Chapter 13 Controlling Market Power: Antitrust and Regulation

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1 Page 1 Chapter 13 Controlling Market Power: Antitrust and Regulation 1)Which of the following is an example of natural monopoly? A) a market for cable TV services B) a market for breakfast cereals C) a market for cold medicines D) a market for cigarettes 2) Figure 13.1 shows a demand and costs of an unregulated monopoly. At the profit maximization output, the firm earns a profit of: A) $80,000. B) $10,000. C) $50,000. D) $0. 3) Figure 13.1 shows a demand and costs of an unregulated monopoly. At the output level of 22,000 units, the firm's marginal revenue is smaller than its marginal cost. the firm is earning a zero economic profit. the firm is producing more than its profit maximizing level of output. All of the above is correct. Page 1

2 Page 2 4) The natural monopoly in figure 13.3 wants to produce: A) Q1. B) Q2. C) Q3 D) Q4. 5) Which of the following is n o t a form of antitrust policy? A) regulation of business practices B) blocking mergers C) breaking up monopolies D) a price control 6) A trust is: A) an agreement among firms to charge the perfectly competitive price. B) a compact between industry and government. C) a creation of the Sherman Act. D) an arrangement between firms whereby decision making is controlled by a board of trustees. Page 2

3 Page 3 7) Which of the following is an example of tie-in sales? A) In order to buy Microsoft Windows, you must also purchase Internet Explorer. B) Bus rides are cheaper for senior citizens than for other people. C) Two companies merge to form one company. D) Prices are set just low enough to prevent other firms from entering the market. 8) In which stage of producing electricity have recent technological innovations led to reduced economies of scale? A) generation in power plants B) transmission along high-voltage lines C) distribution to final users along low-voltage lines D) all of the above 9) Under traditional electricity regulation, public and private utilities were responsible for the: A) generation of electricity in their own power plants. B) transmission of electricity along their own system of high-voltage lines. C) distribution to final users along their own system of low-voltage lines. D) all of the above 10) When a firm has decreasing average costs over the entire range of market demand it is: A) a natural monopoly. B) an oligopoly. C) rent seeking. D) in a contestable market. Page 3

4 Page 4 Chapter 14 Imperfect Information: Adverse Selection and Moral Hazard 11) There exists asymmetric information in a market: A) if both sides of the market have the same information about the good. B) only if buyers have better information about the good than sellers. C) only if sellers have better information about the good than buyers. D) if either buyers or sellers have better information than the other group. 12) In some markets for used goods: A) the seller has more information than the buyer about the quality of the good. B) the buyer has more information than the seller about the quality of the good. C) low-quality used goods will be underpriced. D) the quality of used goods sold in the market will typically rise over time. 13) Which one of the following is an example of asymmetric information? A) A supermarket repackages packages of stale meat and sells them. B) A homeowner knowingly sells a house that has hidden electrical problems. C) A company hires an employee who has an addiction to sleeping pills. D) all of the above 14) Which of the following is the least likely example of asymmetric information? A) an insurance company and a client who just obtained a driver license B) a seller of used cars and a prospective customer C) a seller of produce and a buyer D) a retailer of Music CDs and a buyer Page 4

5 Page 5 15) A mixed market is one in which: A) consumers can be buyers and sellers and producers can be sellers and buyers. B) there are different qualities of a good being sold in the market and there is imperfect information about the quality of each good. C) a seller of a good requires that the purchase of one good be tied to the purchase of another. D) demand is positively sloped and supply is negatively sloped. 16) Suppose buyers in the used car market are willing to pay $4,000 for a plum (high -quality) used car and $2,000 for a lemon (low-quality) used car. If buyers believe that 50% of the used cars on the market are lemons (low quality), what would they be willing to pay for a used car? A) $2000 B) $3000 C) $3500 D) $4000 Markets Plums (high quality) Supplied Lemons (low quality) Supplied % Buyers Believe are Lemons (low quality) % 40% 50% Table ) In Table 14.1, market 1 would be in equilibrium if buyers believed lemons accounted for: A) 60% of the market. B) 55% of the market. C) 45% of the market. D) 40% of the market. Page 5

