Q&A Hero

Q: Consider two industries, industry W and industry X. In industry W there are five companies, each with a market share of 20% of total sales. In industry X, there are six companies. One company has a 50% market share and each of the other five firms has a market share of 10%. a. Calculate the four-firm concentration ratio for each industry. b. Calculate the Herfindahl-Hirschman Index (HHI) for each industry. c. What do the values of the two concentration measures imply about the degree of market power in the two industries?

Q: A monopoly differs from monopolistic competition in that A) a monopoly has market power while a firm in monopolistic competition does not have any market power. B) a monopoly can never make a loss but a firm in monopolistic competition can. C) in a monopoly there are significant entry barriers but there are low barriers to entry in a monopolistically competitive market structure. D) a monopoly faces a perfectly inelastic demand curve while a monopolistic competitor faces an elastic demand curve.

Q: Identify the type of merger in each of the following situations and indicate how the post-merger concentration ratio for the industry is affected. a. A steel company merges with a coal and iron ore mining company.b. Staples, a retailer of office supplies, acquires Office Depot, another retailer of office supplies.c. An oil company merges with pipeline, shipping, and railroad companies as well as refineries and gas stations.

Q: Compared to a monopolistic competitor, a monopolist faces A) a more elastic demand curve. B) a more inelastic demand curve. C) a more elastic demand curve at higher prices and a more inelastic demand curve at lower prices. D) a demand curve that has a price elasticity coefficient of zero.

Q: a. What is the defining characteristic of a natural monopoly? b. Should the government break up a natural monopoly into two or more firms to make the industry more competitive? c. Suppose the government wants to ensure that some of the benefits of declining average total cost are passed on to consumers. To achieve this goal, it requires that the natural monopoly set its price equal to marginal cost. Is this a feasible goal? Explain. d. What is an alternative to marginal cost pricing that ensures that consumers reap some of the benefits of declining average total cost?

Q: A monopolist faces A) a perfectly elastic demand curve. B) a perfectly inelastic demand curve. C) a horizontal demand curve. D) a downward-sloping demand curve.

Q: a. What is the difference between a horizontal merger and a vertical merger? b. Give an example of each type of merger. c. Could a horizontal merger be welfare improving?

Q: A firm that has the ability to control to some degree the price of the product it sells A) is also able to dictate the quantity purchased. B) faces a demand curve that is inelastic throughout the range of market demand. C) is a price maker. D) faces a perfectly inelastic demand curve.

Q: Identify two ways by which the government controls monopolies?

Q: In 2011, Microsoft filed a complaint with the European Commission accusing Google of taking steps to monopolize the Internet search engine business. Microsoft's primary complaint was that A) Google is the only Internet search engine available to Windows operating system users. B) the European Union contracts exclusively with Google for its Internet search engine use. C) Google was using its dominant position as an Internet search engine to exclude competitors. D) Google owns the Internet advertising companies that pay for ads on search engine sites, and has prohibited ads from being sold to competitors.

Q: Economic efficiency requires that a natural monopoly's price be set corresponding to the quantity where marginal revenue equals marginal cost.

Q: Peet's Coffee and Teas produces some flavorful varieties of Peet's brand coffee. Is Peet's a monopoly? A) Yes, there are no substitutes to Peet's coffee. B) No, although Peet's coffee is a unique product, there are many different brands of coffee that are very close substitutes. C) Yes, Peet's is the only supplier of Peet's coffee in a market where there are high barriers to entry. D) No, Peet's is not a monopoly because there are many branches of Peet's.

Q: The term "trust" in antitrust refers to a board of trustees that has collusive control over different companies.

Q: A monopoly is characterized by all of the following except A) there are only a few sellers each selling a unique product. B) entry barriers are high. C) there are no close substitutes to the firm's product. D) the firm has market power.

Q: Local or state offices of the Department of Justice usually set prices for natural monopolies in their jurisdictions.

