Chapter 17: Government and Business
MULTIPLE CHOICE
1. When economies of scale persist to such high levels of output that it is efficient to have only one firm
produce, the resulting firm is known as a(n):
a.
patent holder.
b.
regulated monopolist.
c.
reluctant monopolist.
d.
natural monopolist.
e.
acceptable monopolist.
2. When setting rates that natural monopolists can charge, regulatory commissions attempt to establish a
maximum price:
a.
at the minimum long-run average cost of the monopolist.
b.
at the minimum short-run average cost of the monopolist.
c.
where price equals average total cost plus a fair rate of return on the invested capital of the
monopolist.
d.
where price equals average variable cost plus a fair rate of return on the invested capital of
the monopolist.
e.
at the minimum long-run average variable cost of the monopolist.
3. Catalina Cable Company (CCC) faces a demand for basic cable service given by P = 160 – Q. It has
total costs (exclusive of the required rate of return on its invested capital) of TC = 250 + Q2. If the
commission that regulates CCC determines that $500 is sufficient to compensate equity holders for
their invested capital, what are the regulated price and output?
a.
P = 85, Q = 75.
b.
P = 75, Q = 85.
c.
P = 65, Q = 95.
d.
P = 55, Q = 105.
e.
P = 45, Q = 115.
4. Breckner Gas Company faces a demand for their gas given by P = 30 – 0.25Q. It has total costs
(exclusive of the required rate of return on its invested capital) of TC = –60 + 8Q + 0.75Q2. If the
commission that regulates Breckner determines that $100 is sufficient to compensate equity holders for
their invested capital, what are the regulated price and output?
a.
P = 23.75, Q = 25.
b.
P = 25, Q = 20.
c.
P = 27.5, Q = 10.
d.
P = 22.5, Q = 30.
e.
P = 20, Q = 40.
MSC: Applied
5. Teal Taxi Company has a regulated taxi monopoly in Colortown. It faces a demand for rides given by
P = 3 – 0.02Q. It has total costs (exclusive of the required rate of return on its invested capital) of
TC = –110 + 0.1Q + 0.01Q2. If the commission that regulates Teal Taxi determines that $100 is
sufficient to compensate equity holders for their invested capital, what are the regulated price and
output?
a.
P = 0, Q = 150.
b.
P = .5, Q = 125.
c.
P = 1, Q = 100.
d.
P = 1.5, Q = 75.
e.
P = 2, Q = 50.
6. The lengthy delays for hearings and appeals over proposed rate increases by a natural monopoly are
known as:
a.
regulatory lags.
b.
leaves of appeal.
c.
leaves of repeal.
d.
prudent delays.
e.
the public’s right to be heard.
7. The major disadvantage of rate regulation of natural monopolies is that:
a.
natural monopolists spend too much time lobbying for higher rates.
b.
unlike a competitive firm, the natural monopoly has too much incentive to increase
efficiency.
c.
the regulatory bureaucracy grinds slowly and generates regulatory lags.
d.
state public service commissions are poorly staffed and supervised.
e.
natural monopolists spend too much money on philanthropic activities.
8. The market concentration ratio:
a.
shows the percentage of total sales or production accounted for by the four largest firms in
an industry.
b.
is a widely used, reliable measure of an industry’s market structure.
c.
was developed by a Swedish and a German statistician in the late 1890s.
d.
shows the percentage of total sales or production accounted for by the 10 largest firms in
the United States.
e.
is so flawed a measure of an industry’s market structure that it is almost never used.
9. Many economists believe that competition is preferable to monopoly:
a.
because competition allocates resources more efficiently than monopoly does.
b.
because diffuse economic power leads to more diffuse political power.
c.
because competition yields a greater variety of goods and services.
d.
regardless of the costs of de-concentrating a concentrated industry.
e.
because monopolies tend to pay too little in taxes.
10. The Herfindahl-Hirschman index measures market structure as the:
a.
sum of the squared market shares of the 10 largest firms in an industry.
b.
sum of the squared market shares of all firms in an industry.
c.
sum of the squared market shares of the four largest firms in an industry.
d.
squared market share of the largest firm in an industry.
e.
sum of the market shares of the four largest firms in an industry.
d.
10.
e.
1.
a.
250.
b.
1,350.
c.
1,500.
d.
1,600.
e.
1,850.
a.
40.
b.
50.
c.
60.
d.
10.
e.
12.
14. If there are two equal-sized firms in an industry, the Herfindahl-Hirschman index would be:
a.
50.
b.
100.
c.
2,500.
e.
250.
15. The first federal antitrust law was the:
a.
Sherman Act.
b.
Clayton Act.
c.
Federal Trade Commission Act.
d.
Robinson-Patman Act.
e.
Celler-Kefauver Act.
16. The antitrust law that made “every contract, combination . . . or conspiracy, in restraint of trade” illegal
was the:
a.
Sherman Act.
b.
Clayton Act.
c.
Federal Trade Commission Act.
d.
Robinson-Patman Act.
e.
Celler-Kefauver Act.
17. The antitrust law that made certain specified practices that tend to reduce competition or create
monopoly illegal was the:
a.
Sherman Act.
b.
Clayton Act.
c.
Federal Trade Commission Act.
d.
Robinson-Patman Act.
e.
Celler-Kefauver Act.
18. The antitrust law that made giving discounts to large buyers on the basis of volume purchases illegal
was the:
a.
