Econ Ch. 11-13

Which of the following characterizes monopolistic competition?

A) Many interdependent firms sell a homogeneous product.
B) A few firms produce a particular type of product.
C) Many firms produce a particular type of product, but each maintains some independent control over its own price.
D) A few firms produce all of the market supply of a good.

C) Many firms produce a particular type of product, but each maintains some independent control over its own price.

2. Monopolistically competitive industries are characterized by:
A) Low concentration ratios. B) Independent production decisions.
C) Low entry barriers. D) All of the above.

D) All of the above.

In monopolistic competition, a firm:
A) Has no market power.
B) Captures significant economies of scale
C) Has a downward-sloping demand curve.
D) Has a standardized product that all firms produce.

C) Has a downward-sloping demand curve.

If there are many firms in an industry producing goods that are similar but slightly different, this is an example of:
A) Perfect competition. B) Monopolistic competition. C) Oligopoly. D) Monopoly.

B) Monopolistic competition.

Which of the following market structures is composed of many firms producing close substitutes that are differentiated according to consumers?
A) Perfect competition. B) Monopolistic competition. C) Oligopoly. D) Monopoly.

B) Monopolistic competition.

Which of the following is characteristic of monopolistic competition?
A) Many firms in an industry. C) Some market power.
B) Low concentration ratios. D) All of the above.

D) All of the above.

In a monopolistically competitive market:
A) The concentration ratio tends to be low. C) Resources are allocated most efficiently.
B) Firms are interdependent. D) Price competition is common.

A) The concentration ratio tends to be low.

Concentration ratios that fall in the range of:
A) 20 to 40 percent are common for oligopolies.
B) 70 to 90 percent are common for competitive markets.
C) 30 to 50 percent are common for monopolies.
D) 20 to 40 percent are common for monopolistic competition.

D) 20 to 40 percent are common for monopolistic competition.

Large cities typically have many drug stores which have different qualities of service and selections of product. The drug store market in big cities can best be classified as:
A) A competitive market. B) Monopolistic competition. C) Oligopoly. D) Monopoly.

B) Monopolistic competition.

A major difference between monopoly and monopolistic competition is:
A) One maximizes profits by setting MR equal to MC, and the other does not.
B) The number of firms in the market.
C) One type of firm has market power, and the other does not.
D) One has a downward-sloping demand curve, and the other does not.

B) The number of firms in the market.

A major difference between oligopoly and monopolistic competition is that monopolistically competitive firms:
A) Have low concentration ratios. C) Have low barriers to entry.
B) Do not earn an economic profit in the long run. D) All of the above.

D) All of the above.

Differences between oligopoly and monopolistic competition include the:
A) Amount of advertising that firms do. C) Degree of interdependence among firms.
B) Concentration ratio of the market. D) All of the above.

D) All of the above.

One of the main differences between oligopoly and monopolistic competition is:
A) Monopolistic competition faces a horizontal demand curve; oligopoly does not.
B) The degree of interdependence among firms.
C) The amount of nonprice competition that occurs.
D) All of the above.

B) The degree of interdependence among firms.

14. The kinked oligopoly demand curve does not describe the demand curve for monopolistic competition, because in monopolistically competitive markets:
A) Firms are not as interdependent as oligopolistic firms.
B) Firms have no market power.
C) There is not as much product differentiation as in oligopoly.
D) There is no nonprice competition.

A) Firms are not as interdependent as oligopolistic firms.

Entry into a market characterized by monopolistic competition is generally:
A) Entirely blocked by existing firms.
B) Very easy because few barriers exist.
C) As difficult as in oligopoly.
D) More difficult than entry into monopolized markets.

B) Very easy because few barriers exist.

Which of the following characterizes monopolistic competition?
A) Price leadership. B) Product differentiation. C) Price discrimination. D) Economies of scale.

B) Product differentiation.

Product differentiation refers to:
A) Features that make one product appear different from competing products in the same market.
B) Different prices for the same product in a certain market.
C) The selling of identical products in different markets.
D) The charging of different prices for the same product in different markets.

A) Features that make one product appear different from competing products in the same market.

Product differentiation occurs when:
A) A completely new process is used to produce a familiar product.
B) One firm produces many varieties of a product.
C) Buyers, though not necessarily sellers, perceive differences in the products of several companies.
D) Sellers, though not necessarily buyers, perceive differences in the products of several companies.

C) Buyers, though not necessarily sellers, perceive differences in the products of several companies.

19. Which of the following is an example of product differentiation?
A) Two bars of soap differ only in their label, but consumers pay $0.20 more for the label they recognize.
B) Sugar can be made from sugar beets or sugar cane which consumers cannot differentiate when looking at sugar.
C) Consumers substitute vans in place of cars because vans accommodate more passengers.
D) Some sawmills specialize in producing softwood and others specialize in producing hardwood, but the two types of wood are used for very different purposes.

A) Two bars of soap differ only in their label, but consumers pay $0.20 more for the label they recognize.

Perfect competition and monopolistic competition are best distinguished by:
A) The degree of product differentiation.
B) The long-run economic profits that are expected.
C) The number of firms in the market.
D) The ease of entry and exit.

A) The degree of product differentiation

A monopolistically competitive firm can raise its price somewhat without fear of great change in unit sales because:
A) The demand for its product is typically very price-elastic.
B) Its demand curve is horizontal.
C) Of product differentiation and brand loyalty.
D) Of the gap in its marginal revenue curve.

C) Of product differentiation and brand loyalty.

A monopolistically competitive firm can raise its price somewhat without fear of great change in unit sales because of:
A) Brand loyalty. C) Inelastic demand.
B) Economies of scale. D) Large market shares of firms in the market.

A) Brand loyalty.

When a monopolistically competitive firm advertises, it is attempting to increase:
A) The demand and decrease the price elasticity of demand for its product.
B) The demand and increase the price elasticity of demand for its product.
C) Long-run profits.
D) Market demand.

A) The demand and decrease the price elasticity of demand for its product

Brand loyalty usually makes the demand curve for a product:
A) More price elastic. B) Less price elastic. C) Unitary elastic. D) More income elastic.

B) Less price elastic.

25. Both monopoly and monopolistic competition:
A) Maximize profit where MR = MC. C) Use advertising to differentiate their product.
B) Have high concentration ratios. D) Have high barriers to entry.

A) Maximize profit where MR = MC.

Firms in a monopolistically competitive market will:
A) Produce efficiently. C) Use the profit-maximizing rule MC = MR.
B) Make economic profits in the long run. D) All of the above.

C) Use the profit-maximizing rule MC = MR.

A monopolistically competitive firm maximizes profits or minimizes losses in the short run by:
A) Using marginal cost pricing.
B) Producing output at the level where ATC is minimized.
C) Producing output at the level where price equals ATC.
D) Producing output at the level where MC = MR.

D) Producing output at the level where MC = MR.

A monopolistically competitive firm maximizes profits or minimizes losses in the short run by:
A) Setting price equal to marginal cost.
B) Producing output at the level where ATC is minimized.
C) Producing output at the level where MR equals MC.
D) All of the above.

C) Producing output at the level where MR equals MC.

In monopolistic competition, a firm’s demand is tangent to the long-run average cost curve in the long run because:
A) Barriers to entry are very high.
B) Entry eliminates economic profit, and exit eliminates losses.
C) Advertising is ineffective in differentiating a product.
D) All of the above.

B) Entry eliminates economic profit, and exit eliminates losses.

Entry into a market characterized by monopolistic competition:
A) Is rare because firms have market power.
B) Is frequent because barriers to entry are low.
C) Occurs when a firm’s demand is everywhere below its long-run average cost curve.
D) Results from economies of scale.