Q: In Walnut Creek, California, there are three very popular supermarkets: Safeway, Whole Foods and Lunardi's. While Safeway remains open twenty-four hours a day, Whole Foods and Lunardi's close at 9 pm. Which of the following statements is true? A) Safeway is a monopoly all day because it produces a service that has no close substitutes. B) Safeway has a monopoly at midnight but not during the day. C) Safeway can ignore the pricing decisions of the other two supermarkets. D) Safeway probably has a higher markup to compensate for its higher cost of production.

Q: Merger guidelines developed by the Antitrust Division of the U.S. Department of Justice use four-firm concentration ratios as measures of concentration.

Q: Which of following is the best example of a monopoly if we use a broader definition of monopoly? A) Spuds McKenzie, a wealthy potato farmer in Idaho B) Cheap Gas, one of two gasoline stations in a large rural community C) Santos Tacos, the only taqueria in the small town of Santosville D) Zippie Rentals, a sports car rental service in the downtown Boston area

Q: The U.S. government would never approve a proposed merger between two firms that could significantly increase the newly merged firm's market power even if the efficiency gains from the newly merged firm could make consumers better off.

Q: If we use a narrow definition of monopoly, then a monopoly is defined as a firm A) that has been granted special production rights by the government. B) that can ignore the actions of all other firms because it produces a superior product compared to its rivals' products. C) that can ignore the actions of all other firms because it produces a product for which there are no close substitutes. D) that has the largest market share in an industry.

Q: Holding everything else constant, government approval of horizontal mergers is more likely to be granted if the "market" that firms are in are broadly defined rather than narrowly defined.

Q: A monopoly is a seller of a product A) with many substitutes. B) without a close substitute. C) with a perfectly inelastic demand. D) without a well-defined demand curve.

Q: A vertical merger is one that takes place between two companies producing different goods or services for one specific finished product.

Q: The reason that the Fisherman's Friend restaurant in Stonington, Maine had a monopoly on selling seafood dinners in that town is most likely due to A) a government-imposed barrier. B) occupational licensing. C) no competitors apparently found the profit level attractive enough to enter the market. D) the restaurant owned all the fresh seafood in the state.

Q: A product's price approaches its marginal cost as market concentration increases.

Q: Figure 15-16 Figure 15-16 shows the market demand and cost curves facing a natural monopoly. Refer to figure 15-16. In the absence of any government regulation, the profit-maximizing owners of this firm will produce ________ units and charge a price of ________. A) Q0 units; P0 B) Q1 units; P1 C) Q1 units; P4 D) Q3 units; P3

Q: Figure 15-16 Figure 15-16 shows the market demand and cost curves facing a natural monopoly. Refer to Figure 15-16. If the regulators of the natural monopoly allow the owners of the firm to break even on their investment the firm will produce an output of ________ and charge a price of ________. A) Q1 units; P4 B) Q1 units; P1 C) Q5 units; P3 D) Q3 units; P3

Q: Figure 15-16 Figure 15-16 shows the market demand and cost curves facing a natural monopoly. Refer to Figure 15-16. Which of the following would be true if government regulators require the natural monopoly to produce at the economically efficient output level? A) This results in a misallocation of resources. B) The marginal cost of producing the last unit sold exceeds the marginal benefit. C) The firm will sustain persistent losses and will not continue in business in the long run. D) The firm will break even.

Q: Figure 15-16 Figure 15-16 shows the market demand and cost curves facing a natural monopoly. Refer to Figure 15-16. Suppose the government regulates this industry in order to remove the inefficiency implied by the behavior of the profit maximizing owners. If regulators require that the firm produces the economically efficient output level, what is this level and what price will be charged? A) Q4 units; P4 B) Q1 units; P4 C) Q1 units; P1 D) Q3 units; P3

Q: If a firm is a natural monopoly, competition from other firms cannot be counted on to force price down to the level where the company earns zero economic profit. How are prices usually set in natural monopoly markets in the United States? A) Each natural monopoly is made a public franchise. The public franchise is then required to set its price equal to its marginal cost. B) Natural monopolies are privately owned, but prices proposed by the firms must be approved by the Antitrust Division of the Department of Justice. C) Natural monopolies are privately owned and allowed to set their own prices. Government regulation of the firms would result in greater deadweight losses. D) Local or state regulatory commissions usually set prices for natural monopolies.

