Marginal cost curve NARREND 19. In Figure 11. 2, assume that the average total cost of the firm is represented by the curve ATC2. In the long run, we would expect: A. entry of firms into the market because economic profits exist. B. exit of firms from the market because the existing firms suffer economic losses. C. that demand for each firm will increase. D. the market to become perfectly competitive. E. the market to become a monopoly. Answer: A 20. In Figure 11. 2, if the market is monopolistically competitive, which quantity represents long-run equilibrium for the firm? A. 15 B. Between 15 and 40 C. 40 D. 55 E. 60 Answer: C 21. If economic losses exist in a monopolistically competitive market, A. new products will be introduced. B. new firms will enter the market because they see potential for profit in the future. C. firms will exit the market and the existing firms’ demand curves will shift inward. D. the average total cost curve must lie below the demand curve. E. firms will exit the market and existing firms’ demand curves will shift outward. Answer: E 22. In contrast to perfect competition, in a monopolistically competitive industry: A. new firms entering the market produce a good that is identical to the existing ones. B. new firms entering the market produce a completely different product. C. there are legal restrictions on the entry of new firms. D. new firms entering the market produce a close substitute, not an identical or standardized product. E. new firms are allowed to enter the industry but there are legal restrictions on their exit. Answer: D 23. In the long run, in a monopolistically competitive market: A. marginal revenue is greater than average revenue. B. price equals marginal cost. C. price equals minimum average total cost. D. the firms earn positive economic profits. E. resources are inefficiently allocated . Answer: E NARRBEGIN: Figure 11. 3 The figure given below shows the revenue and cost curves of a monopolistically competitive firm. Figure: 11. 3 In the figure, D: Demand curve MR: Marginal revenue curve MC: Marginal cost curve ATC: Average total cost curve NARREND 24. The monopolistically competitive firm in Figure 11. 3 will maximize profits (or minimize losses) by producing _____ and charging _____. A. Q2; P6 B. Q1; P1 C. Q2; P2 D. Q3; P3 E. Q4; P5 Answer: A 25. The profit per unit of output for the firm in the Figure 11. 3 is: A. P5 - P3. B. P6 - P3. C. P3 - P2. D. P6 - P2. E. P4 - P2. Answer: D 26. Refer to Figure 11. 3. A perfectly competitive outcome would exist at a price of _____ and an output level of _____. A. P6; Q2 B. P4; Q4 C. P3; Q2 D. P1; Q1 E. P5; Q3 Answer: E NARRBEGIN: Figure 11. 4 The figure given below shows the revenue and cost curves of a monopolistically competitive firm. Figure 11. 4 MR: Marginal revenue curve ATC: Average total cost curve MC: Marginal cost curve NARREND 27. Consider the monopolistically competitive firm described in Figure 11. 4. The profit-maximizing output level and price are, respectively: A. F and A. B. F and E. C. J and B. D. L and D. E. N and P. Answer: B 28. Refer to Figure 11. 4. What is the profit earned by the firm at equilibrium? A. 0AGF B. 0BKJ C. ACHG D. AEIG E. CEIH Answer: E 29. Assume that the firm in Figure 11. 4 is monopolistically competitive. In the long run, we would expect: A. the price of the firm’s output to increase. B. entry of new firms because economic profits are positive. C. exit of few existing firms because economic profits are negative. D. the firm’s demand curve to shift outward. E. the firm’s demand curve to becomes less elastic. Answer: B 30. One major similarity between perfect competition and monopolistic competition is that: A. the firms earn above normal profits in the long run. B. the firms are price makers. C. the firms produce identical products. D. the firms just break even in the long run. E. entry of firms is barred in the long run. Answer: D 31. If all the firms in a monopolistically competitive market are incurring losses, then eventually: A. the aggregate demand for the products will increase. B. the aggregate supply of the products will increase. C. the price of the products in general will decline. D. the cost of production will increase. E. the firms will exit until the existing ones just break even. Answer: E 32. If firms are successful in product differentiation: A. their demand will become relatively elastic. B. consumers will believe that the firms are producing more or less identical goods. C. they can raise their prices without losing all of their customers to rivals. D. they tend to face a horizontal demand curve. E. they gradually emerge as price takers. Answer: C 33. Product differentiation: A. is carried out by perfectly competitive and monopolistically competitive firms. B. is successful if a firm faces a relatively inelastic demand curve. C. does not allow the firm to raise its price without losing all of its customers. D. cannot be accomplished through advertising or trivial product changes. E. if carried out successfully enables the firms to enjoy market power. Answer: E 34. Which of the following is true of product differentiation? A. Product differentiation is the first order derivative of the production function. B. Product differentiation exists only when the products are actually different from each other. C. Product differentiation exists when consumers perceive the products to be different. D. Product differentiation exists when producers perceive the products to be different. E. Product differentiation exists when similar goods are sold in geographically segregated markets. Answer: C 35. In monopolistic competition, firms may differentiate their products in many ways except on the basis of: A. quality. B. style. C. price. D. packaging. E. guarantees. Answer: C 36. Which of the following is true of the model of monopolistic competition? A. Barriers to entry enable firms to enjoy positive profits in the long run. B. The number of firms declines over time as a result of economies of scale. C. The monopolistically competitive firms enjoy a greater market power than a monopolist. D. Firms tend to locate near each other in order to minimize total travel costs for consumers. E. The firms end up charging same prices for their individual products. Answer: D 37. Which of the following is not an example of nonprice competition? A. Kellogg’s introduces Froot Loops with Lemonberry Swirls. B. Sterling Planet provides consumers the opportunity to purchase renewable electricity in upstate New York. C. Mountain Dew sells “Livewire” orange soda in the summer of 2003. D. Nissan lowers the interest rate charged for new automobile financing. E. Honda produces a hybrid version of its Civic. Answer: D 38. For years, Intel was able to charge a higher price for microchips because: A. it had a higher quality product than its rivals. B. it spent less on advertising than its rivals. C. consumers knew that Intel had the best employees. D. Intel relied more on foreign labor. E. of its successful product