In an industry, the largest firm has 30 percent of sales, the next three have 20, 15 and 10 percent, and ten small firms split the remaining 25 percent equally. What is the four-firm concentration ratio?
75
✓
65
50
100
Correct Answer
75
The four-firm concentration ratio adds the market shares of the four largest firms: 30 + 20 + 15 + 10 = 75. The value 65 adds only the top three firms. The value 50 adds only the top two. The value 100 adds every firm in the industry, which is the whole market.
Category: Measuring Concentration
Question 2
A market has three firms with market shares of 50, 30 and 20 percent. What is the Herfindahl-Hirschman Index (HHI) for this market?
2,500
3,800
✓
100
10,000
Correct Answer
3,800
The HHI is the sum of each firm's market share squared: 2,500 + 900 + 400 = 3,800. The value 2,500 squares only the largest firm's share. The value 100 simply adds the shares without squaring them. The value 10,000 squares the total of the shares rather than squaring each share separately.
Category: Measuring Concentration
Question 3
What is the Herfindahl-Hirschman Index for a market served by a single firm that makes all of the sales?
1,000
100
10,000
✓
1
Correct Answer
10,000
A lone firm holds a market share of 100 percent, and 100 squared is 10,000, the largest value the index can take. The value 1,000 is a tenth of the correct figure. The value 100 is the firm's share before squaring. The value 1 would come from writing the share as a fraction instead of a percentage, which is not how the index is computed.
Category: Measuring Concentration
Question 4
Agreements that do not directly set price or output, such as limits on who a dealer may buy from or sell to, but that may still reduce competition are known by what general name?
Conglomerate mergers
Natural monopolies
Price controls
Restrictive practices
✓
Correct Answer
Restrictive practices
Restrictive practices are business arrangements that stop short of agreeing on price or output yet can still limit competition, and exclusive dealing and tying are examples. Conglomerate mergers combine firms in unrelated businesses. Natural monopolies arise from cost conditions, not agreements. Price controls are government limits on prices, not private agreements.
Category: Anticompetitive Practices
Question 5
A company that makes car tires combines with an automaker that buys its tires. What kind of merger is this?
Vertical merger
✓
Conglomerate merger
Horizontal merger
Cartel agreement
Correct Answer
Vertical merger
A vertical merger joins firms at different stages of the same supply chain, such as a supplier and the firm that buys its product. A conglomerate merger joins firms in unrelated businesses. A horizontal merger joins direct competitors selling the same product. A cartel agreement is a pact among competitors to coordinate prices and output, not a merger.
Category: Mergers and Antitrust Law
Question 6
If antitrust regulators define a market more narrowly, for example premium organic grocery chains instead of all grocery stores, how do concentration measures for the leading firms usually look?
Lower than before
Higher than before
✓
Exactly the same
Impossible to compute
Correct Answer
Higher than before
A narrower market leaves fewer competitors in the count, so the leading firms hold a larger share and measured concentration rises. Lower than before is what happens when the market is defined more broadly. Exactly the same is wrong because market shares depend on which sellers are counted. Impossible to compute is wrong because the measures can be calculated for any market definition.
Category: Measuring Concentration
Question 7
Three cement companies secretly agree on the price each will charge for a ton of cement instead of competing. Which illegal practice is this?
Bundling
Exclusive dealing
Price fixing
✓
Vertical merger
Correct Answer
Price fixing
Price fixing occurs when competitors agree on the prices they will charge rather than setting them independently, and U.S. antitrust law forbids it. Bundling is selling several products together as a package. Exclusive dealing is an agreement limiting who a dealer can buy from or sell to. A vertical merger combines firms at different stages of a supply chain.
Category: Anticompetitive Practices
Question 8
A seller lets customers buy a popular video game only if they also buy a particular game controller from the same seller. What is this practice called?
Bundling
Price fixing
Predatory pricing
Tying sale
✓
Correct Answer
Tying sale
A tying sale makes the purchase of one product conditional on buying a second product, so the customer cannot get the first item alone. Bundling offers products together as a package but usually still lets customers buy each item separately. Price fixing is an agreement among competitors on prices. Predatory pricing is cutting prices very low to drive out a new rival.