Q: Consider an industry that is made up of six firms with the following market shares: Firm A - 50%, Firm B - 20%, Firms C and D - 10% each, and Firms E and F - 5% each. What is the value of the Herfindahl-Hirschman Index and how will the industry be categorized? A) 2,500; mildly concentrated B) 3,150; highly concentrated C) 8,100; highly concentrated D) 10,000; effectively competitive

Q: According to the Department of Justice merger guidelines, a proposed merger between two firms may be challenged if the post-merger Herfindahl-Hirschman Index A) lies between 1,000 and 1,800 and the merger raises the Index by 50 points. B) lies between 1,000 and 1,800 and the merger raises the Index by more than 100 points. C) lies above 1,800 and the merger raises the Index by less than 50 points. D) lies below 1,000 and the merger raises the Index by 100 points.

Q: The Herfindahl-Hirschman Index is one factor used to determine whether a merger between two firms should be allowed. Which of the following statements regarding the value of the Index for a given industry is true? A) If a merger would result in an Index value less than 1,000, the merger would not be challenged. B) If a merger would result in an Index value of 1,000 or more, the industry would be considered a monopoly and the merger would be challenged. C) If a merger resulted in an Index of between 1,000 and 1,800, the industry would be considered competitive and the merger would not be challenged. D) If a merger would increase the Index by 100, the industry would be considered a monopoly and the merger would be challenged.

Q: Merger guidelines developed by the U.S. Department of Justice and the Federal Trade Commission use the Herfindahl-Hirschman Index as a measure of concentration. This index measures concentration in an industry by A) adding up the market shares of all firms in the industry, squaring this number and then dividing by the number of firms in the industry. B) squaring the market shares of each firm in an industry and then adding up the values of the squares. C) squaring the four-firm concentration ratio of the industry and dividing this number by the total number of firms in the industry. D) determining the market shares of the four largest firms in the industry, but unlike the concentration ratio, the Index includes sales in the United States by foreign firms.

Q: Economists played a key role in the development of merger guidelines by the Department of Justice and the Federal Trade Commission in 1982. These guidelines have three main parts. What are these parts? A) concentration ratios; the Herfindahl-Hirschman Index; market standards B) concentration standards; concentration ratios; competitive analysis C) economic analysis; political analysis; dynamic analysis D) market definition; measure of concentration; merger standards

Q: Beginning in 1965, the head of the Antitrust Division of the U.S. Department of Justice began to change antitrust policy. How did antitrust policy change? A) For the first time horizontal mergers were allowed - with government approval - and vertical mergers were allowed without need for approval from the government. B) For the first time concentration ratios were used to evaluate the degree of competition in the industries of firms that proposed mergers. C) The Division began to systematically consider the economic consequences of proposed mergers. D) Proposed mergers no longer needed the approval of the Federal Trade Commission or the court system.

Q: Which two factors make regulating mergers complicated? A) First, firms may lobby government officials to influence their decision to approve the merger. Second, by the time the government officials reach a decision regarding the merger, the firms often decide not to merge. B) First, the time it takes to reach a decision to approve a merger is so long that the firms often have new owners and mangers. Second, by law, government officials are not allowed to consider the impact of foreign trade (exports and imports) on the degree of competition in the markets of the merged firms. C) First, the Federal Trade Commission and the Antitrust Division of the U.S. Department of Justice must both approve mergers. Second, the concentration ratios that are used to evaluate the degree of competition the merged firms face are flawed. D) First, it is not always clear what market firms are in. Second, the newly merged firm might be more efficient than the merging firms were individually.

Q: Congress has divided the authority to police mergers between the Antitrust Division of the U.S. Department of Justice (AD) and the Federal Trade Commission (FTC). How is this authority divided? A) The AD decides whether proposed horizontal mergers will be challenged; the FTC decides whether proposed vertical mergers will be challenged. B) Both the AD and the FTC are responsible for merger policy. C) The AD always renders its opinion on any proposed merger first. If the AD approves the merger, the case then goes to the FTC for final approval. If the AD disallows the merger, the decision stands and the FTC does not become involved. D) The AD establishes the guidelines that are used to evaluate proposed mergers; the FTC uses these guidelines to decide whether a proposed merger will be allowed to take place.