differentiation. Answer: E 39. Which of the following is an example of price competition? A. Nike signs LeBron James to a $90 million contract for endorsements. B. Kellogg's puts the images of Snap, Crackle, and Pop on boxes of Cocoa Krispies, linking the cereal with Rice Krispies. C. McDonald's introduces new garden McSalads. D. Tropicana introduces the Blue Raspberry Rush juice. E. Apple offers a 20% discount on its new range of iPhones. Answer: E 40. Advertising, brand names, packaging, and celebrity endorsements all occur in monopolistically competitive markets because: A. significant barriers to entry exist in the real world. B. in the real world, there are very few markets with many firms. C. that gives the producer some command over the prices of their products. D. product differentiation seldom occurs in the real world. E. monopolistically competitive firms have an incentive to spend as much money as possible compared to their rivals. Answer: C 41. Consumers are willing to pay a higher price for a product with a brand name as opposed to a generic product because: A. a brand name provides a signal about a product's quality and reliability. B. they are willing to pay more for the privilege of watching the firm's commercials. C. a product with a brand name is always of higher quality. D. consumers maximize utility by purchasing the most expensive products. E. consumers are irrational. Answer: A 42. Martin is in the market for a new television set. He is deciding between two sets: one is rather expensive but offers a guarantee; the other has a lower price but offers no guarantee. Martin’s decision to buy the more expensive set would indicate that: A. Martin does not know a good deal when he sees it. B. Martin interpreted the guarantee as a signal of the quality. C. Martin should have shopped around a bit more for a better deal. D. Martin is not maximizing his utility. E. Martin has a high income. Answer: B 43. Which of the following statements about a monopolistically competitive firm in the short run is true? A. Profits will be maximized at the point at which price equals marginal cost and hence there is no deadweight loss. B. The firm may be able to earn a super normal profit in the short run and the long run. C. Entry into the market is difficult. D. Advertising may enable a firm to charge a higher price than that charged by rival firms. E. It faces a perfectly elastic demand curve Answer: D 44. Firms in monopolistically competitive markets spend significant sums on product differentiation because: A. it enables them to earn positive profits in the short run. B. it increases the elasticity of demand for a firm’s product. C. it reduces the number of competitors. D. it causes the firm’s supply curve to become horizontal so the firm can expand output indefinitely. E. it causes the firm’s demand curve to become horizontal so that it can charge a fixed price for its product. Answer: A 45. Compared with generic products, a brand name: A. reduces the price elasticity of demand and gives the firm more market power. B. increases the price elasticity of demand and gives the firm more market power. C. increases the price elasticity of demand and gives the firm less market power. D. reduces the price elasticity of demand and gives the firm less market power. E. has no effect on price elasticity of demand or market power. Answer: A 46. Because of their brand names, Kodak, IBM, Honda, Daimler-Chrysler, and other well-known firms are able to charge significantly higher prices for their products than their competitors without losing any business. Expenditures made by firms to create brand names: A. are always inefficient. B. provide reliability to consumers. C. lead to monopolies. D. necessarily lead to deadweight losses. E. would not exist if information was less costly for firms to obtain than consumers. Answer: B 47. A consumer becomes loyal to a product when: A. the good is available at a very low price. B. the product is as good as its substitutes. C. the product comes with a gift occasionally. D. he/she has had a positive experience with that good. E. discounts are offered periodically. Answer: D 48. The objective of creating a brand name is: A. to reduce the price of the product. B. to ensure a steady supply of the good in the market. C. to reduce the price elasticity of demand. D. to reduce the cost of production of the firm. E. to attract rival firms into the market. Answer: C 49. One reason that monopolistically competitive firms often use celebrity endorsements is that: A. the firm owners like to be around celebrities so they can feel important. B. they can link their product’s reputation with the celebrity’s reputation. C. celebrity endorsements are so inexpensive. D. firms like to spend money on famous people. E. the firms like to spend a lot on advertisements. Answer: B 50. Which of the following is a characteristic of an oligopoly market? A. Each firm in an oligopoly market can take independent pricing and output decisions. B. There are many firms in an oligopoly market hence a firm cannot influence the market price. C. In an oligopoly market, each firm’s pricing and output decisions depend on those of its rivals. D. Firms in an oligopoly market always manufacture differentiated products. E. Barriers to entry does not exist in an oligopoly market. Answer: C 51. The oligopoly market structure model is characterized by: A. many firms in the industry producing differentiated products. B. many firms in the industry producing identical products. C. few firms in an industry with natural barriers to entry. D. a single firm in an industry with barriers to entry. E. many firms in an industry with barriers to entry. Answer: C 52. An oligopoly market consists of: A. many firms which produce a standardized product. B. at least five firm one of which dominates the market. C. firms that make independent pricing and output decisions. D. a group of firms that dominate the market. E. firms which face perfectly elastic demand curves. Answer: D 53. Oligopoly can arise from: A. diseconomies of scale in production. B. limited demand for a product in the market. C. government regulations. D. easy availability of the crucial inputs. E. reduction of trade barriers. Answer: C 54. Strategic behavior occurs when: A. there are a large number of firms selling identical products. B. there is only one firm in the market. C. the firms have no command over the prices of the good they produce. D. the firms can take any decision irrespective of what their rival does. E. what is best for a firm depends on what his rival does. Answer: E 55. Which of the following theories applies to strategic behavior? A. Field Theory B. Game Theory C. Theory of Consumers’ Behavior D. Social Contract Theory E. Rational Choice Theory Answer: B 56. Wal-Mart created a competitive advantage with its inventory system to reduce the ratio of cost of goods sold to sales expecting: A. to enjoy huge economic profits forever. B. its rivals will never imitate their strategy and it will continue to enjoy positive economic profits. C. its rivals will immediately do the same thing and it will end earning zero profits. D. to enjoy economic profits for a few years before its rivals caught up. E. it will at least be able to cover its fixed costs. Answer: D NARRBEGIN: Table 11. 