Class: Date: CH 17 sample MC - 80 Multiple Choice Identify the choice that best completes the statement or answers the question. 1. 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. 2. 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. 3. 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. 4. 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. 5. 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. 1
6. 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. 7. 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. 8. 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. 9. 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. 10. 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. 11. 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. 12. 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. 2
13. 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. 14. 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. 15. 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 16. 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 3
17. 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 18. 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. 19. 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 20. 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 21. 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 4
22. 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 23. 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. 24. 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. 25. 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. 26. 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. 5
27. 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 28. 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 29. 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 6
30. 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 31. 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. 32. 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 33. 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. 34. 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 35. 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. 36. 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 7
37. 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 38. 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. 39. 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. 40. 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 41. Regulation consists of government rules that influence i. product standards and types. ii. prices. iii. conditions under which new firms may enter an industry. a. ii and iii. b. ii only. c. i and ii. d. i and iii. e. i, ii, and iii. 42. Which of the following is correct about economic regulation in the United States? a. Regulation started in 1887 and continues to increase. b. Regulation expanded its coverage until the 1970s and then began to decrease. c. The United States is completely without any economic regulation. d. The only industries regulated in the United States are cartels. e. Regulation reached its peak in 1939, then reached a minimum in the 1970s, and has increased since then. 43. At the peak of regulation in the United States, nearly of the nation's output was produced by regulated industries. a. 3 percent b. 10 percent c. 25 percent d. 50 percent e. 67 percent 8
44. When in the history of the United States was the regulation of industries the greatest? a. the 1880s b. during the Great Depression in the 1930s c. the mid-1970s d. the present time e. the 1990s 45. Which of the following are regulatory agencies of the U.S. government? i. Interstate Commerce Commission. ii. Securities and Exchange Commission. iii. U.S. Defense Department. a. i only. b. ii only. c. i and ii. d. i and iii. e. i, ii, and iii. 46. In a regulated industry, individual firms are usually free to determine a. the prices to charge. b. the quantities to produce. c. their production technology. d. the markets to serve. e. Both answers C and D are correct. 47. Which of the following forms of regulation do regulated industries typically experience? i. control of the price the firm can charge ii. control of the markets the firm will serve iii. regulation of what production technology to use a. i only. b. iii only. c. i and ii. d. i and iii. e. i, ii, and iii. 48. Who receives benefits if regulation works according to public interest theory? a. the entire economy b. cohesive interest groups c. everyone not in the cohesive interest group d. the regulators e. It is impossible to determine who benefits. 49. Who receives large benefits if regulation works according to the capture theory? a. the entire economy b. cohesive interest groups c. everyone not in the cohesive interest group d. consumers rather than producers e. It is impossible to determine who benefits the most. 50. Regulation that serves the interests of the producer sets price a. using the marginal cost pricing rule. b. using the average cost pricing rule. c. so that the firm maximizes profit. d. so that the firm maximizes total revenue. e. using rate of return regulation. 9