Category: Anticompetitive Practices
Question 9
A manufacturer requires the stores that carry its brand to sell no competing brands of the same product. What is this arrangement called?
Exclusive dealing
✓
Tying sale
Cost-plus regulation
Conglomerate merger
Correct Answer
Exclusive dealing
Exclusive dealing is an agreement that limits whom a dealer can buy from or sell to, such as carrying only one manufacturer's brand. A tying sale forces a customer to buy a second product to get the first. Cost-plus regulation is a way of setting a regulated monopoly's price. A conglomerate merger combines firms in unrelated businesses.
Category: Anticompetitive Practices
Question 10
A commonly proposed test treats an established firm's price cuts as predatory when its price falls below which cost measure?
Average total cost
Average variable cost
✓
Average fixed cost
Total fixed cost
Correct Answer
Average variable cost
A price below average variable cost means the firm is not even covering the costs that change with output, which suggests it is losing money on purpose to drive out a rival. A price below average total cost can happen in ordinary competition, since a firm may keep operating in the short run while covering only its variable costs. Average fixed cost and total fixed cost are not used for this test because fixed costs must be paid whether or not the firm produces.
Category: Anticompetitive Practices
Question 11
Left unregulated, a profit-maximizing natural monopoly chooses its quantity at the point where which condition holds?
Price equals marginal cost
Price equals average cost
Marginal revenue equals marginal cost
✓
Average cost is at its minimum
Correct Answer
Marginal revenue equals marginal cost
Like any monopoly, an unregulated natural monopoly maximizes profit by producing where marginal revenue equals marginal cost, then charging the highest price the demand curve allows for that quantity. Price equals marginal cost is the efficient outcome a regulator might impose. Price equals average cost is the outcome of average cost pricing regulation. Average cost is at its minimum is not the profit-maximizing rule, and for a natural monopoly average cost keeps falling across the market's range of demand.
Category: Natural Monopoly Regulation
Question 12
If regulators force a natural monopoly to charge a price equal to its marginal cost, what problem results?
The firm earns very large economic profits
Output falls below the unregulated level
Consumers pay more than without regulation
The firm suffers losses unless it is subsidized
✓
Correct Answer
The firm suffers losses unless it is subsidized
When average cost is falling, marginal cost lies below average cost, so a price equal to marginal cost does not cover average cost and the firm loses money unless the government makes up the difference. The firm earns very large economic profits describes the unregulated monopoly, not this case. Output falls below the unregulated level is backward, because a lower regulated price raises the quantity sold. Consumers pay more than without regulation is also backward, since the regulated price is lower.
Category: Natural Monopoly Regulation
Question 13
A regulator sets a natural monopoly's price where the demand curve crosses the firm's average cost curve. What kind of profit does the firm earn?
Zero economic profit
✓
Monopoly-level economic profit
An economic loss each period
Profit equal to total revenue
Correct Answer
Zero economic profit
When price equals average cost, total revenue just covers all costs, including a normal return to the owners, so economic profit is zero and the firm can keep operating. Monopoly-level economic profit is earned only when the firm is left to set its own price. An economic loss each period results from setting price equal to marginal cost, which lies below average cost here. Profit equal to total revenue would require the firm to have no costs at all.
Category: Natural Monopoly Regulation
Question 14
Under cost-plus regulation of a utility, how does the regulator set the price the utility may charge?
Marginal cost with no profit
Average cost plus a normal rate of profit
✓
The price an unregulated monopoly would set
A fixed maximum that falls each year
Correct Answer
Average cost plus a normal rate of profit
Cost-plus regulation calculates the firm's average cost of production and adds an allowance for a normal rate of profit. Marginal cost with no profit would leave a natural monopoly with losses. The price an unregulated monopoly would set is what regulation is meant to prevent. A fixed maximum that falls each year describes price cap regulation.