1 The following table shows the payoff matrix of the two firms (Firm X and Firm Y) in dollars when they advertise and when they do not advertise. Table 11. 1 NARREND 57. According to the payoffs in Table 11. 1: A. Firm X will not advertise, no matter what, if Firm Y does not advertise. B. Firm X will advertise only if Firm Y does not advertise. C. Firm X does not have a dominant strategy, but Firm Y does. D. Firm Y does not have a dominant strategy, but Firm X does. E. Both firms would be better off if neither advertised. Answer: E 58. According to Table 11. 1, if firm X advertises and Y does not advertise: A. Firm X earns $50 and firm Y earns $200. B. Firm X earns $150 and firm Y earns $200. C. Firm X earns $100 and firm Y earns $200. D. Firm X earns $50 and firm Y earns $180. E. Firm X earns $180 and firm Y earns $80. Answer: E 59. According to Table 11. 1, if both the firms follow their dominant strategies: A. firm X earns $100 and firm Y earns $150. B. firm X earns $50and firm Y earns $200. C. firm X earns $180 and firm Y earns $150. D. firm X earns $180 and firm Y earns $100. E. firm X earns $150 and firm Y earns $180. Answer: A 60. Refer to Table 11. 1. If firm Y follows its dominant strategy and firm X does not then: A. firm X earns $150 and firm Y earns $200. B. firm X earns $50 and firm Y earns $200. C. firm X earns $150 and firm Y earns $180. D. firm X earns $50 and firm Y earns $100. E. firm X earns $150 and firm Y earns $100. Answer: B 61. According to the Table 11. 1, if the firms collude and decide not to advertise their combined payoff is: A. $250. B. $260. C. $330. D. $300. E. $280 Answer: C 62. Which of the following is true of a successful cartel? A. A successful cartel offers consumers the lowest possible price for a product. B. A successful cartel minimizes profits for its members. C. A successful cartel behaves as a monopolist in the market. D. A successful cartel produces a quantity greater than that produced in a competitive market. E. A successful cartel is always stable. Answer: C 63. A Nash equilibrium occurs when: A. a unilateral move by a participant makes him better off. B. one can deviate from the equilibrium and improve the outcome. C. no one can move from the equilibrium and improve the outcome. D. participants have an incentive to deviate from the equilibrium. E. no one is better off. Answer: C NARRBEGIN: Table 11. 2 The table below shows the payoff (profit) matrix of Firm A and Firm B indicating the profit outcome that corresponds to each firm’s pricing strategy (where $500 and $200 are the pricing strategies of two firms). Table 11. 2 NARREND 64. Refer to Table 11. 2. If firm both firm A and firm B choose their dominant strategies then: A. firm A makes a profit of $40 and firm B makes a profit of $45. B. firm A makes a profit of $50 and firm B makes a profit of $45. C. firm A makes a profit of $50 and firm B makes a profit of $40. D. firm A makes a profit of $42 and firm B makes a profit of $40. E. firm A makes a profit of $40 and firm B makes a profit of $20. Answer: C 65. According to Table 11. 2, if firm A follows its dominant strategy but firm B does not, firm A earns a profit of: A. $50. B. $40. C. $60. D. $45. E. $42. Answer: C 66. Refer to Table 11. 2. If firm B follows its dominant strategy but firm A does not, firm B will earn a profit of: A. $45. B. $40. C. $20. D. $60. E. $50 Answer: A 67. The firms in an oligopoly market structure agree to collude because: A. acting jointly helps them to earn more profits. B. each firm wants to know the strategy of its rivals. C. each firm wants to charge a lower price for its product than its rivals. D. the firms want to maintain a healthy relationship with each other. E. it helps them to enjoy economies of scale. Answer: A 68. Which of the following statements about collusion is true? A. Collusion is legal in the United States. B. Its overriding goal is to enhance competition and thereby increase profits. C. The greater the number of firms, the less difficult it is to maintain. D. Collusion never results in benefits for the participants. E. Collusion may help to increase the profits of the participating firms. Answer: E 69. An efficient way to move toward the Nash equilibrium is called a(n): A. an agreement. B. a convention. C. a principle. D. a resolution. E. a convergence. Answer: B 70. Which of the following is true of price leadership? A. Price leadership requires that firms collude. B. Price leadership will not exist when there is a dominant firm. C. Price leadership may come into being as firms recognize the benefits of not engaging in competitive pricing. D. Price leadership is most likely to arise when no firm has a history of making accurate evaluations of market conditions. E. Price leadership is never used in the real world. Answer: C 71. Which of the following is an example of cartel? A. Advanced Micro Devices B. AREVA C. Organization of the Petroleum Exporting Countries D. Combat Observation Laser Teams E. Lloyds Banking Group Answer: C 72. The condition under which a cartel can maintain its stability is that: A. the barriers to entry should be relaxed. B. an identical product should be produced by the colluding firms. C. there should be a large number of firms in the market. D. there should be legal barriers to share agreements. E. the products of the colluding firms should be highly differentiated. Answer: B 73. Actions that allow oligopoly firms to coordinate their pricing behavior without explicit collusion are referred to as _____. A. strategic behavior B. differential pricing strategies C. facilitating practices D. duopoly price discrimination mechanisms E. independent practices Answer: C 74. When firms use cost-plus pricing in a market, A. each firm determines its price based on other firms’ costs and prices. B. it may appear as though firms are colluding in price when they actually are not. C. prices of different firms will diverge widely. D. each firm will never maximize profit as they are charging the same prices irrespective of their costs. E. each will sell only to its most-favored customer. Answer: B 75. A most-favored customer is one who: A. buys a firm’s product regularly. B. is an acquaintance of the owner of the firm. C. is given the guarantee of receiving the lowest price for a product. D. spends the maximum amount of money on a firm’s product. E. has a high purchasing power. Answer: C 76. The Gulf Cartel and Sinaloa Cartel are the two major cartels in illegal drug trade in Mexico. Although, each of these cartels are better off sharing the market, they have an incentive to try to take the entire market. In which of the following ways is cheating among these cartel members dealt with in this region? A. Through government taxation policy