51. How should a natural monopoly be regulated under the public interest theory of regulation? a. by setting price equal to the average cost of production b. by allowing a price that maximizes the profit of the natural monopoly c. by using a marginal cost pricing rule d. by subsidizing other producers to compete with the monopoly e. by using rate of return regulation 52. A natural monopoly that is regulated to set price equal to marginal cost a. earns an economic profit. b. breaks even by earning a normal profit. c. incurs an economic loss. d. could make an economic loss, an economic profit, a normal profit. e. earns zero normal profit. 53. Regulating a natural monopoly using a marginal cost pricing rule results in an economic loss for the firm because a. demand is elastic for the product. b. the owner of the natural monopoly is inefficient. c. the average total cost curve lies below the firm's marginal cost curve. d. the intersection of the average total cost curve and the demand curve is above the intersection of the marginal cost curve and the demand curve. e. the firm's marginal revenue curve is always below its demand curve. 54. Which of the following explains why the marginal cost pricing rule results in an economic loss for a natural monopoly? a. The ATC curve is downward sloping, therefore the MC is lower than the ATC. b. The demand curve is downward sloping, therefore price falls as quantity increases. c. The MC is constant and equal to price. d. Because output is determined by setting MC equal to the price, consumer surplus is maximized. e. The firm's MR is always less than its price. 55. Which of the following is an example of a two-part tariff? a. price discrimination based on the buyers' willingness to pay b. charging a hookup fee plus a monthly charge equal to marginal cost c. higher sales tax on specific products d. different prices based on the cost of production and quantity bought e. a regulated firm uses marginal cost pricing for some customers and average cost pricing for other customers 56. If a natural monopoly cannot cover its total cost with its revenue, and the government wants it to follow a marginal cost pricing rule, then the government might need to a. tax the monopoly. b. subsidize the monopoly. c. create a regulatory agency. d. eliminate the regulatory agency. e. pay the monopoly's customers a sum equal to the deadweight loss. 10
57. A deadweight loss arises when the government i. subsidizes natural monopolies by taxing some other activity. ii. uses the average cost pricing rule. iii. regulates a monopoly so that price is greater than marginal cost. a. i only. b. ii only. c. iii only. d. i and ii. e. i, ii, and iii. 58. For a natural monopoly to cover its total cost, its price must equal its a. average total cost. b. marginal cost. c. demand. d. total fixed cost. e. marginal revenue. 59. Managers of a monopoly under rate of return regulation have an incentive to a. exaggerate the firm's costs. b. underestimate the firm's costs. c. minimize the monopoly's deadweight loss. d. earn zero economic profit. e. exaggerate the firm's profit. 60. Who benefits from the practice of some natural monopolies to count sumptuous offices, free baseball tickets, golf excursions, and limousines as costs of production? a. stockholders b. managers of the monopoly c. customers of the monopoly d. regulators of the industry. e. None of the above answers is correct. 61. A regulation that motivates a firm to operate efficiently and keep its costs under control is a. average cost pricing. b. marginal cost pricing. c. rate of return regulation. d. price cap regulation. e. cost cap regulation. 62. Price cap regulation is regulation that a. is a marginal cost pricing rule. b. is an average cost pricing rule. c. motivates the firm to operate efficiently and keep its costs under control. d. has the same incentive effects as does rate of return regulation. e. is the same as allowing the firm to operate as if it was totally unregulated. 63. Price caps and earnings-sharing plans are two forms of a. average cost pricing regulation. b. regulation designed to give firms the incentive to operate efficiently. c. rate of return regulation. d. regulation that have the unfortunate effect of giving firms the incentive to exaggerate their costs. e. marginal cost pricing regulation. 11
64. Under the public interest theory of regulation, the goal of regulating oligopolies and cartels is a. to provide a larger, though not maximum, profit for the firms. b. to use average cost pricing. c. to provide an outcome similar to the competitive outcome. d. to provide a the maximum profit for the firms. e. None of the above answers is correct. 65. One method of cartel regulation that can result in the firms earning the maximum profits is a. public interest theory. b. average cost pricing. c. marginal cost pricing. d. to place an output limit on each firm in the industry. e. to require that each firm lower its price so that the quantity sold increases, thereby increasing the firms' profits. 66. Deregulation is the process of restrictions on prices, product standards and types, and entry conditions. a. increasing b. not changing c. evaluating d. decreasing e. fine-tuning 67. The first national regulatory agency to be set up in the United States was the a. Atomic Energy Commission. b. Securities and Exchange Commission. c. Interstate Commerce Commission. d. Food and Drug Administration. e. Federal Energy Regulatory Commission. 68. Rate of return regulation is designed to allow a natural monopoly to a. earn an economic profit. b. earn a normal profit. c. underestimate its average cost. d. compete with any firm entering the market. e. earn zero normal profit. 69. When a regulatory agency uses rate of return regulation, the a. agency is able to eliminate the deadweight loss. b. regulated firm has no incentive to cut costs. c. regulated firm's profit must be maximized for the market to be efficient. d. regulated firm must receive a government subsidy. e. the agency is using a form of marginal cost pricing. 70. A regulation that motivates the firm to operate efficiently and keep its costs under control is called a. an output regulation. b. a subsidy. c. price cap regulation. d. deregulation. e. a price-capture theory regulation. 71. Who can initiate an antitrust lawsuit against a firm? a. only the Department of Justice b. only injured competitors c. only injured customers d. government agencies and injured private parties e. only injured competitors or injured customers 12