Category: Natural Monopoly Regulation
Question 15
Which approach to regulating a natural monopoly sets a maximum price for several years ahead and lets the firm keep extra profit if it cuts costs faster than that price falls?
Cost-plus regulation
Marginal cost pricing
Price cap regulation
✓
Deregulation
Correct Answer
Price cap regulation
Price cap regulation fixes the highest price a firm may charge over the next few years, often declining slowly, so a firm that cuts costs quickly can earn higher profits and has a reason to be efficient. Cost-plus regulation ties price to the firm's own costs, which weakens the reason to cut them. Marginal cost pricing sets price equal to marginal cost and does not reward cost cutting. Deregulation removes government price controls altogether.
Category: Natural Monopoly Regulation
Question 16
Members of a regulatory board were often nominated by the industry they oversaw, relied on the industry for most of their information, and later took industry jobs. What is the term for this situation?
Predatory pricing
Exclusive dealing
Price fixing
Regulatory capture
✓
Correct Answer
Regulatory capture
Regulatory capture occurs when the firms being regulated gain a large role in setting the rules they must follow, so regulators end up serving the industry rather than consumers. Predatory pricing is cutting prices to drive out a rival. Exclusive dealing is an agreement limiting whom a dealer can buy from or sell to. Price fixing is an agreement among competitors on prices.
Category: Deregulation
Question 17
From 1938 until airline deregulation in 1978, which federal agency approved airline fares and decided which airlines could fly which routes?
Civil Aeronautics Board
✓
Federal Trade Commission
Federal Aviation Administration
Department of Justice
Correct Answer
Civil Aeronautics Board
The Civil Aeronautics Board was created in 1938 to regulate airline fares, routes and entry, and its control over fares and routes ended with deregulation. The Federal Trade Commission enforces antitrust and consumer protection laws. The Federal Aviation Administration oversees air safety, not fares. The Department of Justice enforces antitrust law but did not set airline fares.
Category: Deregulation
Question 18
Which 1914 federal law outlawed mergers and acquisitions that would substantially lessen competition, along with price discrimination and tied sales?
Sherman Antitrust Act
Clayton Antitrust Act
✓
Celler-Kefauver Act
Sarbanes-Oxley Act
Correct Answer
Clayton Antitrust Act
The Clayton Antitrust Act of 1914 targeted specific practices, including anticompetitive mergers, price discrimination and tied sales. The Sherman Antitrust Act of 1890 was the first federal antitrust law and aimed at trusts in general. The Celler-Kefauver Act of 1950 extended the merger rules to vertical and conglomerate mergers. The Sarbanes-Oxley Act of 2002 dealt with corporate accounting and financial reporting.
Category: Mergers and Antitrust Law
Question 19
Which two federal agencies have primary responsibility for reviewing proposed mergers and enforcing U.S. antitrust law?
The SEC and the Federal Reserve
The FAA and the Department of Commerce
The FTC and the Department of Justice
✓
The IRS and the Treasury Department
Correct Answer
The FTC and the Department of Justice
The Federal Trade Commission and the Department of Justice share the main job of reviewing mergers and bringing antitrust cases. The SEC and the Federal Reserve oversee securities markets and monetary policy. The FAA and the Department of Commerce handle air safety and trade and business promotion. The IRS and the Treasury Department collect taxes and manage government finances.
Category: Mergers and Antitrust Law
Question 20
Which cost condition gives rise to a natural monopoly?
Marginal cost rises steeply at low output
Average cost rises as output increases
Fixed costs are small relative to variable costs
Average cost falls over the full range of market demand
✓
Correct Answer
Average cost falls over the full range of market demand
When average cost keeps falling across all the output the market wants, one firm can supply the whole market more cheaply than two or more firms, which is a natural monopoly. Marginal cost rising steeply at low output would limit the size of efficient firms. Average cost rising as output increases means smaller firms are cheaper, which favors many sellers. Fixed costs that are small relative to variable costs are the opposite of the large fixed costs typical of natural monopolies such as water systems.
Category: Natural Monopoly Regulation