B. Through legally enforceable contracts C. Through restrictions on the supply of inputs used by the firms D. Through output quota and price ceiling E. Through violence and drug wars Answer: E 77. In order to survive, cartels must be able to enforce contracts. However, when a cartel is trading in an illegal commodity: A. it can use the judicial system to enforce contracts. B. it relies on altruism of members to enforce contracts. C. it is inherently stable because the market is underground. D. violence becomes a means of contract enforcement. E. authorities are effective in preventing the trade. Answer: D 78. When firms in an illegal market form a cartel, _____. A. they are able to supply higher quality products B. it becomes more difficult for police to detect their activities C. they are able to increase profits by behaving as a monopolist D. they result in a deadweight loss E. they rely on goodwill to ensure the stability of the cartel Answer: C 79. In which market structure model(s) is product differentiation a significant feature? A. Perfect competition B. Monopolistic competition C. Monopoly D. Oligopoly E. Both perfect competition and monopolistic competition Answer: B 80. Strategic interdependence occurs in: A. perfect competition. B. monopoly. C. monopolistic competition. D. oligopoly. E. local monopoly. Answer: D 81. The market structure in which the largest quantity of output is sold at the minimum possible price is: A. monopoly. B. perfect competition. C. oligopoly. D. monopolistic competition. E. duopoly. Answer: B TRUE/FALSE 1. A monopolistically competitive firm faces a relatively less elastic demand curve than a monopolist. Answer: False 2. A monopolistically competitive market is marked by the barriers to entry of new firms in the long run. Answer: False 3. A monopolistically competitive firm may earn above normal profits or may incur losses in the short run. Answer: True 4. A monopolistically competitive firm maximizes profit at the point at which price is equal to marginal cost. Answer: False 5. The short-run equilibrium position for a firm in monopolistic competition is the point at which the firm’s marginal-cost curve intersects its marginal-revenue curve from above. Answer: False 6. Suppose a monopolistically competitive firm is producing at the profit-maximizing output level and receiving a price that is sufficient to cover only its average variable cost. If the price falls further the firm should suspend its operations. Answer: True 7. In a monopolistically competitive industry, firms which enter the market in the long run produce a close substitute and not a standardized product. Answer: True 8. Both monopolistically and perfectly competitive firms earn only normal profits in the long run. Answer: True 9. If additional firms enter a monopolistically competitive industry, the demand facing a typical firm increases. Answer: False 10. In long-run equilibrium, each monopolistically competitive firm can earn positive economic profits due to economies of scale. Answer: False 11. The monopolistically competitive firm will charge a price which is more than that charged by a perfectly competitive firm. Answer: True 12. Compared with a perfectly competitive firm in long-run equilibrium, a monopolistically competitive firm will operate on the upward-sloping portion of the average-total-cost curve. Answer: False 13. Successful product differentiation by a monopolistically competitive firm makes the demand curve faced by the firm steeper. Answer: True 14. Often the best way for a firm to convey information to consumers about the quality of a product is to spend money on creating well-known brand names and the provision of guarantees. Answer: True 15. As a firm in a monopolistically competitive market successfully differentiates its products and earns a positive economic profit, it is soon imitated by its rivals and profit of the firm falls to zero. Answer: True 16. Consumers who purchase brand-name pharmaceuticals because they believe the brand name has some value, may be right even if a brand-name pharmaceutical and a generic product are chemically identical. Answer: True 17. Consumer loyalty tends to be very low in markets such as cola drinks and tobacco products. Answer: False 18. Firms develop brand names in order to make the demand for their product more elastic. Answer: False 19. Celebrity endorsements are often used by monopolistically competitive firms to boost the reputation of the product that is being endorsed. Answer: True 20. Consumers who are loyal to a brand will purchase products under that brand name even if their prices are above other competing brands. Answer: True 21. Oligopolies can arise as a result of both natural barriers and governmentally created barriers. Answer: True 22. Since only a few firms dominate the oligopoly market, cutthroat competition does not exist. Answer: False 23. Strategic behavior occurs when a firm takes a particular strategy without considering the policies of its rivals. Answer: False 24. A strategy that produces the best result no matter what strategy the opposing player follows is known as the dominated strategy. Answer: False 25. In a price-leadership oligopoly model, the oligopoly firms engage in price wars. Answer: False 26. Collusion of firms is legal in the United States. Answer: False 27. A cartel is an organization of firms in which there is a dominant firm which dictates price and output decisions to the other member firms. Answer: False 28. By forming a cartel the member firms can actually raise their profits. Answer: True 29. A cartel attempts to increase profits in the industry by limiting the production of each member firm. Answer: True 30. Certain actions by oligopolistic firms can lead to collusion even when they formally do not agree to cooperate. Answer: True 31. A deadweight loss arises in a perfectly competitive market as each firm is a price taker. Answer: False 32. Perfect competition is the only market structure in which firms are economically efficient in the long run. Answer: True 33. In an oligopoly market, firms do not produce identical product. Answer: False Chapter 12 Antitrust and Regulation MULTIPLE CHOICE 1. Which of the following is true of Antitrust policy? A. Antitrust policy prohibits agreements that allow free trade. B. Antitrust policy restricts abusive behavior by a firm dominating a market. C. Antitrust policy allows anti-competitive practices. D. Antitrust policy encourages establishment of monopoly firms. E. Antitrust policy creates trade barriers like tariffs and quota. Answer: B 2. Antitrust policy is used to describe government policies and programs that are designed to: A. promote the creation of trusts, or combinations of independent firms. B. control the growth of monopoly and enhance competition. C. deal with the threat of competitive practices to public interests. D. create an environment in which the government will distrust firms. E. create an environment in which firms will distrust the government. Answer: B 