Q: Baxter International, a manufacturer of hospital supplies, acquired American Hospital Supply, a distributor of hospital supplies. This is an example of A) a conglomerate merger. B) a horizontal merger. C) a vertical merger. D) a two-dimensional merger.

Q: A horizontal merger A) is a merger between firms in the same industry. B) results in a trust (for example, the Standard Oil Company). C) is a merger between firms at different stages of production of a good. D) was illegal in the United States until the Federal Trade Commission Act was passed by Congress in 1914.

Q: A merger between firms at different stages of production of a good A) is a vertical merger. B) was made illegal by the Sherman Act. C) was made legal by the Clayton Act. D) is a horizontal merger.

Q: The U.S. Congress has given two government entities the authority to police mergers. These two entities are A) the antitrust division of the Department of State and the Securities and Exchange Commission. B) the Federal Trade Commission and the Internal Revenue Service. C) the Antitrust Division of the U.S. Department of Justice and the Council of Economic Advisors. D) the Federal Trade Commission and the Antitrust Division of the U.S. Department of Justice.

Q: Why are laws aimed at regulating monopolies called "antitrust" laws? A) The rise of large firms (e.g., Standard Oil) in the late 1800s in the United States caused consumers to lose trust in private business. B) "Trust" was a word in Old English that meant monopoly in the Middle Ages. Therefore, "antitrust" is a term that means "against monopoly." C) In the late 1800s, firms in several industries formed trusts; the firms were independent but gave voting control to a board of trustees. Antitrust laws were passed to regulate these trusts. D) In the late 1800s, firms in several industries formed trusts; they were called "trusts" because when corporate officials were questioned about their business they would clam that business was good for the country and that they should trusted.

Q: The Clayton Act is an antitrust law that was passed to A) outlaw monopolization. B) address loopholes in the Sherman Act. C) prohibit charging buyers different prices if the result would reduce competition. D) toughen restrictions on mergers by prohibiting mergers that reduce competition.

Q: Which antitrust law prohibited firms from buying stock in competitors and from having directors serve on the boards of competing firms? A) the Clayton Act B) the Securities and Exchange Act C) the Sherman Act D) the Robinson-Patman Act

Q: The first important law regulating monopolies in the United States was A) the Grant Act, which was passed in 1890. B) the Clayton Act, which was passed in 1890. C) the Sherman Act, which was passed in 1890. D) the Federal Trade Commission Act, which was passed in 1914.

Q: In the United States, government policies with respect to monopolies and collusion are embodied in A) the U.S. Constitution. B) common law, which the United States adopted from English law. C) the Supreme Court. D) antitrust laws.

Q: Collusion is A) common among monopoly firms. B) an agreement among firms to charge the same price or otherwise not to compete. C) necessary for firms to raise money by borrowing from investors or from banks in order to fund research and development required to develop new products. D) legal under U.S. antitrust laws if the intent is to increase competition.

Q: In regulating a natural monopoly, the price strategy that ensures the highest possible output and zero profit is one that sets price A) equal to average total cost where it intersects the demand curve. B) equal to marginal cost where it intersects the demand curve. C) equal to average variable cost where it intersects the demand curve. D) corresponding to the demand curve where marginal revenue equals zero.

Q: Economic efficiency requires that a natural monopoly's price be A) equal to average total cost where it intersects the demand curve. B) equal to marginal cost where it intersects the demand curve. C) equal to average variable cost where it intersects the demand curve. D) equal to the lowest price the firm can charge and still make a normal profit.