B) Is frequent because barriers to entry are low.

In a monopolistically competitive market with positive economic profits:
A) Firms will enter until accounting profits are zero.
B) Firms will enter until economic profits are zero.
C) Firms will exit until economic profits are zero.
D) No entry or exit will occur.

B) Firms will enter until economic profits are zero.

If economic profits are earned in a monopolistically competitive market:
A) More firms will enter the market. C) Price will rise.
B) The market supply curve will shift to the left. D) All of the above.

A) More firms will enter the market.

In monopolistic competition, if economic profits are being earned:
A) New firms will enter.
B) Entry will shift the market supply curve to the right.
C) Entry will shift the firm’s demand curve to the left.
D) All of the above.

D) All of the above.

In monopolistic competition, the entry of new firms will:
A) Cause long-run economic profits to be zero. C) Shift the firm’s demand curve to the left.
B) Shift the market supply curve to the right. D) All of the above.

D) All of the above.

When new firms enter a monopolistically competitive industry, the market:
A) Supply curve shifts to the left. C) Demand curve shifts to the left.
B) Supply curve shifts to the right. D) Demand curve shifts to the right

B) Supply curve shifts to the right.

When new firms enter a monopolistically competitive industry, ceteris paribus, the:
A) Market price decreases.
B) Market price increases.
C) Market price remains unchanged.
D) Change in market price cannot be determined based on the information given.

A) Market price decreases.

If new firms enter a monopolistically competitive market, the demand curves for the existing firms will:
A) Shift to the left and become more price inelastic.
B) Shift to the left and there will be no change in price elasticity.
C) Shift to the left and become more price elastic.
D) Shift to the right and there will be no change in price elasticity.

C) Shift to the left and become more price elastic.

If new firms enter a monopolistically competitive market, the demand curves for the existing firms will:
A) Shift to the left.
B) Shift to the right.
C) Remain unchanged.
D) Remain unchanged, but the market demand curve shifts to the right

A) Shift to the left.

Which of the following characterizes monopolistic competition?
A) Price leadership. B) Zero long-run profit. C) Retaliation. D) Marginal cost pricing.

B) Zero long-run profit.

Both perfect competition and monopolistic competition:
A) Experience product differentiation.
B) Earn zero economic profit in the long run.
C) Find prices pushed to the minimum long run average total cost by entry.
D) All of the above.

B) Earn zero economic profit in the long run.

Which of the following characterizes the difference between oligopoly and monopolistic competition?
A) Oligopolists are independent of each other, and monopolistically competitive firms are interdependent.
B) Monopolistically competitive firms experience zero long-run economic profit, whereas oligopolists may experience positive long-run economic profit.
C) There are many oligopolists and only a few monopolistically competitive firms.
D) Monopolistically competitive firms face horizontal demand curves, whereas oligopolists face downward-sloping ones.

B) Monopolistically competitive firms experience zero long-run economic profit, whereas oligopolists may experience positive long-run economic profit.

One of the main similarities of perfect competition and monopolistic competition is:
A) The amount of product differentiation.
B) The point on the long-run average cost curve at which firms maximize profits.
C) That in the long run, price equals average total cost and marginal revenue equals marginal cost.
D) All of the above.

C) That in the long run, price equals average total cost and marginal revenue equals marginal cost.

For which of the following market structures will the firm’s demand curve be tangent to the long-run average total cost curve in the long run?
A) Duopoly. B) Monopolistic competition. C) Oligopoly. D) Monopoly.

B) Monopolistic competition.

In the long run, monopolistically competitive firms maximize profit at the output where:
A) They earn zero economic profit.
B) P = MC.
C) Marginal cost = the minimum of the long-run average total cost curve.
D) All of the above.

A) They earn zero economic profit.

47. In the short run, a monopolistically competitive firm:
A) May make economic profits, but it fails to make economic profits in the long run because of the entry of new firms.
B) May make profits just as it does in the long run, because firms can enter easily.
C) Produces at a rate at which long-run average cost equals price, but not at which long-run marginal cost equals marginal revenue.
D) Makes profits just as it does in the long run because entry is blocked.

A) May make economic profits, but it fails to make economic profits in the long run because of the entry of new firms.

Which of the following is true about a monopolistically competitive firm in the long run?
A) It is as efficient as a purely competitive firm.
B) It tends to realize only a normal profit.
C) It produces at the level where costs are minimized.
D) It will practice marginal cost pricing.

B) It tends to realize only a normal profit.

In the long run, a monopolistically competitive firm:
A) Tends to realize only a normal profit since P = ATC.
B) Will practice marginal cost pricing.
C) Is as efficient as perfectly competitive firms.
D) Is a price taker.

A) Tends to realize only a normal profit since P = ATC.

Which of the following market structures will have only normal profit in the long run?
A) Monopoly. B) Duopoly C) Monopolistic competition. D) Oligopoly.

C) Monopolistic competition.

Which of the following market structures will have higher prices in the long run than will perfect competition, ceteris paribus?
A) Monopolistic competition. B) Oligopoly. C) Monopoly. D) All of the above.

D) All of the above.

Which of the following market structures will have lower prices in the long run than will monopoly, ceteris paribus?
A) Perfect competition. B) Oligopoly. C) Monopolistic competition. D) All of the above

D) All of the above

53. Which of the following market structures will have lower output in the long run than will perfect competition, ceteris paribus?
A) Monopolistic competition. B) Oligopoly. C) Monopoly. D) All of the above.

D) All of the above.

Which of the following market structures will have higher output in the long run than monopolistic competition, ceteris paribus?
A) Perfect competition. B) Monopoly. C) Duopoly. D) Oligopoly.

A) Perfect competition.

Which of the following is true about a monopolistically competitive industry?
A) There is excess capacity. C) It produces the wrong mix of output.
B) The price signals are flawed. D) All of the above.

D) All of the above.

Monopolistic competition results in:
A) Allocative efficiency. C) The wrong mix of output.
B) Production efficiency. D) Marginal cost pricing.

C) The wrong mix of output.

A monopolistically competitive industry:
A) Produces the optimal mix of output.
B) Uses marginal cost pricing. C) Has excess capacity D) Achieves allocative efficiency.

C) Has excess capacity

Which of the following real-world situations is the result of excess capacity in a monopolistically competitive market?
A) A factory producing women’s clothing produces more than it can sell during a season.
B) Gas stations with infrequently used pumps are located at all four corners of an intersection.
C) A retail auto tire store orders too much inventory.
D) Monopolistically competitive firms do not exist in the real world.

B) Gas stations with infrequently used pumps are located at all four corners of an intersection.

Suppose that an economy wants to eliminate the resource waste associated with excess capacity in monopolistically competitive markets. Which of the following actions would achieve this goal?
A) Allow monopolistically competitive firms to create more significant barriers to entry.
B) Encourage more competition in monopolistically competitive markets.
C) Require all the firms in a given monopolistically competitive market to produce identical products.
D) Require all the firms in a given monopolistically competitive market to charge the same price.

C) Require all the firms in a given monopolistically competitive market to produce identical products.

Monopolistically competitive firms are productively inefficient because long-run equilibrium occurs at an output rate where:
A) MC is greater than MR. C) ATC is greater than minimum ATC.
B) Price is greater than MC. D) Diseconomies of scale exist.

C) ATC is greater than minimum ATC.

In monopolistic competition there is allocative inefficiency because:
A) Price is greater than the minimum ATC. C) Of excess capacity.
B) Production is not at the minimum ATC. D) Price is greater than MC.