3. Which of the following are the three laws that define the U. S government’s approach to antitrust? A. The Wilmington, Jackson, and International Trade Commission Acts B. The Springfield, Clayton, and Trade Commission Acts C. The Sherman, Clayton, and Federal Trade Commission Acts D. The Sherman, Jackson, and Regional Trade Commissions Acts E. The Jackson, Charleston and Sherman Monopoly Restrictive Trade Acts Answer: C 4. The antitrust laws in the United States were created in the late 1800s as a result of : A. the emergence of large and dominant businesses in railroads, steel, oil, mining and finance. B. the government decision to take responsibility for the improvement of trade deficit. C. the first illegal cartel, created in late 1800s. D. a steep decline in prices of primary goods in the United States. E. the United States being threatened by an external aggression. Answer: A 5. Which of the following laws was enacted to forbid monopolization and attempts to monopolize? A. The Anti-Monopoly Act B. The Sherman Antitrust Act C. The Clayton Antitrust Act D. The Federal Trade Commission Act E. The Celler-Kefauver Act Answer: B 6. Which of the following practices is not restricted by the antitrust law in the United States? A. Contracts and conspiracies in restraint of trade B. Attempts to monopolize a market C. Mergers that substantially lessen competition D. Unfair or deceptive acts of competition E. All forms of quality discrimination Answer: E 7. Which of the following does the Sherman Antitrust Act forbid? A. Monopolization or attempts to monopolize B. All types of price discrimination C. Unfair or deceptive acts D. Unfair methods of competition E. Practices that might keep other firms from entering into an industry Answer: A 8. In an antitrust lawsuit, which of the following parties is entitled to receive treble damages? A. The Antitrust Division of the Justice Department B. The Federal Trade Commission C. Private plaintiffs D. Defendants E. The Department of Labor Answer: C 9. Which of the following entities is able to sue a firm for alleged antitrust misbehavior in the U. S. ? A. Department of Illegal Affairs B. Department of State C. Department of Homeland Security D. Department of Justice E. Department of Labor Answer: D 10. Which of the following is most likely to happen if the Federal Trade Commission (FTC) wins a suit against alleged violators of antitrust law? A. The FTC will receive compensation up to three times the damage caused. B. The FTC will not be able to impose substantial penalties. C. The FTC will force firms to break up through dissolution. D. The FTC will force firms to merge together. E. The FTC will file criminal actions that may result in fines but not prison sentences. Answer: C 11. Which of the following practices is restricted by the antitrust laws of the United States? A. Merger of smaller firms into a large firm B. Entry of new firms in the long run C. Standardization of products in a market D. Exit of non-performing firms in the long run E. Quality differentiation by competitive firms Answer: A 12. The first phase of antitrust policy in the U. S. began with the passage of the Sherman Antitrust Act in 1890. To judge a firm’s action, the courts in this period used: A. a per se rule. B. a rule of reason. C. a rule of thumb. D. the 80-20 rule. E. strict enforcement rule. Answer: B 13. Under the second phase of antitrust policy that began in 1914 in the U. S. , the courts used _____ in order to judge the firms’ actions. A. a rule of reason B. the rule of 72 C. a rule of thirds D. a per se rule E. the rule of law Answer: D 14. A market is said to be concentrated when: A. the degree of competition in the market increases. B. many firms supply to a small number of consumers. C. the firms producing identical goods are clustered in a particular location. D. a firm or a few firms are able to dictate the competitive conditions in a market. E. there is a huge immigration of workers from neighboring areas. Answer: D 15. The most reliable measure of market concentration is: A. the Cost of Living index. B. the Herfindahl index. C. the Market index. D. the Market-Value weighted index. E. the Wholesale Price index. Answer: B 16. The three phases of antitrust policy in the United States since 1890 are: A. 1890 to 1914, the rule of reason; 1914 to the early 1980s, per se; since then, the rule of reason. B. 1890 to 1914, per se; 1914 to the early 1980s, the rule of reason; since then, per se. C. 1890 to 1914, the rule of reason; 1914 to the early 1980s, per se; since then, no antitrust policy. D. 1890 to 1914, the rule of reason; 1914 to the early 1980s, per se; since then, a period of rate of return regulation. E. 1890 to 1914, the rule of reason; 1914 to the early 1980s, per se; since then, a period of nationalization. Answer: A 17. The judicial doctrine, being a monopoly or attempting to monopolize is not in itself illegal; to be illegal, an action had to be shown to have negative economic effects, is called: A. the “big is bad” policy. B. the per se rule. C. predatory price-cutting policy. D. the rule of law. E. the rule of reason. Answer: E 18. Which of the following is true of the per se rule? A. The per se rule was used by U. S. courts from 1914 until the 1920s. B. The per se rule had the effect of making antitrust policy more liberal. C. According to the per se rule, activities that were potentially monopolizing tactics were illegal. D. The per se rule did not allow the mere existence of anticompetitive activities to be sufficient evidence for a guilty verdict. E. The per se rule was revived by Bush administration. Answer: C 19. Under George W. Bush’s administration, antitrust policy: A. became much more strict. B. prohibited every merger attempts. C. focused increasingly on environmental concerns. D. became more relaxed. E. ignored financial regulation and corporate scandals. Answer: D 20. The Justice Department of the U. S. classifies the industries on the basis of the Herfindahl index as: A. below 500: highly competitive; 500-1000: moderately competitive; above 1000: highly concentrated. B. below 1000: highly competitive; 1000-1500: moderately competitive; above 1500: highly concentrated. C. below 500: highly competitive; 500-1500: moderately competitive; above 1500: highly concentrated. D. below 1000: highly competitive; 1000-1800: moderately competitive; above 1800: highly concentrated. E. below 1500: highly competitive; 1500-2000: moderately competitive; above 2000: highly concentrated. Answer: D 21. Which of the following statements is true of price fixing? A. It represents a high level of competition in an industry. B. It is allowed only under the provisions of the Federal Trade Commission Act. C. It is, by definition, illegal, as there is no justification for it. D. It occurs only in monopolistically competitive industries. E. It is legal in United States. Answer: C 22. One necessary step in demonstrating monopolistic behavior is to define the market. In this process defendants would: A. claim that the market was not in equilibrium. B. want the market defined as narrowly as possible. C. deny that a market existed. D. assert that the market was not stable. E. want the market defined as broadly as possible. Answer: E 23. A market that is shared equally by 100 firms would have a Herfindahl index of : A. 1. B. 1,000. C. 500. D. 100. E. 50. Answer: D 24. A Herfindahl index of 5,000 would indicate: A. a monopoly. B. a duopoly (two firms) with equal shares. C. an oligopoly with three firms. D. a monopolistically competitive industry. E. a perfectly competitive market. Answer: B 25. Consider a market consisting of seven firms with market shares of 40, 20, 10, 10, 8, 7, and 5 percent, respectively. Which of the following statements is true? A. The four-firm concentration ratio would be 0. 