Q: Figure 15-15 Figure 15-15 shows the cost and demand curves for the Erickson Power Company. Refer to Figure 15-15. Why won't regulators require that Erickson Power produce the economically efficient output level? A) because there is insufficient demand at that output level B) because at the economically efficient output level, the marginal cost of producing the last unit sold exceeds the consumers' marginal value for that last unit C) because Erickson Power will earn zero profit D) because Erickson Power will sustain persistent losses and will not continue in business in the long run

Q: Figure 15-15 Figure 15-15 shows the cost and demand curves for the Erickson Power Company. Refer to Figure 15-15. What is the economically efficient output level and what is the price at that level? A) Q4, P1 B) Q3, P2 C) Q2, P2 D) Q2, P3

Q: Figure 15-15 Figure 15-15 shows the cost and demand curves for the Erickson Power Company. Refer to Figure 15-15. If the government regulates Erickson Power Company so that the firm can earn a normal profit, the price would be set at ________ and the output level is ________. A) P1, Q4 B) P2, Q3 C) P2, Q2 D) P3, Q2

Q: Figure 15-15 Figure 15-15 shows the cost and demand curves for the Erickson Power Company. Refer to Figure 15-15. The profit-maximizing price is A) P1. B) P2. C) P3. D) P4.

Q: Figure 15-15 Figure 15-15 shows the cost and demand curves for the Erickson Power Company. Refer to Figure 15-15. The firm would maximize profit by producing A) Q1 units. B) Q2 units. C) Q3units. D) Q4units.

Q: Figure 15-15 Figure 15-15 shows the cost and demand curves for the Erickson Power Company. Refer to Figure 15-15. Erickson Power is a natural monopoly because A) it is a power company and all power companies are natural monopolies. B) average total cost is still declining when it intersects demand. C) of its continually declining marginal revenue curve as output rises. D) its marginal cost lies entirely below its long-run average cost.

Q: If a natural monopoly regulatory commission sets a price where marginal cost is equal to demand A) the firm would earn monopoly profits. B) economic efficiency would not be achieved. C) the firm would incur a loss. D) the firm would break even.

Q: Natural monopolies in the United States are generally regulated by A) the Federal Trade Commission. B) the Department of Justice. C) local or state regulatory commissions. D) the Department of Commerce.

Q: Article Summary Arguing that a merger would lead to higher prices, reduced service, and significantly less competition, the Justice Department and attorneys general from 6 states and the District of Columbia filed a lawsuit in August to challenge the pending merger of American Airlines and US Airways. The lawsuit took some by surprise as the Justice Department has in recent years approved the mergers of Delta with Northwest and United with Continental. The European Union approved the merger in August, and American and US Airways had hoped to complete the merger by September. Source: Even Perez, "US government seeks to block American-US Airways merger," CNN.com, August 13, 2013. Refer to the Article Summary. A merger between two competitors such as American Airlines and US Airways may ultimately be approved by the Department of Justice and the FTC if the two companies can substantiate ________ as a result of the merger. A) increases in revenue for the merged company B) an increase in the HHI to over 1,800 C) decreases in marginal revenue for the merged company D) increases in economic efficiency

Q: Article Summary Arguing that a merger would lead to higher prices, reduced service, and significantly less competition, the Justice Department and attorneys general from 6 states and the District of Columbia filed a lawsuit in August to challenge the pending merger of American Airlines and US Airways. The lawsuit took some by surprise as the Justice Department has in recent years approved the mergers of Delta with Northwest and United with Continental. The European Union approved the merger in August, and American and US Airways had hoped to complete the merger by September. Source: Even Perez, "US government seeks to block American-US Airways merger," CNN.com, August 13, 2013. Refer to the Article Summary. The standards used by the Department of Justice and the FTC to evaluate a potential merger such as the one between American Airlines and US Airways are based on market concentration as determined by the A) Herfindahl-Hirschman Index. B) Clayton Antitrust Act. C) Anti-Collusion Task Force. D) Robinson-Patman Act.

Q: The lawsuit the Justice Department brought against Apple regarding the pricing of e-books for its iPad is an example of attempts by the government A) to prevent vertical mergers which would significantly reduce competition. B) to prevent horizontal mergers which would significantly reduce competition. C) to regulate a natural monopoly by establishing government-regulated prices. D) to keep firms from artificially restricting competition to raise prices.