Sherman Act.
b.
Clayton Act.
c.
Federal Trade Commission Act.
d.
Robinson-Patman Act.
e.
Celler-Kefauver Act.
19. The law that closed a loophole in an earlier law that allowed firms to merge to monopoly by buying a
firm’s assets rather than its shares was the:
a.
Sherman Act.
b.
Clayton Act.
c.
Federal Trade Commission Act.
d.
Robinson-Patman Act.
e.
Celler-Kefauver Act.
20. The antitrust law aimed at preventing unfair competitive practices, including those not yet dreamed up
by creative entrepreneurs, was the:
a.
Sherman Act.
b.
Clayton Act.
c.
Federal Trade Commission Act.
d.
Robinson-Patman Act.
e.
Celler-Kefauver Act.
21. The Supreme Court case that reestablished sheer size as a violation per se of the antitrust laws was the:
a.
Alcoa case.
b.
Standard Oil case.
c.
Von’s Grocery case.
d.
Brown Shoe case.
e.
IBM case.
22. The rule of reason, which states that only unreasonable combinations in restraint of trade are illegal,
was enunciated in the:
a.
Alcoa case.
b.
Standard Oil case.
c.
Von’s Grocery case.
d.
Brown Shoe case.
e.
IBM case.
23. A competitive market with demand Q = 120 – 4P and supply Q = –30 + 2P is in equilibrium. If
government imposes a price floor of 26, what quantity will be traded on the market?
a.
28.
b.
16.
c.
20.
d.
22.
e.
None of the above.
24. A competitive market with demand Q = 120 – 4P and supply Q = –30 + 2P is in equilibrium. If
government imposes a price ceiling at 22, what quantity will be traded on the market?
a.
28.
b.
32.
c.
20.
d.
14.
e.
None of the above.
25. A competitive market with demand Q = 120 – 4P and supply Q = –30 + 2P is in equilibrium. If
government imposes a price floor of 23, what quantity will be traded on the market?
a.
28.
b.
16.
c.
20.
d.
22.
e.
None of the above.
26. An external economy occurs whenever a(n):
a.
action taken by a firm or individual results in uncompensated benefits to others.
b.
action taken by a firm or individual results in compensated benefits to others.
c.
action taken by a firm or individual results in compensated costs to others.
d.
firm trains workers in a highly specialized, firm-specific skill.
e.
action taken by a firm or individual results in uncompensated costs to others.
27. If an activity produces an external diseconomy, then there will be too:
a.
much of the activity undertaken by private parties from a social viewpoint.
b.
little of the activity undertaken by private parties from a social viewpoint.
c.
much of the activity undertaken by government from a private viewpoint.
d.
much of the activity undertaken by private parties from a private viewpoint.
e.
much of the activity undertaken by government from a social viewpoint.
28. If an activity produces an external economy, then there will be too:
a.
much of the activity undertaken by private parties from a social viewpoint.
b.
little of the activity undertaken by private parties from a social viewpoint.
c.
much of the activity undertaken by government from a private viewpoint.
d.
much of the activity undertaken by private parties from a private viewpoint.
e.
much of the activity undertaken by government from a social viewpoint.
29. The socially optimal level of pollution control occurs where the marginal:
a.
benefit of pollution control is zero.
b.
cost of pollution is minimized.
c.
cost of pollution control equals the marginal cost of pollution.
d.
cost of pollution control is minimized.
e.
cost of pollution control equals the marginal benefit of pollution.
30. An external diseconomy occurs whenever a(n):
a.
action taken by a firm or individual results in uncompensated benefits to others.
b.
action taken by a firm or individual results in compensated benefits to others.
c.
action taken by a firm or individual results in compensated costs to others.
d.
firm trains workers in a highly specialized, firm-specific skill.
e.
action taken by a firm or individual results in uncompensated costs to others.
31. The cost of pollution originating in the chemical industry is Cp = 4P + 2P2, where P is the quantity of
pollutants emitted. The cost of pollution control for this industry is Cc = 120 – 12P. What is the
optimal level of pollution?
a.
0 units.
b.
1 unit.
c.
2 units.
d.
3 units.
e.
4 units.
32. An effluent fee is a:
a.
fine polluters must pay the government for discharging waste.
b.
brokerage fee paid to the EPA by parties exchanging transferable emissions permits.
c.
fine paid to the EPA by firms caught violating the pollution laws.
d.
fine paid to the injured parties by firms caught violating the pollution laws.
e.
way to reduce the costs of regulated firms.
33. The cost of pollution originating in the chemical industry is Cp = 4P + 2P2, where P is the quantity of
pollutants emitted. The cost of pollution control for this industry is Cc = 120 – 12P. What is the
optimal effluent fee?
a.
$4.
b.
$8.
c.
$12.
d.
$16.
e.
$24.
34. Transferable emissions permits establish property rights to:
a.
generate a certain amount of pollution.
b.
generate more business for the Chicago Board of Trade.
c.
reduce the regulatory burden of the FTC.
d.
allocate the costs of pollution control equitably.
e.
generate unlimited amounts of specified pollutions.
35. A public good is any good that:
a.
is provided by the federal government.
b.
can be consumed by everyone.
c.
can be consumed by any person without reducing the amount available to be consumed by
everyone else.
d.
can be easily withheld from consumers.
e.
citizens demand of their public institutions.