D) Price is greater than MC.

Compared to the outcome under a marginal cost pricing strategy, a monopolistically competitive firm will produce a:
A) Lower output and charge a higher price. C) Lower output and charge a lower price.
B) Greater output and charge a higher price. D) Greater output and charge a lower price.

A) Lower output and charge a higher price.

In monopolistic competition, a firm:
A) Uses marginal cost pricing. C) Faces a horizontal demand curve.
B) Uses nonprice competition. D) All of the above.

B) Uses nonprice competition.

Nonprice competition occurs with respect to:
A) Service. B) Quality. C) Advertising. D) All of the above.

D) All of the above.

Which of the following is true about advertising?
A) It is an efficient form of competition.
B) It is less important than price competition in oligopolistic and monopolistic competition.
C) It is a form of nonprice competition.
D) It is a major component of competition in perfectly competitive markets.

C) It is a form of nonprice competition.

Advertising:
A) Creates brand loyalty. C) Raises the price of goods and services.
B) Is a form of nonprice competition. D) All of the above.

D) All of the above.

An example of nonprice competition in the airline market is: A) Advertising. B) On-time flights. C) Frequency of flights. D) All of the above.

D) All of the above.

Nonprice competition results in:
A) Resource misallocation. C) Marginal cost pricing.
B) Low entry barriers. D) Production efficiency

A) Resource misallocation.

In which of the following market structures does a firm produce a unique product for which there are no close substitutes?
A) Perfect competition. B) Monopolistic competition. C) Oligopoly. D) Monopoly.

D) Monopoly.

In which of the following market structures are entry barriers the highest?
A) Perfect competition. B) Monopolistic competition. C) Oligopoly. D) Monopoly.

D) Monopoly.

There are many wheat farmers, each of whom produces the same product. The wheat market can best be classified as:
A) Monopolistic competition. B) Perfect competition. C) Oligopoly. D) Monopoly.

B) Perfect competition.

Which of the following market structures is characterized by many firms?
A) Monopolistic competition. B) Oligopoly. C) Monopoly. D) Duopoly.

A) Monopolistic competition.

Which market structure is characterized by a few interdependent firms?
A) Monopoly. B) Perfect competition. C) Monopolist competition. D) Oligopoly.

D) Oligopoly.

The only market structure in which there is significant interdependence among firms with regard to their pricing and output decisions is:
A) Monopolistic competition. B) Monopoly. C) Oligopoly. D) Perfect competition.

C) Oligopoly.

The number of firms in an oligopoly must be:
A) Four.
B) Large enough so that firms cannot coordinate.
C) Small enough so that one firm’s decisions have a significant impact on the decisions of the other firms in the industry.
D) Small enough so that revenues are large enough to support advertising expenditures.

C) Small enough so that one firm’s decisions have a significant impact on the decisions of the other firms in the industry.

Which of the following may characterize an oligopoly?
A) A few firms. B) High barriers to entry. C) Significant market power. D) All of the above

D) All of the above

It is most difficult for new firms to enter into:
A) A perfectly competitive market. C) An oligopolistic market.
B) A monopolistically competitive market. D) A perfectly contestable market.

C) An oligopolistic market.

The soft drink market is dominated by Coke, Pepsi, and very few other firms. The firms often start price wars. The market can best be classified as:
A) Perfect competition. B) Monopolistic competition. C) Oligopoly. D) Monopoly.

C) Oligopoly.

Which of the following is a determinant of market power?
A) Number of producers. B) Barriers to entry. C) Availability of substitutes. D) All of the above.

D) All of the above.

The degree of market power exercised by a firm is inversely related to:
A) The number and proximity of competing firms.
B) The price elasticity of demand for the firm’s product.
C) Its ability to influence the market price of its output.
D) All of the above.

D) All of the above.

The correct ranking of degree of market power (from highest to lowest) is:
A) Monopoly, monopolistic competition, perfect competition, oligopoly.
B) Monopoly, monopolistic competition, oligopoly, perfect competition.
C) Monopoly, oligopoly, monopolistic competition, perfect competition.
D) Oligopoly, monopoly, monopolistic competition, perfect

C) Monopoly, oligopoly, monopolistic competition, perfect competition.

The correct ranking of barriers to entry (from highest to lowest) in the market is:
A) Monopoly, oligopoly, monopolistic competition, perfect competition.
B) Monopoly, monopolistic competition, perfect competition, oligopoly.
C) Monopoly, monopolistic competition, oligopoly, perfect competition.
D) Oligopoly, monopoly, monopolistic competition, perfect competition.

A) Monopoly, oligopoly, monopolistic competition, perfect competition.

A similarity of an oligopoly and a monopoly is:
A) Zero profits in the long run. C) The existence of market power.
B) The number of firms in the industry. D) All of the above.

C) The existence of market power.

If an oligopoly market is contestable and new firms enter, the:
A) Market power of the former oligopolists will be reduced.
B) Number of firms in the industry will decrease.
C) Former oligopolists will raise their price.
D) All of the above.

A) Market power of the former oligopolists will be reduced.

A contestable market is:
A) A perfectly competitive market.
B) An imperfectly competitive situation that is subject to entry.
C) An imperfectly competitive situation with high barriers to entry.
D) A market with only one producer.

B) An imperfectly competitive situation that is subject to entry.

The concentration ratio measures the:
A) Number of plants owned by an oligopoly.
B) Percentage of total profits made by a firm in a specific market.
C) Proportion of total output produced by the four largest producers in a specific market.
D) Relative size of a firm compared to other industries.

C) Proportion of total output produced by the four largest producers in a specific market.

The measure of market power found by adding together the market shares of the largest four firms is:
A) The concentration ratio. C) Their Herfindahl-Hirshman Index.
B) The sales of the market. D) The barriers to entry.

A) The concentration ratio.

Which of the following is the best indication of high market power?
A) A firm with large sales.
B) A Herfindahl-Hirshman Index of 100 or greater.
C) A concentration ratio of 90 percent.
D) Infrequent, sticky price changes.

C) A concentration ratio of 90 percent.

Which of the following is the best indication of high market power?
A) A small firm with a market share of 80 percent.
B) A firm with $10 billion in sales in a market with an HHI of 800.
C) A large firm with a concentration ratio of 10 percent.
D) An elastic demand curve for the firm’s product.

A) A small firm with a market share of 80 percent.

While there are many newspapers in the U.S., each city tends to have only one or two. If newspapers are generally local markets, then newspapers are characterized by a:
A) Low national concentration and a high HHI at the local level.
B) Low national concentration and a low HHI at the local level.
C) High national concentration and a high HHI at the local level.
D) High national concentration and a low HHI at the local level.

A) Low national concentration and a high HHI at the local level.

Concentration ratios tend to overstate the power of some corporations to influence economic outcomes because they measure output:
A) For single firms rather than markets.
B) For the whole United States, which is too large a geographic market for some firms or industries.
C) Only for domestic production, when the true market boundaries are international for some markets.
D) Over many industries, rather than a single market.

C) Only for domestic production, when the true market boundaries are international for some markets.

A nationwide concentration ratio is likely to understate market power when:
A) Firms sell nationally. C) The true markets are local and small.
B) There is extensive foreign competition. D) A market is perfectly contestable.

C) The true markets are local and small.

Which of the following industries is likely to have the highest concentration ratio?
A) Corn production. B) Video game systems. C) Clothing manufacturing. D) College education.

B) Video game systems.

Which of the following industries has the highest concentration ratio?
A) Wheat production. B) Sugar production. C) Used car sales. D) Soft drinks

D) Soft drinks

The market share of a monopolist is:
A) 20 percent. B) 40 percent. C) 60 percent. D) 100 percent.

