Question 1

The share of industry output sold by the top four steel producers in the country are 19 percent, 15 percent, 12 percent, and 9 percent, respectively.The four-firm concentration ratio for the steel industry is

Accepted Answer

To calculate the four-firm concentration ratio, we sum up the market share of the top four steel producers: 19% + 15% + 12% + 9% = 55%.

Then, we divide the total market share of the top four firms by the total market share of the industry:

55% / 100% = 0.55.

Therefore, the four-firm concentration ratio for the steel industry is 0.55.

Question 2

Which of the following is a valid effect of monopoly power?

Accepted Answer

Monopoly power often leads to inefficiencies and higher prices for consumers, as monopolies have no competition to keep prices in check or to encourage innovation and efficient resource allocation.

Question 3

Which statement about market power is incorrect?

Accepted Answer

Monopoly power can lead to a decrease in consumer surplus, as the firm can charge higher prices, but it actually leads to an increase in producer surplus, as the firm has more control over the market and can charge higher prices which result in higher profits. Therefore, statement D is incorrect.

Question 4

What does the Herfindahl-Hirschman Index value near zero imply about the market?

Accepted Answer

The Herfindahl-Hirschman Index (HHI) measures the level of competition in a market. A value near zero implies perfect competition, where no individual seller has market power and prices are determined by market forces. Higher values of HHI indicate a greater concentration of market power among a few large firms, with values above 2500 indicating high market concentration and the potential for market power. Therefore, a value near zero corresponds to perfect competition.

Question 5

What is defined as the ability of a firm to earn high profits by raising and keeping the prices of its products substantially above the levels at which those products would be priced in competitive markets?

Accepted Answer

Monopoly power is defined as the ability of a firm to earn high profits by raising and keeping the prices of its products substantially above the levels at which those products would be priced in competitive markets. Economies of scope refer to the cost advantages a firm can achieve by producing multiple products or services. Tacit collusion refers to the informal cooperation between firms to limit competition and maintain higher prices. Perfect competition refers to a market structure where there are many small firms selling homogeneous products and no single firm has the power to affect the market price.

Question 6

If the four-firm concentration ratio in an industry increases, the industry

Accepted Answer

The answer of If the four-firm concentration ratio in an...

Question 7

Government agencies may fail to identify anticompetitive behavior if

Accepted Answer

If competitors have been forced out of business due to inefficient production and the inability to keep prices low, it may not be immediately obvious to government agencies that anticompetitive behavior is occurring. This is because there may not be any other firms left to compete against the dominant player, making it difficult to identify that there is a lack of competition.

Question 8

If the automobile industry has become highly concentrated and cartelized.To maintain profits, firms may

Accepted Answer

One way for highly concentrated and cartelized firms to maintain profits is to prevent entry of new firms. This allows the existing firms to have more control over the market and maintain their prices and profits. Allowing newcomers to enter the market or becoming price takers would reduce firms' control and potentially lower profits. Lowering prices to raise revenues may also lead to reduced profits if it results in lower profit margins.

Question 9

Archer Daniels Midland (ADM) was convicted for this anticompetitive practice in the lysine market.

Accepted Answer

Archer Daniels Midland was convicted for price fixing in the lysine market. Price fixing involves colluding with competitors to artificially set prices at a certain level, which harms consumers and stifles competition.

Question 10

Policies that preclude the deliberate creation of monopoly and undesirable practices are called

Accepted Answer

Antitrust policies aim to promote competition, prevent the creation of monopolies or oligopolies, and discourage anticompetitive behavior such as price fixing, market allocation, and unfair business practices. These policies are based on the belief that competition is essential for economic efficiency and innovation, and that monopolies or cartels can distort markets, harm consumers, and reduce welfare. Antitrust policies are often enforced by regulatory agencies or courts, and may involve fines, divestitures, or injunctions.

Question 11

Which of the following events would increase the four-firm concentration ratio in a milk industry with six firms?

Accepted Answer

In a milk industry with six firms, if the two largest milk producers merge, then the four-firm concentration ratio would increase. The concentration ratio is calculated by adding the market share of the top four or top n firms in the industry. If the two largest firms merge, their combined market share would increase, leading to a higher concentration ratio.

Question 12

The Herfindahl-Hirschman Index measures

Accepted Answer

The Herfindahl-Hirschman Index is a measure of market concentration in an industry. It is calculated by summing the squares of the market shares of all firms in the industry. The higher the HHI score, the more concentrated the market, and the higher the likelihood of reduced competition and increased market power for the dominant firms.

Question 13

Under a tying contract,

Accepted Answer

A tying contract occurs when a customer is required to purchase one product only if they agree to purchase another product from the same seller. This is commonly used to force customers to buy products they may not want or need, which can be anticompetitive. A and C are incorrect, as they do not accurately describe tying contracts. D is incorrect, as it describes a payment for a business service and not a tying contract.

Question 14

____ occur(s) when an X percent increase in input use raises output by more than X percent, so that the more the firm produces, the lower its per-unit costs become.

Accepted Answer

Scale economies occur when a firm experiences lower per-unit costs as it produces a greater output. This means that if a firm increases its input use by X percent, its output would increase by more than X percent, resulting in a lower cost to produce each unit. This phenomenon is also known as increasing returns to scale.

Question 15

Modern antitrust policy began in response to

Accepted Answer

Modern antitrust policy began in response to abuses of market power in the oil industry, specifically Standard Oil's monopoly. John D. Rockefeller's Standard Oil controlled over 90% of the oil refining industry in the late 1800s, leading to concerns about unfair competition and consumer harm. The Sherman Antitrust Act was therefore passed in 1890 to combat such monopolies.

Question 16

Which of the following acts prohibits directors of one company from sitting on the board of a competitor?

Accepted Answer

The Clayton Act prohibits directors of one company from sitting on the board of a competitor. The Sherman Act prohibits anti-competitive behavior, the Federal Trade Commission Act establishes the Federal Trade Commission to regulate business practices, and the Robinson-Patman Act prohibits price discrimination.

Question 17

Major firms charged with predatory pricing defend by saying that their prices are low because of superior efficiency.

Accepted Answer

Major firms charged with predatory pricing often defend themselves by stating that their low prices are a result of their superior efficiency in production and distribution, rather than an attempt to drive out smaller competitors. However, this defense may not always hold up in court if it is found that the prices are below cost and are being used to eliminate competition.

Question 18

The four-firm concentration ratio for an industry is

Accepted Answer

The four-firm concentration ratio is a measure of market concentration that calculates the combined market share of the four largest firms in the industry. It is calculated by adding the market share percentages of the four largest firms in the industry. Therefore, choice B - the share of industry output sold by the four largest firms in the industry - is the correct answer.

Question 19

The Clayton Act prohibits "all contracts, combinations and conspiracies in restraint of trade."

Accepted Answer

The Sherman Antitrust Act, not the Clayton Act, contains the specific provision that prohibits "all contracts, combinations, and conspiracies in restraint of trade." The Clayton Act, on the other hand, was designed to supplement the Sherman Act by addressing specific practices that were not covered by the Sherman Act.

Question 20

Price discrimination by a firm is

Accepted Answer

Price discrimination is legal if the firm can demonstrate that the difference in prices it charges customers is justified by a difference in the costs of serving them. This is because the goal of antitrust laws is to promote competition and protect consumers, not to regulate prices. Therefore, firms can use different pricing strategies as long as they do not harm competition.

Quiz 14: Limiting Market Power: Antitrust and Regulation