ECON 610 ch 9,10,11

Why do oligopolies exist? a. A small number of firms have established barriers to entry using economies of scale, patents, and sheer size to prevent other firms from challenging them. b. The members of an oligopolistic market are producing in the upward sloping range of their long run average cost curves. c. The members of an oligopolistic market have signed agreements that divide the market such that no other firms will be able to achieve their level of profits. d. The oligopolistic firms are created, run, and supported by the government.

a. A small number of firms have established barriers to entry using economies of scale, patents, and sheer size to prevent other firms from challenging them.

How would you calculate a four-firm concentration ratio? a. By adding the market shares (expressed as percentages) of the four largest firms. b. By calculating the square root of the market shares of the four largest firms. c. By multiplying the market shares of four random firms. d. By dividing the market share of the largest firm by the market share of the smallest firm.

a. By adding the market shares (expressed as percentages) of the four largest firms.

The formula for calculating marginal revenue is... a. Change in total revenue / change in quantity sold. b. Change in total revenue / the change in quantity produced. c. Change in quantity sold minus change in quantity produced. d. Change in quantity sold / change in quantity produced.

a. Change in total revenue / change in quantity sold.

What is the most controversial aspect of Antitrust regulation? a. Defining a market b. Agreeing on which concentration measurement to use. c. Sending violators to jail. d. Defining the allowable size the merged firm should be.

a. Defining a market

Antitrust laws... a. Give the government the power to block certain mergers or break up large firms. b. Often result in people going to jail when broken. c. Make it more difficult to achieve pure competition. d. Were implemented by the federal government to outlaw trusts.

a. Give the government the power to block certain mergers or break up large firms.

Allocative efficiency is an economic concept regarding efficiency at the social or societal level. It refers to producing the optimal quantity of some output, the quantity where the marginal benefit to society of one more unit just equals the marginal cost. The rule of profit maximization in a world of perfect competition was for each firm to produce the quantity of output where P = MC, where the price (P) is a measure of how much buyers value the good and the marginal cost (MC) is a measure of what marginal units cost society to produce. A monopolist... a. Has no motivation to operate at an output level where P=MC, once a barrier is in place and no longer has to worry about competition. b. Would try to achieve allocative efficiency to compete with the other firms who own a larger market share. c. Will experience greater profits if it sets prices equal to average total cost. d. Will prefer to operate where price < average total cost.

a. Has no motivation to operate at an output level where P=MC, once a barrier is in place and no longer has to worry about competition.

What does the prisoner's dilemma teach us about the behavior of oligopolists? a. It is a scenario that teaches us that the gains from cooperation are larger than the rewards from pursuing self-interest. b. It teaches us that oligopolists typically get better business results when they pursue their own self-interests. c. It teaches us that the oligopoly market structure always leads to poor business results. d. It teaches us that oligopolists make random decisions about business decisions that could land them in jail.

a. It is a scenario that teaches us that the gains from cooperation are larger than the rewards from pursuing self-interest.

The Microsoft antitrust case covered in your textbook embodies many of the gray areas in restrictive practices. Antitrust regulators accused Microsoft of numerous offenses. What was the end result? a. Microsoft appealed a federal court decision to break up the company and reached a settlement with the government that it would end its restrictive practices. b. Microsoft won and its practices were not classified as restrictive. c. The federal government won its case, and Microsoft was broken into several smaller companies. d. The federal government regulators finally dropped their case because the case was too complex to prove.

a. Microsoft appealed a federal court decision to break up the company and reached a settlement with the government that it would end its restrictive practices.

How would a monopolistically competitive firm determine its profit maximizing level of output and price? a. The firm would determine output based on the intersection of marginal cost and marginal revenue, then examine where that output level intersects with the demand curve to determine the price. b. A monopolistically competitive firm could set any output and price level to yield maximum profit because it controls all of the resources. c. The firm would determine output based on the intersection of average cost and marginal cost, then examine where that output level intersects with the supply curve to determine the price. d. The firm would use industry averages to determine the profit maximizing level of output and price.

a. The firm would determine output based on the intersection of marginal cost and marginal revenue, then examine where that output level intersects with the demand curve to determine the price.

Which of the following is NOT an example of a monopoly? a. Three firms control the production of a precious gem globally. b. A utility (e.g. water, sewer, electricity) provided primarily by one company c. In the 1930s, ALCOA (The Aluminum Company of America) controlled most of the bauxite, a key mineral used in making aluminum. d. The government-run postal service.

a. Three firms control the production of a precious gem globally.