D) 100 percent.

Market share can be computed by dividing:
A) The amount that a buyer buys by the total amount that is produced in the market.
B) Profit by total cost.
C) The amount sold by a single firm by the total sold in the market.
D) Price by average total cost.

C) The amount sold by a single firm by the total sold in the market.

Suppose there are only three firms in a market. The largest firm has sales of $500 million, the second-largest has sales of $200 million, and the smallest has sales of $100 million. The market share of the second-largest firm is:
A) 25 percent. B) 40 percent. C) 60 percent. D) 20 percent.

A) 25 percent.

Suppose the larger firm of a duopoly has sales of $800 million and the smaller firm has sales of $200 million. The market share of the larger firm is:
A) 20 percent. B) 40 percent. C) 80 percent. D) 25 percent.

C) 80 percent.

The danger of experimenting with pricing for an oligopoly is:
A) Retaliation. B) The uncertainty of competitor response. C) Price wars. D) All of the above.

D) All of the above.

Which of the following may characterize oligopolistic behavior?
A) Price leadership. B) Collusion. C) Retaliation. D) All of the above.

D) All of the above.

Which of the following is evidence of the interdependence which characterizes the relationship among oligopolists?
A) Retaliation. B) Price wars. C) Gamesmanship. D) All of the above.

D) All of the above.

When a business advertises that its product has unique features that make it superior to other similar products, it is engaging in:
A) Game theory. C) Predatory pricing.
B) Product differentiation. D) Contestable market advertising.

B) Product differentiation.

Product differentiation is:
A) Involves charging different prices to different customers.
B) Commonly practiced in perfect competition and monopoly markets.
C) Involves advertising unique product features.
D) A rarely successful advertising campaign.

C) Involves advertising unique product features.

The kinked-demand curve indicates:
A) Why oligopoly prices might be sticky. C) How the current output is established.
B) How the current price is established. D) All of the above.

A) Why oligopoly prices might be sticky.

The kinked-demand curve explains the observation that in oligopoly markets:
A) Rivals match price increases.
B) Rivals do not match price reductions.
C) Prices may not change even in the face of cost increases.
D) All of the above.

C) Prices may not change even in the face of cost increases.

Which of the following is true about the kink in the demand curve?
A) It occurs at the same rate of output as the vertical segment in the marginal revenue curve.
B) It leads to an explanation of sticky prices.
C) It is the result of the difference in rival responses to price increases and reductions.
D) All of the above.

D) All of the above.

The kinked-demand curve explains:
A) The consequences of the interdependent behavior of oligopolists.
B) Why oligopolists are more sensitive to cost changes than are competitive markets.
C) Price fixing along the elastic part of the demand curve and predatory pricing on the inelastic portion.
D) How an oligopoly can achieve monopoly profits.

A) The consequences of the interdependent behavior of oligopolists.

The kinked-demand curve:
A) Is based on the assumption that all price changes will be matched by competitors.
B) Reflects two different market demand curves.
C) Occurs because rival oligopolists match price reductions but not price increases.
D) All of the above.

C) Occurs because rival oligopolists match price reductions but not price increases.

Which of the following types of pricing by rivals is consistent with a kinked oligopoly demand curve?
A) Price leadership. C) Price fixing.
B) Matching price decreases only. D) Matching price increases only.

B) Matching price decreases only.

If a firm is producing at the kink in its demand curve and it decides to increase its price, according to the kinked-demand model:
A) It will gain market share.
B) It will lose market share to the firms that do not follow the price increase.
C) Its market share will not be affected.
D) It will not gain market share but it will definitely increase profits

B) It will lose market share to the firms that do not follow the price increase.

If a firm is producing at the kink in its demand curve and it decides to decrease its price, according to the kinked-demand model:
A) It will gain market share.
B) It will lose market share to the firms that do not follow the price decrease.
C) Its market share will not be affected.
D) It will lose market share but its profits will decrease.

C) Its market share will not be affected.

A kinked-demand curve indicates that rival oligopolists match all:
A) Increased advertising. B) Price increases. C) Advertising reductions. D) Price reductions.

D) Price reductions.

What is the most likely response by rivals when an oligopolist cuts its price to increase its sales?
A) Raise their prices. B) Ignore the change. C) Cut their prices. D) Reduce their costs.

C) Cut their prices.

If an oligopolist is going to change its price or output, its initial concern is:
A) The response of its competitors.
B) A change in its cost structure.
C) The concentration ratio.
D) The response of the Federal Trade Commission.

A) The response of its competitors.

If an oligopolist is going to change its price or output, its initial concern is:
A) Product differentiation. C) Gamesmanship practiced by its competitors.
B) Price discrimination. D) The response of antitrust investigators.

C) Gamesmanship practiced by its competitors.

Oligopolists have a mutual interest in coordinating production decisions in order to maximize joint:
A) Costs. B) Profits. C) Revenues. D) Market share.

B) Profits.

The goal of an oligopoly is to maximize:
A) Market share to achieve long-run economic profit.
B) Short-run profit to achieve long-run maximum revenue.
C) Short-run profit to achieve long-run market share.
D) Profit in the short run and to minimize cost in the long-run.

A) Market share to achieve long-run economic profit

If a market changes from oligopoly to perfect competition, then as a result:
A) Output should increase in the long run. C) Profitability should rise in the long run.
B) Fewer resources will be allocated to the market. D) Prices should rise in the long run.

A) Output should increase in the long run.

Oligopolists will maximize total profits for all of the firms in the market at the rate of output where:
A) TR = TC for the total market. C) MR = MC for the marginal firm.
B) AR = AC for each firm. D) MR = MC for the market.

D) MR = MC for the market.

Which of the following is not true about coordinating oligopolies?
A) The kinked-demand curve for each of the coordinating firms loses its kink.
B) Each coordinating firm will produce the output where the firm’s MR = the firm’s MC.
C) Total market output will tend to be less than if the oligopolies were not coordinating.
D) An increase in marginal costs is likely to result in an increase in price.

B) Each coordinating firm will produce the output where the firm’s MR = the firm’s MC.

If one firm in an oligopoly market increases its advertising expenditures in an effort to increase market share, the most likely response by its competitors would be to:
A) Keep the price of their products the same but increase advertising expenditures even if it means reducing profits.
B) Increase the price of their products to raise profits and then increase advertising expenditures.
C) Reduce advertising expenditures to maintain profits.
D) Make no changes in price or advertising expenditures.

A) Keep the price of their products the same but increase advertising expenditures even if it means reducing profits.

In oligopoly markets sticky prices are the result of:
A) Rivals matching price increases, but not decreases.
B) The uncertainty of competitor responses to price changes.
C) The danger of price-fixing schemes being discovered by the government.
D) All of the above.

B) The uncertainty of competitor responses to price changes.

As long as the marginal cost curve continues to intersect the gap in the marginal revenue curve for a kinked-demand curve, the oligopolist will:
A) Increase production rates and raise prices. C) Lower production rates and raise prices.
B) Increase production rates and lower prices. D) Maintain both production rates and prices.

D) Maintain both production rates and prices.

If an oligopolist views the demand curve as kinked, then the marginal revenue curve:
A) Has a gap at the kink. C) Moves from inelastic to elastic.
B) Flattens out at the kink. D) Has the shape of the demand curve.

A) Has a gap at the kink.

If an oligopolist views the demand curve as kinked, then the marginal revenue curve:
A) Is very inelastic throughout.
B) Is identical to its demand curve.
C) Has a gap that occurs at the same output level as the kink.
D) Is horizontal.

