Question 1

The consensus among economists who consider monopoly and oligopoly to be both inevitable and undesirable is, when confronted with a monopolized industry, to

Accepted Answer

Government regulation is often seen as a necessary measure to control monopolies and protect consumers, ensuring fair prices and preventing abuse of market power.

Question 2

Those economists who do not believe there is anything inherently wrong with monopolies advocate a policy of

Accepted Answer

Economists who do not see monopolies as inherently problematic often advocate for a laissez-faire approach, meaning minimal government intervention in business practices, allowing the market to regulate itself.

Question 3

Governments often choose to regulate monopolies, rather than break them up into smaller firms, because monopolies often are

Accepted Answer

Monopolies can achieve economies of scale, leading to lower average costs and potentially more efficient production compared to smaller firms.

Question 4

Some economists who consider monopoly to be both inevitable and bad are inclined toward a policy of ___________ if regulation of the monopoly seems ineffectual.

Accepted Answer

Economists who view monopoly as both inevitable and undesirable, yet find regulation ineffective, might lean towards nationalization. This involves the government taking control of the monopoly to ensure it serves the public interest, as other measures are seen as insufficient.

Question 5

Arguments in favor of a laissez-faire policy concerning government's role in the economy include the

Accepted Answer

The answer of Arguments in favor of a laissez-faire policy...

Question 6

Paul and Maggie advertise for a babysitter. Jenny is the only one who answers the ad and she's hired. She asks for $7 per hour and gets it. She occasionally thinks of raising the rate to $10 but is afraid that Paul and Maggie will decide to advertise again. This tale is analogous to

Accepted Answer

Jenny's situation is analogous to contestable markets because she is the only babysitter (a monopoly) but is deterred from raising prices due to the threat of potential competition (Paul and Maggie advertising again), similar to how firms in contestable markets behave.

Question 7

Some economists believe that monopolies are both inevitable and beneficial to society. They believe that monopolies are more efficient than competitive markets and generate lower prices. For these reasons they oppose _________ and advocate __________.

Accepted Answer

Economists who view monopolies as beneficial and more efficient than competitive markets typically oppose antitrust laws, which are designed to prevent monopolies and promote competition. They advocate for laissez-faire policies, which favor minimal government intervention in the economy.

Question 8

Government regulation of industry is designed to separate __________ from__________.

Accepted Answer

The answer of Government regulation of industry is designed to...

Question 9

The primary reason government chooses to regulate a natural monopoly is to

Accepted Answer

The primary reason for regulating a natural monopoly is to control price and output. Natural monopolies, due to their unique position and the lack of competition, can set prices and outputs at levels that may not be in the best interest of consumers or the economy. Regulation helps ensure that the monopoly does not abuse its position by setting excessively high prices or restricting output.

Question 10

Cable television is regulated because of its monopolistic cost structure. Baseball and basketball games, which also have monopolistic cost structures, are unregulated. What do these activities (watching TV and going to the ball park or stadium) not have in common?

Accepted Answer

Large-scale public consumption is the only characteristic not shared by watching TV and going to the ball park or stadium. Watching TV is a private activity, while going to the ball park or stadium is a public activity.

Question 11

When regulating a firm, setting price equal to marginal cost does not necessarily requireproviding a subsidy if

Accepted Answer

The answer of When regulating a firm, setting price equal...

Question 12

Setting a fair price means

Accepted Answer

Setting a fair price involves pricing as if the market were competitive and considering the sum of average fixed and average variable costs to match the price, which are options C and E combined, hence A (C and E) is correct.

Question 13

A big problem with fair pricing schemes is that

Accepted Answer

Fair pricing schemes often lead to a lack of incentive for firms to control costs because they are guaranteed a certain price or profit, reducing the motivation to minimize expenses and improve efficiency.

Question 14

Marginal cost pricing regulations for a natural monopolist ensure that

Accepted Answer

Marginal cost pricing for a natural monopolist often means setting prices where the price equals the marginal cost of producing one more unit. This approach can lead to situations where the price does not cover the total costs, necessitating a subsidy. Therefore, it reflects the value society places on the last unit produced (B) and often requires subsidization (E) to cover the difference between the price and the average total cost.

Question 15

The Interstate Commerce Commission was created to check the monopoly power of________ and ended up protecting them from the competitive forces of _________.

Accepted Answer

The Interstate Commerce Commission (ICC) was initially established to regulate the railroad industry and its monopolistic practices. Over time, it also became involved in regulating other forms of transportation, including trucking. However, instead of solely limiting the power of railroads, it often ended up protecting them from competition, notably from the emerging truck transportation industry.

Question 16

Antitrust issues can be political firestorms. In order to accomplish their economic missions regarding monopolies, regulation, and antitrust policy without incurring the scrutiny of the press and public, many presidents choose to

Accepted Answer

Presidents may manipulate the budgets of enforcement agencies to indirectly influence antitrust enforcement without drawing direct public or media scrutiny.

Question 17

Suppose there are 100 firms of equal size currently sharing the market for peanut butter. If 12 of these firms merge, how much will the Herfindahl-Hirschman Index change?

Accepted Answer

The answer of Suppose there are 100 firms of equal...

Question 18

Suppose there are two industries, A and B. Suppose that mergers are proposed in both industries, and the Herfindahl-Hirschman Index would increase by 500 in each one. If antitrust officials allow the mergers in industry A but challenge the mergers in industry B, the most likely explanation is that

Accepted Answer

The Herfindahl-Hirschman Index (HHI) measures market concentration, and an increase indicates a move towards less competition. If antitrust officials allow a merger in an industry where the HHI increases by the same amount as in another industry where the merger is challenged, the most likely explanation is that the starting point for competition was different. Industry A, where the merger was allowed, likely started as more competitive (lower HHI) than Industry B, meaning that even after the merger, it remained sufficiently competitive in the eyes of the antitrust officials.

Question 19

The advantages that arise from economies of scale make entry difficult for new firms. As a result, monopolies and oligopolies are often associated with __________ and___________.

Accepted Answer

Economies of scale allow monopolies and oligopolies to produce at lower costs, but they often set higher prices due to the lack of competition.

Question 20

Which of the following are options available to government when dealing with monopolies?

Accepted Answer

Options B (nationalization), C (marginal cost pricing regulation), and E (breaking up the firm) are all strategies governments can use to address monopolies. Nationalization involves taking the monopoly into public ownership, marginal cost pricing regulation ensures prices are set where the cost of producing one more unit is, and breaking up the firm involves dividing a large monopoly into several smaller entities to encourage competition.

Quiz 13: Antitrust and Regulation