Economics Study Set 17

Business

Quiz 13 :

Limiting Market Power: Regulation and Antitrust

Quiz 13 :

Limiting Market Power: Regulation and Antitrust

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Why is an electric company in a city often considered to be a natural monopoly What would happen if two competing electric companies were established How about telephone companies How can changes in technology affect your answer
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An electric company in a city is considered to be a natural monopoly because the average cost of it reduces as it increases the production of its services. New electric companies find it difficult to compete against the existing company because of the decreasing average cost.
If two electric companies are established, then the monopoly power of an existing company will vanish accordingly.
A change in technology tends to reduce the cost of production. Reduction in the cost of production is likely to eliminate the natural monopoly since other firms will enter in the market.

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Firm X cuts its prices, and competing Firm Y soon goes out of business. How would you judge whether this price cut was an act of legitimate and vigorous competition or an anticompetitive act
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If firm X is able to maximize its profit by cutting its price, then the action would be considered as legitimate. Production efficiency allows firm X to reduce its price. If firm Y is not able to compete with the price determined by firm X, then it has go out of the business. Reduction in the price by firm X drives the firm Y out of the business.
Therefore, considering the benefits to consumers one would consider the price cut as a legitimate act.
If the price is raised by firm X after the exit of firm Y, then it would be regarded as an anticompetitive act.

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Why do you think the specific industries you selected in Discussion Question 8 are highly concentrated
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Automobiles and aircraft industries are highly concentrated because of their higher fixed costs. Higher fixed cost leads to establish large economies of scale. Establishment of large economies scale tends to create monopoly in the market.
Computer and electronic production, pharmaceuticals, and jewelry industries are not concentrated because these industries do not have economies of scale. Entry of new firms in these industries is not difficult.

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Suppose that a 20 percent cut in the price of coast-tocoast telephone calls brings in so much new business that it permits a long-distance telephone company to cut its charges for service from Chicago to St. Louis, but only by 2 percent. In your opinion, is this practice equitable Is it a good idea or a bad one
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Do you think that it is fair or unfair for rural users of telephone service to be cross-subsidized by other telephone users
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Do you think it is in the public interest to launch an antitrust suit that costs $1 billion What leads you to your conclusion
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In some regulated industries, regulatory agencies prevented prices from falling, and as a result many firms opened for business in those industries. In your opinion, is this kind of regulation competitive or anticompetitive Is it a good idea or a bad one
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Some economists believe that firms rarely attempt predatory pricing because it would be a very risky act even if it were legal. Why may this be so
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Regulators are highly concerned about the prevention of "predatory pricing." The U.S. Court of Appeals has noted, however, that "the term probably does not have a well-defined meaning, but it certainly bears a sinister connotation." How might one distinguish "predatory" from "nonpredatory" pricing What would you do about it
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During the oil crisis in the 1970s, long lines at gas stations disappeared soon after price controls were removed and gas prices were permitted to rise. Should this event be interpreted as evidence that the oil companies have monopoly power Why or why not
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A shopkeeper sells his store and signs a contract that restrains him from opening another store in competition with the new owner. The courts have decided that this contract is a reasonable restraint of trade. Can you think of any other types of restraint of trade that seem reasonable Can you think of any that seem unreasonable
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To provide incentives for increased efficiency, several regulatory agencies have eliminated ceilings on the profits of regulated firms but instead put caps on their prices. Suppose that a regulated firm manages to cut its prices in half, but in the process it doubles its profits. Should rational consumers consider this to be a good or a bad development Why
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Which of the following industries do you expect to have high concentration ratios: automobile production, aircraft manufacture, computer and electronics production, pharmaceuticals, production of expensive jewelry Compare your answers with the data in Table 2.
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Can you think of some legal rules that may discourage the use of antitrust laws to prevent competition while at the same time not interfering with legitimate antitrust actions
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In Japan and a number of European countries, the antitrust laws were once much less severe than those in the United States. Do you think that this difference helped or harmed American industry in its efforts to compete with foreign producers Why
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