C) Has a gap that occurs at the same output level as the kink.

A gap in the marginal revenue curve results from:
A) Price fixing. B) A kinked demand curve. C) Price leadership. D) Predatory pricing.

B) A kinked demand curve.

The best explanation of why there is a gap in the oligopolist’s marginal revenue curve according to the kinked-demand model is that the gap:
A) Reflects the dramatic difference in the response of the competition depending on whether the existing price is increased or decreased.
B) Reflects the increased revenue opportunities available to the oliogopolist because of its tendency to coordinate.
C) Provides the space necessary for the MC curve to shift and still maintain price stability.
D) Exists because the oligopolist’s demand curve is downward sloping.

A) Reflects the dramatic difference in the response of the competition depending on whether the existing price is increased or decreased.

If the marginal cost curve shifts but remains in the gap in the marginal revenue curve, the result will be:
A) An increase in price and no change in output. C) A decrease in price and an increase in output.
B) A decrease in price and no change in output. D) No change in price or output.

D) No change in price or output.

If an oligopolist’s MC curve shifts upward but still passes through the gap in the MR curve, which of the following will be the firm’s profit-maximizing response?
A) Sticky prices. C) The use of nonprice methods to compete.
B) No change in output. D) All of the above.

D) All of the above.

65. Suppose costs for all oligopolists in an industry increase to such an extent that the marginal cost curve shifts out of the gap in the marginal revenue curve. Which of the following is the most probable response of oligopolists?
A) The oligopolists would lower prices simultaneously to increase sales and cover the higher costs.
B) The oligopolists would reach an explicit agreement to raise prices enough to cover the increase in costs.
C) Predatory price cuts would become more common.
D) One of the oligopolists would raise prices and the other firms would follow.

D) One of the oligopolists would raise prices and the other firms would follow.

One reason why prices tend to be less flexible in oligopoly markets than in other market structures is because:
A) Coordination tends to stabilize prices.
B) According to the kinked-demand model, a firm will tend to become worse off if it increases or decreases its prices.
C) Oligopoly firms cannot afford to let prices decrease since they incur large advertising expenses.
D) Price changes are always matched by the oligopolist’s competitors.

B) According to the kinked-demand model, a firm will tend to become worse off if it increases or decreases its prices.

If rival oligopolists completely ignore Glenwood Tool Company’s price changes, then Glenwood Tool Company’s:
A) Demand curve will not have a kink.
B) Most profitable strategy will be to raise its price.
C) Demand curve will be less elastic than if rivals matched price changes.
D) Demand and marginal revenue curves will be the same.

A) Demand curve will not have a kink.

In an effort to maximize profits, oligopolists will participate in:
A) Price leadership. B) Price fixing. C) Cartels. D) All of the above.

D) All of the above.

The pricing strategy in which there is an explicit agreement among producers regarding price is called:
A) Price discrimination. B) Price fixing. C) Price leadership. D) Marginal cost pricing.

B) Price fixing.

Which of the following is an example of price fixing?
A) The MIT-Ivy League agreement on student aid. C) Borden’s actions on school milk.
B) The vitamin industry from 1990-1998. D) All of the above.

D) All of the above.

When oligopolists coordinate price, the market demand curve will be:
A) Kinked. B) Perfectly inelastic. C) Strongly inelastic like a monopolist’s. D) Elastic.

C) Strongly inelastic like a monopolist’s.

Oligopolists have an incentive to coordinate price because with coordination:
A) The demand for each firm’s product is kinked.
B) Each firm faces a perfectly inelastic demand for its product.
C) The market demand curve is perfectly inelastic.
D) Each firm faces a relatively inelastic demand for its product.

D) Each firm faces a relatively inelastic demand for its product.

Price leadership is a method by which oligopolies can:
A) Increase prices without explicit price fixing. C) Maintain the "kink" in their demand curves.
B) Illegally raise prices. D) Encourage competition.

A) Increase prices without explicit price fixing.

Price leadership:
A) Results in sticky prices. C) Helps achieve monopoly profit for the market.
B) Accounts for kinked oligopoly behavior. D) Results in predatory pricing.

C) Helps achieve monopoly profit for the market.

Price leadership:
A) Typically results in greater instability in oligopolistic markets.
B) Is illegal under the Federal Trade Commission Act.
C) Is common in perfectly competitive markets.
D) Permits oligopolistic firms in a given market to coordinate market-wide price changes.

D) Permits oligopolistic firms in a given market to coordinate market-wide price changes.

The pricing strategy in which one firm is allowed to establish the market price for all firms in the market is called:
A) Price discrimination. C) Price leadership.
B) The profit-maximizing rule. D) Marginal cost pricing.

C) Price leadership.

The pricing strategy in which one firm is allowed by its rivals to establish the market price for all firms in the market is called:
A) Overt collusion. B) Price leadership. C) Pattern pricing. D) Price fixing.

B) Price leadership.

Open and explicit agreements concerning pricing and output shares transform an oligopoly into a:
A) Monopoly. B) Cartel. C) Differentiated oligopoly. D) Perfectly competitive firm.

B) Cartel.

Temporary price reductions intended to drive out competition are referred to as:
A) Predatory pricing. B) Price fixing. C) Price leadership. D) Retaliation.

A) Predatory pricing.

Which of the following may characterize oligopolistic behavior?
A) Price leadership. B) Price fixing. C) Predatory pricing. D) All of the above.

D) All of the above.

Which of the following functions as a barrier to entry into an oligopoly market?
A) Patents. C) Control of distribution outlets.
B) The expense involved in nonprice competition. D) All of the above.

D) All of the above.

Oligopolists can limit competition by:
A) Mergers and acquisitions.
B) Supporting government regulation of international trade.
C) Gaining control of distribution outlets.
D) All of the above.

D) All of the above.

For an oligopoly, above-normal profits cannot be maintained in the long run unless:
A) A cartel is formed. C) A firm has a high concentration ratio.
B) Barriers to entry exist. D) The market is contestable.

B) Barriers to entry exist.

In the long run, an oligopolist is most likely to:
A) Experience economic profits because of barriers to entry.
B) Experience zero economic profits because barriers to entry do not exist in the long run.
C) Produce at the most technically efficient output level due to long-run competition.
D) Face a straight line demand curve.

A) Experience economic profits because of barriers to entry.

The most common form of nonprice competition is:
A) Collusion. B) Advertising. C) Patents. D) All of the above.

B) Advertising.

An example of nonprice competition in the automobile market is:
A) Advertising.
B) Availability of service on weekends.
C) Providing financing for the purchase of an automobile.
D) All of the above.

D) All of the above.

How might an oligopolist increase total revenue without changing price?
A) Reduce output. C) Reduce marketing efforts.
B) Through nonprice competition. D) Reduce costs.

B) Through nonprice competition.

Market power leads to market failure when it results in:
A) Decreased market output. C) Long lasting, above normal economic profits.
B) Increased market prices. D) All of the above.

D) All of the above.

Collusion is undesirable and illegal because:
A) Government intervention leads to inefficient outcomes.
B) It leads to greater production than would occur in a competitive market.
C) It is unprofitable and the government must bail out firms which are bankrupted by collusion.
D) Resources are misallocated and suboptimal outputs are produced.

D) Resources are misallocated and suboptimal outputs are produced.

When oligopoly firms collude to raise prices:
A) Each firm benefits, but society loses.
B) Both the colluding firms and society benefit.
C) Everyone is eventually a loser.
D) Only the price leader benefits while other firms and society lose.