03. B. The Herfindahl index would be 1,000. C. The Herfindahl index would be 2,228. D. The Herfindahl index would be 1,500. E. The Herfindahl index would be 2,338. Answer: E 26. A Herfindahl index value of 20 for a particular industry indicates that the industry is most likely to be: A. perfectly competitive. B. highly concentrated. C. oligopolistic. D. monopolistic. E. made up of illegal firms. Answer: A 27. Consider an oligopoly that has two firms, one with a 75 percent market share and the other with a 25 percent market share. The Herfindahl index for this market is: A. 5,625 B. 6,250 C. 625 D. 5,000 E. 8,500 Answer: B 28. Which of the following was formed in October 2001 to make the national antitrust laws more consistent across the developing and developed countries of the world? A. International Cooperation Network B. International Competition Network C. International Communication Network D. International Competition Organization E. International Communication Organization Answer: B 29. A monopolistic industry will have a Herfindahl index value of: A. 1. B. 100. C. 500. D. 1000. E. 10. Answer: D 30. Which of the following statements best describes the difference between economic regulation and social regulation? A. Economic regulation has little to do with price and output while social regulation explicitly deals with price and output. B. Social regulation is concerned with directly redistributing wealth while economic regulation is concerned with accumulation of wealth. C. Economic regulation is concerned with directly redistributing wealth while social regulation is concerned with accumulation of wealth. D. Social regulation has historically targeted industries such as railroads and airlines while economic regulation has all the industries under its purview. E. Economic regulation deals with price and output , while social regulation deals with health and safety matters that apply across several industries. Answer: E 31. In the United States, monopoly regulation began primarily because: A. there were no natural monopolies in the real world. B. monopolies were especially guilty of unsafe industrial practices. C. monopolies did not typically follow occupational and safety rules. D. monopolies tended to restrict output and raise prices. E. most economists believed that the majority of industries were following the purely competitive model. Answer: D 32. Most natural monopolies are regulated at some level by government because: A. an unregulated natural monopolist would produce an inefficiently low level of output. B. an unregulated natural monopolist would produce only for government bureaucrats. C. an unregulated natural monopolist would charge an inefficiently low price in the market. D. an unregulated natural monopolist would charge an inefficiently high price in the market. E. an unregulated natural monopolist would produce a large quantity at a high price. Answer: D 33. When regulators require that a natural monopoly sets price equal to average total cost: A. it is said to be allowing a fair rate of return. B. the firm earns a super normal profit. C. the firm shuts down permanently. D. the firm operates at the profit-maximizing level of output. E. the firm shuts down temporarily. Answer: A 34. A regulated firm may have an incentive to spend an inefficiently high amount on capital when: A. it becomes deregulated. B. fair rate of return regulation is used. C. regulators set price equal to marginal cost. D. it is part of a monopolistically competitive industry. E. it is allowed to charge a monopoly price. Answer: B NARRBEGIN: Figure 12. 1 The figure below shows revenue and cost curves of a natural monopoly firm. Figure 12. 1 In the figure, D: Demand curve MR: Marginal revenue curve MC: Marginal cost curve ATC: Average total cost curve NARREND 35. Refer to Figure 12. 1. The natural monopolist will charge a price equal to: A. P4. B. P3. C. P2. D. P1. E. P5. Answer: C 36. According to Figure 12. 1, the price under perfect competition will be: A. P1. B. P3. C. P5. D. P4. E. P2. Answer: D 37. According to Figure 12. 1, to attain allocative efficiency the regulatory body must attempt to set the price equal to: A. P2. B. P3. C. P1. D. P4. E. P5. Answer: D 38. Refer to Figure 12. 1. Identify the fair-rate-of-return price. A. P5 B. P2 C. P4 D. P1 E. P3 Answer: E 39. Refer to Figure 12. 1. If the regulatory agency sets the fair-rate-of-return price, the monopolist will: A. suspend production. B. just break even. C. earn super normal profits. D. incur losses. E. be able to cover only the variable costs. Answer: B 40. One reason that governments may intervene in the operation of a business through regulation is to: A. increase monopoly profits. B. reduce the amount of information consumers have about a product. C. increase negative externalities. D. promote competitive behavior. E. decrease positive externalities. Answer: D 41. To avoid driving a natural monopolist into bankruptcy, regulatory commissions: A. allow the monopolist to enjoy an economic profit. B. do not allow the monopolist to make an accounting profit. C. subsidize the monopolist to help it break even. D. allow the monopolist to earn a fair rate of return. E. allow the monopolist to temporarily shut down. Answer: D 42. When regulating a natural monopoly, government officials face a dilemma that: A. the efficient price may not allow the firm to break even. B. the efficient price may lead to an inefficiently high level of output. C. the efficient price leads to an output level that is too low. D. the efficient price may not allow the firm to enjoy positive profits. E. long-run average costs are constantly increasing. Answer: A 43. Why was trucking deregulated in the U. S. in the 1980s? A. There was an acute shortage of trucks. B. The truckers were making huge profits. C. A significant percent of all truck-miles were logged by empty trucks. D. The truckers were engaged in black marketing. E. The rates charged by the truckers were exorbitantly high. Answer: C 44. Why do the regulated companies oppose deregulation? A. They are thrown out of the market. B. They are deprived of their rights to continue business. C. They are denied every kind of support from the government. D. They would