Q: A possible advantage of a horizontal merger for the economy is that A) the merging firms could avoid losses. B) the merged firm might reap economies of scale which could translate into lower prices. C) the degree of competition in the industry will be intensified. D) the government stands to collect more corporate income tax revenue.

Q: Consider an industry that is made up of nine firms each with a market share (percent of sales) as follows: a. Firm A: 30% b. Firm B: 20% c. Firms C, D and E: 10% each d. Firms F, G, H and J: 5% each What is the value of the Herfindahl-Hirschman Index and how is the industry categorized? A) 1700; moderately concentrated B) 1425; moderately concentrated C) 1600; moderately concentrated D) 2600; highly concentrated

Q: Consider an industry that is made up of nine firms each with a market share (percent of sales) as follows: a. Firm A: 30% b. Firm B: 20% c. Firms C, D and E: 10% each d. Firms F, G, H and J: 5% each What is the value of the four-firm concentration ratio and how is the industry categorized? A) 50%; monopolistic competition B) 70%; oligopoly C) 75%; oligopoly D) 80%; strongly oligopolistic

Q: Suppose an industry is made up of 25 firms, all with equal market share. The four-firm concentration ratio of this industry is A) 16%. B) 20%. C) 25%. D) It cannot be determined from the information given.

Q: A Herfindahl-Hirschman Index is calculated by A) summing the amount of sales by the four largest firms and dividing by total industry sales. B) dividing the number of firms wanting to merge by the total number in the industry. C) summing the squares of the market shares of each firm in the industry. D) summing the advertising expenditures of the firms that want to merge by total industry advertising expenditures.

Q: When a proposed merger between two companies is reviewed by the government, the relevant market is defined by A) whether or not there are close substitutes for the products of the two firms. B) how elastic the demand is for each firm's product. C) counting the number of firms that produce the same product. D) how much advertising is done in the industry.

Q: A merger between U.S. Steel and General Motors would be an example of a A) vertical merger. B) horizontal merger. C) conglomerate merger. D) conspiracy in restraint of trade.

Q: A merger between the Ford Motor Company and General Motors would be an example of a A) vertical merger. B) horizontal merger. C) conglomerate merger. D) trust.

Q: The Federal Trade Commission (FTC) Act A) gave the FTC full power to regulate mergers. B) closed the loopholes in the Sherman and Clayton Acts. C) divided authority to police mergers between the FTC and the Department of Justice. D) prohibited charging buyers different prices if the result would reduce competition.

Q: The Clayton Act prohibited A) all vertical mergers. B) all horizontal mergers. C) any merger if its effect was to substantially lessen competition or create a monopoly. D) all conglomerate mergers.

Q: The Sherman Act prohibited A) marginal cost pricing. B) setting price above marginal cost. C) collusive price agreements among rival sellers. D) selling below average total cost.

Q: The first important federal law passed to regulate monopolies in the United States was the A) Cellar-Kefauver Act. B) Clayton Act. C) Federal Trade Commission Act. D) Sherman Act.

Q: Figure 15-14 Refer to Figure 15-14. From the monopoly graph above, identify the following: a. The profit maximizing price b. The profit maximizing quantity c. The area representing deadweight loss d. The area representing the transfer of consumer surplus to the monopoly

Q: Figure 15-13 Refer to Figure 15-13. From the monopoly graph above, identify the area representing the deadweight loss. Would the deadweight loss be larger if the demand curve was more elastic or less elastic?

Q: Explain why market power leads to a deadweight loss. Is the total deadweight loss from market power in the United States large or small?

Q: Equilibrium in a perfectly competitive market results in the greatest amount of economic surplus, or total benefit to society, from the production of a good. Why, then, did Joseph Schumpeter argue that an economy may benefit more from firms that have market power than from firms that are perfectly competitive?

Q: Suppose that a perfectly competitive industry becomes a monopoly. What effect will this have on consumer surplus, producer surplus, and deadweight loss?

Q: How do the price and quantity of a monopoly compare to that of a perfectly competitive industry?

Q: Producers in perfect competition receive a smaller producer surplus than a monopoly producer.