A) Each firm benefits, but society loses.

Tacit collusion is most easily and effectively accomplished in:
A) Contestable markets. B) Conglomerates. C) Competitive markets. D) Oligopolies

D) Oligopolies

Oligopolistic behavior includes:
A) Tacit collusion. B) High barriers to entry. C) Low concentration ratios. D) All of the above.

A) Tacit collusion.

Which of the following are problems associated with pursuing anti-trust policy based on the behavior of firms rather than the structure of a market?
A) It is more expensive to investigate behavior rather than structure.
B) It is more difficult to prove anti-competitive behavior.
C) The general absence of public awareness and interest in the problem of collusion.
D) All of the above.

D) All of the above.

Which of the following may be a legitimate objection to pursuing an anti-trust policy based on structure rather than behavior?
A) A firm may dominate a market because it is the most efficient producer.
B) A firm may dominate a market because it provides the best product.
C) Industry dominance is not likely to last forever because of the unrelenting quest for profits by both foreign and domestic firms.
D) All of the above may.

D) All of the above may.

The Herfindahl-Hirshman Index:
A) Is a measure of industry concentration.
B) Takes into account the number of firms and size of each.
C) Is used to identify cases worthy of antitrust concern.
D) All of the above.

D) All of the above.

The Herfindahl-Hirshman Index is:
A) The sum of the squared market shares of the firms in the market.
B) The sum of the market shares of all the firms in the market.
C) The sum of the market shares of the top four firms in the market.
D) The sum of the squared concentration ratios for the firms in the market.

A) The sum of the squared market shares of the firms in the market.

The Herfindahl-Hirshman Index is:
A) Used to identify cases worthy of antitrust concern.
B) A barrier to entry.
C) An example of government failure.
D) Accounts for the combined market share of the top four firms.

A) Used to identify cases worthy of antitrust concern.

The purpose of industry concentration indicators like the Herfindal-Hirshman Index is to provide the Justice Department with a convenient way to:
A) Decide which proposed mergers and acquisitions to challenge based on changes in the structure of a market.
B) Investigate the behavior of firms in a market.
C) Investigate the contestability of a market.
D) Test for the existence of predatory pricing.

A) Decide which proposed mergers and acquisitions to challenge based on changes in the structure of a market

The doctrine of laissez faire is consistent with:
A) Use of the market mechanism. C) The invisible hand.
B) Undesirability of government intervention. D) All of the above.

D) All of the above.

When firms have the power to restrict output, raise prices, stifle competition, and inhibit innovation the market failure involved is:
A) Public goods. B) Externalities. C) Market power. D) Inequities.

C) Market power.

Market failure includes:
A) Market power resulting in reduced output and higher price.
B) Antitrust laws.
C) Administrative costs of compliance.
D) Compliance costs.

A) Market power resulting in reduced output and higher price.

Which of the following is a form of government intervention?
A) Natural monopoly. B) Public goods. C) Regulation. D) Externalities.

C) Regulation.

Which of the following is a form of government intervention that is designed to correct market failures?
A) Antitrust laws. B) Laissez faire. C) Public goods. D) All of the above.

A) Antitrust laws.

Government intervention can focus on the structure or behavior of a market. Antitrust focuses:
A) On both, while regulation focuses mostly on behavior.
B) On both, while regulation focuses mostly on structure.
C) Mostly on behavior, while regulation focuses on both.
D) Mostly on structure, while regulation focuses on both.

A) On both, while regulation focuses mostly on behavior.

A natural monopoly is a desirable market structure because:
A) When unregulated, it offers a firm a higher profit margin which creates jobs for the economy.
B) When regulated, it can be forced to produce at the same output level as an unregulated monopoly.
C) It can offer the products consumers want at the lowest possible price because of economies of scale.
D) It generates more jobs for the economy than a competitive market structure does.

C) It can offer the products consumers want at the lowest possible price because of economies of scale.

A natural monopoly is preferable to a competitive market because:
A) It can produce the products consumers want at the lowest possible price.
B) It can produce the products consumers want with the least amount of resources.
C) A competitive market does not experience the economies of scale that a natural monopoly experiences.
D) All of the above.

D) All of the above.

Natural monopolies:
A) Always face downward-sloping long-run average total cost curves.
B) Capture economies of scale over the entire market.
C) Incur losses if they produce where P = MC.
D) All of the above.

D) All of the above.

The long-run average total cost curve of a natural monopolist:
A) Is downward sloping in the relevant range of production.
B) Is U-shaped.
C) Reflects diseconomies of scale.
D) Is everywhere below the long-run marginal cost curve.

A) Is downward sloping in the relevant range of production.

The distinctive characteristic of a natural monopoly is its:
A) Horizontal demand curve.
B) Downward-sloping average total cost curve at market output.
C) Vertical marginal cost curve.
D) Kinked demand curve.

B) Downward-sloping average total cost curve at market output.

A natural monopoly:
A) Does not provide any basis for government regulation.
B) Is not a source of market failure.
C) Arises from the existence of substantial economies of scale.
D) All of the above.

C) Arises from the existence of substantial economies of scale.

An industry in which one firm can achieve economies of scale over the entire range of market supply is a:
A) Contestable market. C) Kinked-demand curve oligopoly.
B) Natural monopoly. D) Perfectly competitive market.

B) Natural monopoly.

Breaking up an unregulated natural monopoly into many smaller competing firms would:
A) Decrease product price due to increased competition.
B) Increase product price due to decreased technical efficiency.
C) Destroy the cost advantage of economies of scale.
D) Decrease average total costs.

C) Destroy the cost advantage of economies of scale.

If a natural monopoly was forced to break up into several small competitive firms, then the:
A) Cost of production should fall as the smaller firms become more efficient.
B) Price charged by the competitive firms should decrease as the firms become more efficient.
C) Price charged by the competitive firms should increase because the firms will be less efficient.
D) Total production for the industry should increase because of the efficiency generated by increased competition.

C) Price charged by the competitive firms should increase because the firms will be less efficient.

A natural monopoly:
A) Provides a basis for government regulation. C) Results from substantial economies of scale.
B) Is a source of market failure. D) All of the above.

D) All of the above.

According to the text, what type of market failure provides the best case for government regulation?
A) Market power. B) Public goods. C) Inequalities. D) Natural monopoly.

D) Natural monopoly.

For a natural monopoly, marginal cost:
A) Intersects average total cost at zero profit.
B) Equals price at a profitable output level.
C) Equals marginal revenue above the demand curve.
D) Is always below average total cost in the relevant range of production.

D) Is always below average total cost in the relevant range of production.

In a natural monopoly, marginal cost:
A) Is always above the ATC.
B) Is constant, and equal to the ATC .
C) Is always below the ATC in the relevant range of production.
D) Is always rising.

C) Is always below the ATC in the relevant range of production.

The long-run average total cost curve of a natural monopolist:
A) Is U-shaped.
B) Reflects declining average fixed costs.
C) Is always above the marginal cost curve in the relevant range of production.
D) Reflects diminishing returns.

C) Is always above the marginal cost curve in the relevant range of production.

To maximize profit, a natural monopolist produces the level of output at which:
A) Price equals average total cost.
B) Marginal cost equals the minimum of long-run average total cost.
C) Marginal revenue equals marginal cost.
D) All of the above.

C) Marginal revenue equals marginal cost.

An unregulated natural monopolist will:
A) Minimize average total cost. C) Use marginal cost pricing.
B) Produce where MR = MC. D) Achieve allocative efficiency.

B) Produce where MR = MC.