incur losses on account of increased competition. E. They would become unpopular as no longer they would be controlled by the government. Answer: D 45. If a market becomes deregulated and is forced to change from monopoly to competition, the monopolist may be stuck with costly assets for which no returns are possible. These assets are known as: A. monopoly assets. B. market assets. C. non-returnable assets. D. stranded assets. E. sunk assets. Answer: D 46. Cities and local governments in the United States have contracted out many services in the recent years. It implies that: A. government has taken over the ownership of many firms in the service sector. B. private firms are now providing certain services for a government entity. C. government has surrendered its ownership of public assets to private individuals. D. the government is the sole purchaser of certain services provided by the private firms. E. the government has borrowed funds from large private firms. Answer: B 47. The argument made in favor of privatization is: A. that the government can make more money with which to pay off its debts. B. that the private sector can only make zero economic profit. C. that the private sector will operate more efficiently than the public sector. D. that the government can devote more time to administrative matters. E. the government can keep a track of the activities of the private sector. Answer: C 48. Which of the following calculations is necessary to determine whether a regulation should be implemented? A. Marginal cost-marginal revenue calculations B. Cost effectiveness calculations C. Total cost-total revenue calculations D. Cost minimization calculations E. Cost-benefit calculations Answer: E 49. An example of the opportunity costs involved with social regulation would be: A. the monetary costs of hiring administrative assistants to fill out OSHA safety reports. B. the environmental costs of pollution control required under the Clean Air Act. C. the monetary costs of laboratory trials required to try out a new drug. D. the lives that are lost because new drugs are not introduced quickly enough. E. the monetary cost of manufacturing a life saving drug. Answer: D 50. If social regulation increases a firm’s fixed and variable costs: A. then both marginal cost and average total cost will increase, and the firm will produce more. B. then both marginal cost and avetage total cost will increase, and the firm will produce less. C. then both marginal cost and average total cost will decrease, and profits will increase. D. Marginal cost will increase, average total cost will be constant, and price will decline. E. both price and quantity produced will fall. Answer: B 51. Which of the following factors helps to determine how the costs of social regulation are split between consumers and producers. A. The price elasticities of demand and supply B. The quantity produced by the firm C. The average total costs of the firm before regulation D. The number of consumers in the market E. The number of producers in the market Answer: A 52. Suppose that the demand for apples in Washington is elastic and the supply is inelastic. If the government of Washington passes a law prohibiting the use of synthetic pesticides that increases the marginal and average costs of producing apples, then: A. the price of Washington State apples will decline. B. Washington will stop producing apples, and New York apple growers will benefit. C. apple growers will pass most of the increased costs on to consumers in the form of higher apple prices. D. apple growers will keep prices constant but reduce costs by advertising less. E. apple growers will bear most of the increased costs of regulation, and prices will increase only slightly. Answer: E 53. If social regulation causes the supply curve in a market to shift up because of higher marginal costs, then: A. both consumer and producer surplus will decrease. B. both producer and consumer surplus will increase. C. consumers will gain at the expense of producers. D. producers will gain at the expense of consumers. E. there will be no change in the sum of producer and consumer surplus, although its division may change. Answer: A NARRBEGIN: Figure 12. 2 In the following figure, the first panel shows a market situation prior to regulation and the second panel shows the effects of regulation. Figure 12. 2 In the figure, D: Demand curve for automobiles S1: Supply curve of automobiles prior to regulation S2: Supply curve of automobiles after regulation FG: Clean up cost per unit NARREND 54. What is the total societal surplus prior to regulation described in Figure 12. 2? A. Area 0FGQ1. B. Area BEP1. C. Area CEP1. D. Area FGEP1. E. Area BEC. Answer: E 55. According to Figure 12. 2, the total clean up cost for the society prior to regulation is: A. area 0BEQ1. B. area 0FIQ2. C. area 0FGQ1. D. area 0P1EQ1. E. area 0CEQ1. Answer: C 56. According to Figure 12. 2, the total clean up cost after the regulation is: A. area 0FIQ2. B. area 0FGQ1. C. area BEC. D. area BEP1. E. area BEGF. Answer: A 57. According to Figure 12. 2, the total societal surplus after the regulation is: A. area BEC. B. area AECJ. C. area IGQ1Q2. D. area 0FIQ2. E. area BAJ. Answer: E 58. Refer to Figure 12. 2. The regulation will benefit the society if: A. area BAJ > area 0FIQ2. B. area AECJ > area IGQ1Q2. C. area IGQ1Q2 > area AECJ. D. area BAJ > BAC. E. area 0FIQ2 > area BAJ. Answer: C 59. Graphically, consumer surplus is the area: A. above the demand curve. B. below the supply curve. C. under the demand curve and above the supply curve. D. above the market supply curve and under the equilibrium price. E. under the market demand curve and above the equilibrium price. Answer: E 60. Which of the following raises the economic freedom of a country: A. Limited international movement of productive resources B. Higher taxes C. Red-tapism and bureaucracy D. Reduction of trade barriers like tariffs and quotas E. Reduction of government subsidies on gasoline Answer: D 61. Which of the following is not a component of the index which measures economic freedom of a country? A. Monetary freedom B. Cultural freedom C. Government size D. Freedom from corruption E. Labor freedom Answer: B 62. Monetary freedom refers to: A. the ability to create and operate an enterprise easily. B. the absence of tariff and non-tariff barriers that affect imports of goods. C. the tax burden and overall tax revenue of the government. D. price stability with an assessment of price control. E. the free flow of foreign capital. Answer: D 63. According to the Index of Economic Freedom, which of the following is the freest economy in the world? A. Cuba B. Zimbabwe C. Hong Kong D. North Korea E. Libya Answer: C 64. Which of the following is true of the General Agreement on Tariffs and Trade (GATT)? A. It is now called the World Agreement on Trade and Tariffs. B. It was the global trade agreement that did away with the gold standard. C. It was a United States’ policy to raise tariffs on imported sugar. D. It