What is often the result of regulatory capture? a. Industries are better regulated, increasing output, keeping prices low, and limiting competition. b. Government price regulation becomes a way for existing competitors to work together to reduce output, keep prices high, and limit competition. c. Individuals who violate regulations are captured and sent to jail. d. Government is able to more closely monitor the activities of potential violators.

b. Government price regulation becomes a way for existing competitors to work together to reduce output, keep prices high, and limit competition.

How is a legal monopoly different from a natural monopoly? a. In a legal monopoly, the monopolist has purchased the necessary certificate from the local government that allows the formation of a monopoly. b. In a legal monopoly, barriers to entry are created by the government. c. In a legal monopoly, the Federal Trade Commission has paid a firm to be the only producer of a product in a given area. d. A legal monopoly applies to government-run institutions, whereas a natural monopoly applies to all other resources

b. In a legal monopoly, barriers to entry are created by the government.

How does advertising impact monopolistically competitive firms? a. It causes a firm's perceived demand curve to become more inelastic. b. It either causes a firm's perceived demand curve to become more elastic, or advertising causes demand for the firm's product to increase. c. Advertising expenses drive down average cost of production by increasing demand for the product and in turn increases total revenue. d. Advertising always causes monopolistically competitive firms to experience lower average costs.

b. It either causes a firm's perceived demand curve to become more elastic, or advertising causes demand for the firm's product to increase.

The profit maximizing monopolist would achieve loss minimization when... a. Price is above average total cost. b. Price is between average total cost and average variable cost. c. Price is below average variable cost. d. Total cost equals total revenue.

b. Price is between average total cost and average variable cost.

Patents, Trademarks, and Copyrights... a. low innovative firms to achieve monopoly power for one year. b. Provide limited monopoly power. c. Allow individual innovators to form companies and possess monopoly power for 30 years d. Allow innovators to possess monopoly power forever.

b. Provide limited monopoly power.

Between 1926 and 1978 the Federal Government closely regulated the airline industry. What happened when the industry was deregulated? a. Every airline saw increased profits immediately. b. Some airlines went bankrupt while new companies entered the industry c. The level of competition immediately fell. d. Employment in the industry fell.

b. Some airlines went bankrupt while new companies entered the industry

What kind of demand curve does the monopolist face? a. The monopolist faces a horizontal demand curve just like the perfectly competitive firm where any change in price will lead to zero units demanded. b. The monopolist faces a downward sloping demand curve, which means if it wants to sell a low level of output, it can charge a high price, and if it wants to sell a large level of output it will have to charge a low price. c. The monopolist faces a vertical demand curve where the quantity demanded remains the same, regardless of what price is set. d. The monopolist faces an upward sloping demand curve, which means if it wants to sell a low level of output, it will charge a low price, and if it wants to sell a high level of output it will charge a high price.

b. The monopolist faces a downward sloping demand curve, which means if it wants to sell a low level of output, it can charge a high price, and if it wants to sell a large level of output it will have to charge a low price.

What are the key trade offs of imperfect competition? a. The monopolistically competitive market structure fails to achieve allocative efficiency, but the firms all face perfectly elastic demand curves. b. The monopolistically competitive market structure provides powerful incentives for innovation, but they never achieve productive efficiency in the long run. c. The monopolistically competitive market structure provides powerful incentives for innovation, but the strongest firms in a monopolistically competitive market become oligopolists. d. The monopolistically competitive market structure allows firms to achieve economic profit in the short run, but the individual firms all face perfectly elastic demand curves.

b. The monopolistically competitive market structure provides powerful incentives for innovation, but they never achieve productive efficiency in the long run.

How would you calculate the HHI for an industry? a. By gathering data on total sales of the firms in the industry and dividing the sum by 7. b. By multiplying industry sales by .77. c. By summing the squares of the market share of each firm in the industry. d. By summing the market shares for each firm in the industry and multiplying by .2.

c. By summing the squares of the market share of each firm in the industry.

What is the difference between collusion and competition? a. Collusion is when firms follow the price changes and product changes of the dominant firm in an oligopolistic market.Competition is when firms operate independently. b. Competition firms follow the price changes and product changes of the dominant firm in an oligopolistic market. Collusion is when firms operate independently. c. Collusion is when firms act together in ways to reduce output, keep prices high, and divide up markets. Competition is when firms operate independently. d. Competition is when firms operate independently. Collusion is when firms in the oligopoly market structure try to invite new entrants into the market to make it more competitive.

c. Collusion is when firms act together in ways to reduce output, keep prices high, and divide up markets. Competition is when firms operate independently.