For a natural monopoly, production efficiency is achieved where:
A) Price equals marginal cost. C) Marginal revenue equals marginal cost.
B) Zero economic profits are earned. D) ATC is at a minimum.

D) ATC is at a minimum.

An unregulated natural monopoly is most likely to:
A) Earn an economic profit.
B) Produce where marginal cost equals price.
C) Charge a lower price than if the same product were produced in a competitive market because of the monopolist’s greater technical efficiency.
D) Take advantage of the concept of marginal cost pricing.

A) Earn an economic profit.

When a firm experiences positive economic profits over the long run:
A) Technical efficiency cannot be achieved. C) The firm must be a natural monopoly.
B) Allocative efficiency cannot be achieved. D) Equity may not be achieved.

D) Equity may not be achieved.

Price efficiency is achieved if price is equal to:
A) ATC. B) AVC. C) MC. D) AFC.

C) MC.

If a natural monopoly is forced to use marginal cost pricing, which of the following is not true?
A) Average total costs would increase. C) Output would increase.
B) Allocative efficiency would be achieved. D) Economic profits would be reduced.

A) Average total costs would increase.

If the government forces a natural monopoly to produce the output where P = MC, the firm:
A) Will fail to produce efficiently.
B) Will be producing less than the profit-maximizing level of output.
C) Will incur losses.
D) All of the above.

C) Will incur losses.

If the government regulated a natural monopolist to achieve price efficiency without subsidies or price discrimination, the monopolist would:
A) Earn economic profits.
B) Earn only normal profits.
C) Lose money and go out of business.
D) Earn less of a profit than before, but still earn a profit.

C) Lose money and go out of business.

To produce with the greatest possible price efficiency, a natural monopoly:
A) Should be allowed to maximize profit without government interference.
B) Sets price equal to average total cost.
C) Must be subsidized by the government to overcome losses.
D) All of the above.

C) Must be subsidized by the government to overcome losses.

If the government wants a natural monopolist to achieve allocative efficiency, then the government should:
A) Subsidize the firm and require marginal cost pricing.
B) Assure the firm produces at full capacity.
C) Regulate the firm so that it produces the output where economic profit is zero.
D) Use price ceilings so the firm will earn a normal profit.

A) Subsidize the firm and require marginal cost pricing.

A regulated natural monopoly is more likely to advertise freely under which of the following types of regulation?
A) Price regulation. B) Profit regulation. C) Output regulation. D) Social regulation.

B) Profit regulation.

If a regulatory agency decides to pursue profit regulation of a natural monopoly, price and output will be determined by the:
A) Minimum point of ATC. C) Intersection of the demand and ATC curves.
B) Intersection of MR and MC. D) Intersection of the demand and MC curves.

C) Intersection of the demand and ATC curves.

If profit regulation is used to control a natural monopolist, then the monopolist is likely to:
A) Attempt to reduce the costs of production.
B) Inflate or pad the costs of production.
C) Increase the quality of their product in an effort to increase sales.
D) Reduce maintenance of plant and equipment.

B) Inflate or pad the costs of production.

Profit regulation of a natural monopoly is achieved where:
A) P = ATC. B) P = MC. C) MR = MC. D) MR = minimum ATC.

A) P = ATC.

Profit regulation is appealing because:
A) It allows the focus to be on profits only.
B) It eliminates the need to subsidize the monopolist.
C) It removes the need to develop demand and cost curves.
D) All of the above.

D) All of the above.

Suppose the quality of service provided by a newly regulated firm begins to deteriorate soon after regulation is enforced. Which of the following types of regulation is most likely being used?
A) Price regulation. B) Profit regulation. C) Output regulation. D) Social regulation.

C) Output regulation.

Output regulation forces the natural monopolist to produce at an output:
A) That perfectly competitive firms would choose. C) Greater than its profit-maximizing choice.
B) Where MR = MC. D) Where MR equals zero.

C) Greater than its profit-maximizing choice.

Regulation of the quantity produced may:
A) Encourage the padding of costs. C) Induce a decline in quality.
B) Result in shortages. D) Cause the exit of inefficient firms.

C) Induce a decline in quality.

Output regulations:
A) Encourage quality decline. C) May jeopardize equity goals.
B) Violate the principle of marginal cost pricing. D) All of the above.

D) All of the above.

Compared with the profit-maximizing choice of a natural monopolist, output regulation will result in:
A) A higher level of output and a higher price. C) A lower level of output and a higher price.
B) A higher level of output and a lower price. D) A lower level of output and a lower price.

B) A higher level of output and a lower price.

When market outcomes improve after government regulation is enforced:
A) Technical efficiency is being achieved.
B) The net effect of government intervention on society has been beneficial.
C) Government intervention still may not be justified if the economic costs are too high.
D) All of the above.

C) Government intervention still may not be justified if the economic costs are too high.

Regulations that offer imperfect answers:
A) Are options that should never be implemented.
B) Reflect the realistic choices that society must make between imperfect markets and imperfect government intervention.
C) Are not consistent with utility maximization in the real world.
D) Will always have cost greater than benefits.

B) Reflect the realistic choices that society must make between imperfect markets and imperfect government intervention.

Which of the following leads to possible government failure?
A) Market power. B) Antitrust laws. C) Externalities. D) Inequities from the market mechanism.

B) Antitrust laws.

If government failure did not exist:
A) Laissez faire would apply to all markets.
B) Deregulation would be unnecessary.
C) The invisible hand would be the most efficient and equitable way to run the economy.
D) All markets would be regulated.

B) Deregulation would be unnecessary.

Government failure occurs when:
A) Dealing with a natural monopoly.
B) Government intervention fails to improve economic outcomes.
C) There is market power.
D) Public goods are present.

B) Government intervention fails to improve economic outcomes.

The costs associated with the employment of more than 100,000 workers by the federal government regulatory agencies are an example of:
A) Administrative costs. B) Compliance costs. C) Efficiency costs. D) Human costs.

A) Administrative costs.

When a regulatory agency hires personnel to enforce regulations, the cost is:
A) An administrative cost. B) A compliance cost. C) An efficiency cost. D) An information cost.

A) An administrative cost.

The costs that firms incur to learn about the regulations in their industry are referred to as:
A) Efficiency costs. B) Capital costs. C) Compliance costs. D) Administrative costs.

C) Compliance costs.

Which regulatory cost is borne by the firms which are regulated?
A) Efficiency costs. B) Subsidy. C) Compliance costs. D) Administrative costs.

C) Compliance costs.

When a firm must educate its employees concerning government regulations, the cost of government involvement is:
A) An administrative cost. B) A compliance cost. C) An efficiency cost. D) An education cost.

B) A compliance cost.

When regulation results in an inferior mix of output there are:
A) Administrative costs. B) Compliance costs. C) Efficiency costs. D) All of the above.

C) Efficiency costs.

When the regulatory process itself impedes new technology and improved production processes, there are:
A) Administrative costs. B) Compliance costs. C) Efficiency costs. D) Technological costs.

C) Efficiency costs.

When the regulatory process itself becomes a drag on economic growth, society experiences:
A) Compliance costs of regulation. C) Administrative costs of regulation.
B) Efficiency costs of regulation. D) Budgetary costs of regulation.

B) Efficiency costs of regulation.

Regulation is appropriate if:
A) Government failure exists.
B) Market failure exists and the benefits of regulation exceed the costs.
C) It improves market outcomes regardless of costs.
D) An economic profit is being earned.

B) Market failure exists and the benefits of regulation exceed the costs.

In cost-benefit analysis, regulatory intervention can be justified if the:
A) Marginal benefit of regulation exceeds its marginal cost.
B) Economic cost of regulation exceeds the value of the improvements in government intervention.
C) Value of government failure exceeds the value of market failure.
D) Intervention improves market outcomes, regardless of costs.