was the first global trade agreement that followed World War II. E. It was a global trade agreement to raise tariffs. Answer: D 65. Delegates from different countries of the world met at Geneva in April 1947 which resulted in the formation of the first global trade agreement. Its main objective was: A. to create multiple trade barriers in the member countries. B. to enable the member countries to maintain their autarkic conditions. C. to provide security to the domestic producers of the member countries by prohibiting international trade. D. to create an atmosphere of economic rivalry in the international sphere. E. to liberalize trade for mutual prosperity of the members. Answer: E 66. Although the GATT was supported by most of the countries of the world, yet global trade shrank during the close of the last decade. This was due to: A. growing suspicion among the nations of the world. B. hyperinflation in the major economies of the world. C. the recession which began in 2007. D. political turmoil in the Asian countries. E. the desire among the major players to dominate the international market. Answer: C 67. The "buy American" restriction introduced in the U. S. in 2009 required: A. entities receiving subsidies to invest in American stocks and bonds. B. entities receiving subsidies to sell their produce only to American consumers. C. entities receiving subsidies to produce only those goods specified by the U. S. government. D. entities receiving subsidies to maintain a price for their products as specified by the American government. E. entities receiving subsidies to purchase resources from American suppliers. Answer: E 68. Which of the following is a measure of the size of the total economy? A. Gross domestic product B. Government debt burden C. The ratio of imports to exports D. Stock of inventories E. The money supply Answer: A 69. If the tax rate increases with an increase in the tax base, the tax is said to be: A. regressive in nature. B. a progressive tax. C. a proportional tax. D. an indirect tax. E. inequitable in nature . Answer: B 70. Under the License Raj system in India: A. the producers having the licence could produce as much as they wanted. B. the producers were allowed to manufacture goods only for the government. C. only the producers having the licence were allowed to import inputs from abroad. D. producing beyond the specified limit was a punishable offence. E. the producers could only produce to meet their subsistence needs. Answer: D TRUE/FALSE 1. Antitrust policies are a set of measures which are taken to liberate the economy from unnecessary governmental controls. Answer: False 2. Sherman Antitrust Act bans price discrimination that substantially lessens competition or injures particular competitors. Answer: False 3. Actions against alleged violators of the antitrust statutes may be initiated by the Justice Department, by the Federal Trade Commission, and by private plaintiffs. Answer: True 4. Being a monopoly or attempting to monopolize act as sufficient evidence that lead to a guilty verdict under the rule of reason. Answer: False 5. Under the Clinton administration, attempts were made to relax the antitrust enforcement efforts of the Reagan administration. Answer: False 6. If there are 50 firms in the industry, and each have an equal market share, the Herfindahl index will be equal to 1,00,000. Answer: False 7. If a market is narrowly defined, the market share of each firm declines than if it is broadly defined. Answer: False 8. According to the per se rule, activities that were potentially monopolizing tactics were illegal. Answer: True 9. If the Herfindahl index for automobiles take foreign competition into account, the Herfindahl index for the U. S. automobile industry would be significantly higher. Answer: False 10. Antitrust laws in the United States rely more on economic theory and the rule of reason approach, whereas the European Union relies more on the per se approach. Answer: True 11. One difference between economic and social regulation is that economic regulation usually pertains to a specific industry, whereas social regulation applies most if not all industries. Answer: True 12. Regulation of monopolies is justified on the ground that a monopolist sells too less at a too high price. Answer: True 13. When a monopoly is regulated it is required to sell lower output at a lower price. Answer: False 14. A regulated natural monopoly is allowed to set a price which will enable it to earn an above-normal profit. Answer: False 15. Regulation of enterprises by the government has always been found to make the market more efficient. Answer: False 16. Social regulation means that the government dictates the price that a firm must charge and/or the quantity that a firm must supply. Answer: False 17. In a natural monopoly, government regulation is often used to ensure more beneficial price and output combinations for consumers in the market than would exist in the absence of regulation. Answer: True 18. Privatization occurs when a state owned firm is transferred to private ownership. Answer: True 19. Restrictions on the types of food additives that breakfast cereal manufacturers can use is an example of a social regulation. Answer: True 20. When examining the costs of regulation to the U. S. economy, economists can safely ignore the opportunity costs of regulation because they are relatively insignificant compared with the direct costs of regulation. Answer: False 21. Any kind of social regulation raises the per unit cost of production of a good and hence leads to a loss of producer and consumer surplus. Answer: True 22. Economic freedom refers to the freedom of the government to control resources and labor in a country. Answer: False 23. A country is likely to have investment freedom if the government allows free flow of foreign capital into the domestic economy. Answer: True 24. For the world as a whole, economic freedom increased since 1994 as the countries opened up in the world market and the governments slashed tax rates. Answer: True 25. Bills introduced in the United States in 2009 reduced overall trade between America and the rest of the world. Answer: True 26. The International Communication Network which is the successor of GATT settles trade disputes among its member countries. Answer: False 27. The recession beginning in 2007 led many governments to begin encouraging trade. Answer: False 28. International regulation occurs at two levels, one in which a specific government regulates the activities of individual firms operating within the country, and another in which several nations are involved. Answer: True 29. The Social Security tax structure in the United States is regressive in nature. Answer: False 30. When the government borrows by having the Treasury Department sell IOUs or bonds to finance deficit, it is not considered as a public debt. Answer: False Test Bank for Microeconomics William Boyes, Michael Melvin 9781111826154

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