A good example of a monopolistically competitive market would be? a. Airlines b. The production of tennis balls where 4 firms dominate - Wilson, Dunlap, Spalding, and Penn c. Gas stations in Texas d. The 4 Companies that control over 80% of the US beef market: Tyson, Cargil, Swift, and National Beef Packing Company

c. Gas stations in Texas

In cost plus regulation, regulators calculated the average cost of production, added in an amount for the normal rate of profit the firm should expect to earn, and set the price for consumers accordingly. In price cap regulation, the regulator sets a price that the firm can charge over the next few years. What is the problem of price cap regulation? a. Low level managers will have too much power. b. It will not work if the price regulators set new prices every six months. c. It will not work if the price regulators set the price cap unrealistically low. d. It will cause long term certainty in the market.

c. It will not work if the price regulators set the price cap unrealistically low.

Restrictive practices are characterized as... a. Practices that prevent firms from entering certain markets. b. Practices that promote competition by restricting monopolies c. Practices the reduce competition without outright agreements to raise price or reduce quantity d. Practices that restrict the number of consumers who may purchase a product

c. Practices the reduce competition without outright agreements to raise price or reduce quantity

As firms enter and exit a monopolistically competitive market, what happens to productive efficiency in the long run? a. The strongest firms will survive and the market will morph into an oligopolistic market. b. Prices will rise to unprecedented levels, and productive efficiency will be reached. c. Price will eventually intersect the average cost curve at a point where price > average cost, and productive efficiency will not be reached d. Productive efficiency will not be reached because in the long run, economic profits reach equilibrium.

c. Price will eventually intersect the average cost curve at a point where price > average cost, and productive efficiency will not be reached

A good example of an oligopoly would be... a. The production of electric energy in metropolitan Houston is run by one company that owns the majority market share. b. Restaurants in Texas. c. The production of tennis balls where 4 firms dominate - Wilson, Dunlap, Spalding, and Penn d. Dry cleaning stores in Texas.

c. The production of tennis balls where 4 firms dominate - Wilson, Dunlap, Spalding, and Penn

How does the monopoly determine the level of output that maximizes profit? a. By multiplying price by marginal cost. b. By determining where total revenue equals marginal cost. c. A monopoly does not need to calculate where maximum profit occurs because they have no competition and can set any price they want for their product. d. By determining where marginal revenue is equal to marginal cost.

d. By determining where marginal revenue is equal to marginal cost.

Using a graphical approach, once you have found the optimal level of output for the monopolist, how would you find the corresponding price? a. From the point of optimal level of output, trace up to the average total cost curve, and then trace horizontally over to the price axis. b. From the point of optimal level of output, trace up to the marginal revenue curve, and then trace horizontally over to the price axis c. From the point of optimal level of output, trace up to the marginal cost curve, and then trace horizontally over to the price axis. d. From the point of optimal level of output, trace up to the demand curve, and then trace horizontally over to the price axis.

d. From the point of optimal level of output, trace up to the demand curve, and then trace horizontally over to the price axis.

Your textbook covered 4 possible ways to deal with a natural monopoly. Which approach would be best for consumers? a. Regulators would allow the monopolist to continue with no government regulation. b. Regulators would split the monopolist into two competing firms. c. Regulators would force the monopolist to set its price equal to its marginal cost. d. Let the natural monopoly charge enough to cover its average costs and earn a normal rate of profit.

d. Let the natural monopoly charge enough to cover its average costs and earn a normal rate of profit.

A large airline provides most of the flights between two particular cities. A new, small start-up airline decides to offer service between these two cities. The large airline immediately slashes prices on this route to the bone, so that the new entrant cannot make any money. After the new entrant has gone out of business, the incumbent firm raises prices again. We would call the behavior of the large airline... a. Aggressive marketing b. Multi-level marketing c. Competitive pricing d. Predatory pricing

d. Predatory pricing

You run a company in a monopolistically competitive market. Why would you want to find ways to differentiate your product from the products of your competitors? a. To create a truly different product and exit the monopolistically competitive market. b. To reduce production costs. c. To make your products more like those of your competitors. d. To set your product apart from the others, gain market share, and achieve economic profit.

d. To set your product apart from the others, gain market share, and achieve economic profit.