A) Marginal benefit of regulation exceeds its marginal cost.

When there is market failure:
A) Government intervention is always beneficial.
B) A laissez-faire approach is the best policy.
C) Government intervention is beneficial only in the case of natural monopolies.
D) Government intervention is beneficial only when the marginal benefit of intervention exceeds the marginal cost.

D) Government intervention is beneficial only when the marginal benefit of intervention exceeds the marginal cost.

The case for deregulation rests on the argument that:
A) Costs of market failure exceed costs of government failure.
B) Regulations are more costly to implement than the market failure that is to be corrected.
C) Regulation aids adaptation to market changes in tastes, costs, and technology.
D) Antitrust intervention is less costly than regulation.

B) Regulations are more costly to implement than the market failure that is to be corrected.

The case for deregulation rests on the argument that:
A) Government imperfections are worse than the market imperfections they were designed to cure.
B) Public goods are best provided by laissez faire.
C) Economies of scale are better achieved with the invisible hand.
D) All of the above.

A) Government imperfections are worse than the market imperfections they were designed to cure.

The basic issue in regulatory policy is:
A) Whether or not the benefits of government regulation exceed the costs.
B) How to achieve second-best solutions in all markets.
C) How to eliminate all natural monopolies.
D) How to achieve profit regulation in all industries.

A) Whether or not the benefits of government regulation exceed the costs.

Which of the following is an example of government failure?
A) Too much regulation resulting in wasted resources.
B) Public goods.
C) Externalities.
D) All of the above.

A) Too much regulation resulting in wasted resources.

Critics of government intervention frequently point out that:
A) Government regulation may not be justified from a cost-benefit standpoint.
B) Regulation may lead to price, cost, or production outcomes that are inferior to those of an unregulated market.
C) Government intervention might worsen the mix of output or the distribution of income.
D) All of the above.

D) All of the above.

The first major regulatory target in the United States was:
A) Airlines. B) Railroads. C) Trucking firms. D) Telephone companies.

B) Railroads.

Which of the following industries was substantially deregulated over the last several decades?
A) Airlines. B) Cable TV. C) Telephone service. D) All of the above.

D) All of the above.

Which of the following markets has not been subject to substantial deregulation?
A) Airlines. B) Computers. C) Telecommunications. D) Cable TV.

B) Computers.

Deregulation of the railroad industry led to:
A) Decreased rates. C) Reconfigured routes and services.
B) Decreased operating costs. D) All of the above.

D) All of the above.

Prior to the deregulation of the railroad industry, there was little incentive to invest in new technology or equipment. This is an example of:
A) The failure of deregulation. C) Government failure.
B) Market failure. D) The failure of laissez faire.

C) Government failure.

Before the deregulation in telecommunications, AT&T charged higher rates on long-distance service in order to make local service rates lower. Such a practice is an example of:
A) Price discrimination because different prices were charged for the same service.
B) The pricing of public goods.
C) Cross-subsidization of local phone service.
D) Predatory price cutting to eliminate local telephone companies.

C) Cross-subsidization of local phone service.

The collapse of AT&T’s natural monopoly in long distance telephone service was caused by:
A) Satellite technology which made it easier and less expensive for new companies to provide long-distance service.
B) The takeover of the telephone industry by the U.S. government.
C) Government regulation because of illegal collusion between AT&T and foreign competitors.
D) Inadequate profits.

A) Satellite technology which made it easier and less expensive for new companies to provide long-distance service.

Before deregulation of the telephone industry:
A) Telephone service prices were lower than after deregulation.
B) Cutthroat competition eliminated profits.
C) The volume of communication was lower than after deregulation.
D) There was greater variety and quality of service than after deregulation.

C) The volume of communication was lower than after deregulation.

When a telecommunication company uses the money from long-distance service to lower the price for local service, it engages in:
A) Marginal cost pricing. C) Cross-subsidization.
B) Price discrimination. D) Product differentiation.

C) Cross-subsidization.

Deregulation in the airline market has:
A) Caused the industry to become more concentrated in most markets.
B) Increased output.
C) Caused prices to fall for the industry.
D) All of the above.

D) All of the above.

After deregulation, the airline market experienced:
A) Decreased market entry. C) Higher prices.
B) Increased industry concentration. D) All of the above.

B) Increased industry concentration.

In which of the following markets did deregulation contribute to increased industry concentration?
A) Airlines. B) Telecommunications. C) Trucking. D) Railroads.

A) Airlines.

If entry barriers into a monopolized market are kept low:
A) Market power increases. C) A market is contestable.
B) Government failure exists. D) All of the above.

C) A market is contestable.

Which of the following would be most likely to give the American public more air travel at a lower cost?
A) Reregulate the airline market by reestablishing the CAB.
B) Allow foreign airlines to enter the U.S. market.
C) Limit entry of new firms to allow the current firms to gain greater financial strength.
D) Subsidize research and development and purchases of new airplanes for the major existing airlines.

B) Allow foreign airlines to enter the U.S. market.

The ownership of airport landing slots by airlines:
A) Acts as an entry barrier to other airlines. C) Increases hub dominance by the airline.
B) Most likely results in an increase in airfares. D) All of the above.

D) All of the above.

Which of the following is most likely to give consumers more cable programming at a lower price?
A) A ban on direct satellite broadcasts.
B) Deregulation of the local cable TV monopolies.
C) Allowing telephone companies to provide cable TV services over telephone wires.
D) The Telecommunications Turns Act of 1996.

C) Allowing telephone companies to provide cable TV services over telephone wires.

Deregulation of the cable TV market by the Telecommunications Turns Act of 1996 resulted in:
A) Lower prices and better service.
B) Little change in either prices or service.
C) Prices that rose four times faster than the rate of inflation.
D) Reductions in prices but little change in the level of service.

C) Prices that rose four times faster than the rate of inflation.

Critics of the Telecommunications Turns Act of 1996 argue that the deregulation of cable TV:
A) Will result in unfair competition for the existing firms.
B) Is not appropriate because alternative technologies are not yet viable competition for cable.
C) Will increase the concentration of producers, increasing prices and reducing the quality of service.
D) Will increase barriers to entry allowing existing firms to gain market power.

B) Is not appropriate because alternative technologies are not yet viable competition for cable.

The industry that is the most recent target of deregulation is the:
A) Trucking industry. C) Electric utility industry.
B) Airline industry. D) Long distance telephone service.

C) Electric utility industry.

The electric utility industry became a target for deregulation when:
A) The cost of constructing nuclear power plants declined.
B) New technology allowed the transmission of power from region to region without significant power loss.
C) Local utility companies began behaving like monopolies.
D) All of the above.

B) New technology allowed the transmission of power from region to region without significant power loss.

Proponents of electric utility industry deregulation said that:
A) Profit regulation had resulted in increased costs and higher prices.
B) Profit regulation had resulted in too much investment in highly efficient energy production.
C) Profit regulation had resulted in industry output that was too great.
D) Regulation of electricity producers favored industrial electricity users.

A) Profit regulation had resulted in increased costs and higher prices.

85. Proponents of electric utility industry deregulation argued that deregulation was justified because:
A) Other industries had been deregulated.
B) Improvements in technology allowed easy transmission of electricity using satellite technology.
C) Improvements in technology allowed easy transmission of electricity through the deregulates telephone system.
D) Improvements in technology allowed the development of high-voltage transmission power lines.

D) Improvements in technology allowed the development of high-voltage transmission power lines.