72. In the 1970s, when a gasoline price ceiling was imposed that was below the equilibrium price of gasoline, some gas stations required that buyers of gas also purchase other products sold at the station. This policy is an example of which of the following? a. price discrimination b. tying arrangements c. exclusive dealing d. requirements contract e. resale price maintenance 73. A tying arrangement a. prevents a firm from selling competing items. b. prevents a buyer from reselling a product outside a specified area. c. requires that other goods be bought from the same firm. d. requires a firm to buy all its requirements of a particular item from a single firm. e. is a type of price discrimination. 74. Resale price maintenance can be illegal a. under the Clayton Act. b. under the Sherman Act. c. only if the distributors engage in predatory pricing. d. if distributors tell the manufacturer the maximum price at which they will sell the product. e. only when it is combined with territorial confinement. 75. Larry's Appliances requires customers to buy a regular oven in order to buy a microwave oven and this is the only way Larry's will sell a microwave oven. Larry's is a. engaging in resale price maintenance. b. definitely increasing its market power. c. engaging in predatory pricing. d. engaging in tying. e. fixing its prices. 76. Economists are skeptical that occurs very often because firms engaging in it are certain to suffer an economic loss for a period of time. a. a tying arrangement b. inefficient resale price maintenance c. predatory pricing d. efficient resale price maintenance e. exclusive dealing 77. The Department of Justice will examine and possibly try to block a. any merger in a market with a Herfindahl-Hirschman Index (HHI) less than 1,000. b. a merger in a market with a HHI between 1,000 and 1,800 that increases the index more than 1,000. c. a merger in a market with a HHI greater than 1,800 that increases the index more than 50. d. any merger that decreases the HHI by more than 500. e. any merger that decreases the HHI by more than 50. 78. If an industry has a Herfindahl-Hirschman index of 800, it is considered a a. competitive market. b. moderately concentrated market. c. concentrated market. d. monopoly. e. small market. 13
79. Suppose that an industry has an HHI of 1,900. Two firms in the industry want to merge. Under which conditions does the Department of Justice challenge the merger? a. The market is considered competitive, so the merger will not be challenged. b. The merger will be challenged if it raises the HHI by 100 or more points. c. The merger will be challenged if it raises the HHI by 50 or more points. d. The merger will be challenged if it raises the HHI by 200 or more points. e. The merger will be challenged if it raises the HHI by 500 or more points. 80. The first antitrust act was passed in. a. the Clayton Act; 1890 b. the Sherman Act; 1890 c. the Clinton Act; 1999 d. the Rockefeller Act; 1890 e. the Clayton Act; 1914 81. Which antitrust law has two main provisions, one against conspiring with others to restrict competition and the other making it a felony to monopolize or attempt to monopolize? a. Sherman Act b. Clayton Act c. Robinson-Patman Act d. Celter-Kefauver Act e. Bade-Parkin Act 82. The Clayton Act a. replaced the Sherman Act. b. along with its amendments, outlawed several business practices if they substantially lessened competition or created monopoly. c. along with its amendments, prohibited all business practices that substantially lessen competition or create monopoly. d. was the first anti-trust law in the United States. e. was repealed in 1985. 83. If Polka Cola prevents all of its retail outlets from selling any other competing soft drink, it is engaged in a. a tying agreement. b. a requirement contracts. c. an exclusive deal. d. territorial confinement. e. resale price maintenance. 84. Which of the following is always illegal? a. possessing a very large market share b. selling at a price below other producers because of efficiency c. price fixing d. attempting to merge with a competitor e. price discrimination 85. Predatory pricing occurs when a firm sets a price to drive competitors out of business with the intention of then setting a price. a. monopoly; high b. monopoly; low c. low; monopoly d. low; low e. high; monopoly 14
86. In the case against Microsoft, it was claimed that combining Internet Explorer and Windows was a. predatory pricing. b. an illegal tying agreement. c. creating one product that is convenient for the consumers. d. illegal territorial confinement. e. an inefficient resale maintenance agreement. 87. 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. 88. 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 15