CH 17 sample MC. Name: Class: Date: Multiple Choice Identify the choice that best completes the statement or answers the question.

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1 Class: Date: CH 17 sample MC Multiple Choice Identify the choice that best completes the statement or answers the question. 1. 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. 2. 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. 3. 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. 4. 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. 5. 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. 6. 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. 1

2 7. Regulations over economic activity peaked during what time period? a. the 1990s b. the 1930s c. the 1970s d. the 1940s e. the 1900s 8. 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. 9. 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. 10. 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. 11. 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. 12. 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. 13. 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. 2

3 14. 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. 15. 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. 16. 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. 17. 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. 18. 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. 19. 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. 20. 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 3

4 21. 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. 22. 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. 23. 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. 24. 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. 25. 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. 26. 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. 4

5 27. 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. 28. 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. 29. 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. 30. 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 31. 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. 32. 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. 5

6 33. 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, 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. $ 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 6

7 36. 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. 37. 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. $ 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, 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. 40. 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. 41. 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. 7

8 42. 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. 43. 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. 44. Regulation over the taxicab industry in New York City is designed to maintain a safe fleet of cabs and a high-quality 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 45. 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

9 46. 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. $ 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 48. 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. 49. The first antitrust law in the United States was the a. Sherman Act, passed in b. Clayton Act, passed in c. Clayton Act, passed in d. Sherman Act, passed in e. Sherman Act, passed in 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. 51. 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. 52. 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 9

10 53. 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 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. 55. 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. 56. 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 57. If the Herfindahl-Hirschman Index in an industry is above 1,800, a merger that increases the Herfindahl-Hirschman 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. 58. 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. 10

11 59. 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. 60. 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 61. 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. 62. 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 63. 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. 64. 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. 11

12 65. 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; 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 67. 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. 68. 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. 12