6 Page 6 18) Figure 14.1 represents the market for used bikes. Suppose buyers are willing to pay $200 for a plum (high-quality) used bike and $50 for a lemon (low-quality) used bike. If buyers believe that 50% of the used bikes are lemons (low quality), how much will they be willing to pay for a used bike? A) $50 B) $80 C) $125 D) $200 19) Figure 14.1 represents the market for used bikes. Suppose buyers are willing to pay $200 for a plum (high-quality) used bike and $50 for a lemon (low-quality) used bike. If buyers have pessimistic expectations about the used bikes in the market, what number of used bikes sold will actually be lemons (low quality)? A) 8 B) 12 C) 16 D) 22 Page 6

7 Page 7 Markets Plums (high quality) Supplied Lemons (low quality) Supplied % Buyers Believe are Lemons (low quality) % 80% 50% Table ) Table 14.4 represents 3 markets for used motorcycles. Which of the markets in Table 15.4 are in equilibrium? A) 1 only B) 2 only C) 3 only D) 1 and 3 21) In Table 14.4, market 1 would be in equilibrium if buyers believed lemons accounted for: A) about 90.91% of the market. B) about 74.5% of the market. C) about 63.25% of the market. D) about 57.65% of the market. 22) One result of adverse selection in the market for used cars is: A) more lemons (low quality) may be offered for sale than plums (high quality). B) more plums (high quality) may be offered for sale than lemons (low quality). C) few lemons (low quality) are sold. D) no used cars are sold. 23) Adverse selection in employment is more likely when: A) jobs require specific training. B) everyone is equally qualified for the job. C) people ' s abilities are easy to measure. D) people ' s abilities are difficult for potential employers to observe. Page 7

8 Page 8 24) In a thin market: A) only high-quality goods are sold. B) some high-quality goods are sold but fewer than would be sold in a market with perfect information. C) some low-quality goods are sold but fewer than would be sold in a market with perfect information. D) no high-quality goods are sold. 25) Moral hazard occurs when a person's behavior changes in a way that: A) is immoral. B) is dangerous. C) increases the likelihood of a bad outcome for someone else. D) causes positive externalities. 26) Which of the following is not an example of moral hazard problems? A) Managers have an incentive to pursue their own interests rather than shareholders. B) A tenured faculty has a weaker incentive to do best in teaching or research. C) A high-cost individual has a greater incentive to purchase a health insurance. D) An insured individual tends to drive a car more recklessly. 27) Thin markets can be revived by: A) guaranteed price matching. B) increasing the number of sellers in the market. C) imposing price ceilings. D) warranties and repair guarantees. Page 8

9 Page 9 28) Lemon laws that allow consumers to return low-quality used cars are designed to help solve the problem of in used car markets. A) moral hazard B) thick markets C) experience ratings D) adverse selection 29) Health insurance companies face an asymmetric information problem because: A) companies have superior information concerning the risk of illness or injury of those insured. B) buyers have superior information concerning their risk of illness or injury. C) the insurance companies and buyers both have equal information concerning the risk of illness or injury of those insured. D) the probability of becoming ill or injured is unrelated to the insured person ' s occupation. 30) Insurance policies in which each firm pays a different price for medical insurance depending upon the past medical bills of the firm ' s employees are based upon a(n): A) experience rating. B) community rating. C) asymmetric information rating. D) adverse selection rating. Chapter 17 The Labor Market, Income and Poverty 31) The demand for labor is: A) derived from the demand for the products it is used to produce. B) determined by the demand for consumer products. C) determined by the price of consumer products. D) all of the above Page 9

10 Page 10 32) The marginal product of labor is the: A) change in labor necessary to produce an additional unit of output. B) cost of additional labor necessary to produce an additional unit of output. C) change in output resulting from adding an additional unit of labor. D) change in revenue resulting from adding an additional unit of labor. 33) Other things being equal, as the diminishing marginal returns begin to occur, the marginal revenue product of labor: A) decreases as more workers are used. B) increases as more workers are used. C) remains unchanged as more workers are used. D) none of the above 34) A curve that shows the relationship between the wage and the quantity of labor demanded in the short -run is: A) the marginal revenue product of labor curve. B) the marginal revenue curve. C) the marginal product of labor curve. D) none of the above Page 10

11 Page 11 Number of workers Units of output Table ) Refer to Table The marginal product of the third unit of labor is: A) 30. B) 50. C) 60. D) ) Refer to Table The marginal product of the fourth unit of labor is: A) 210. B) 40. C) 50. D) ) Refer to Table The marginal product of the fifth unit of labor is: A) 8. B) 40. C) 50. D) 250. Page 11

12 Page 12 38) Figure 17.1 depicts a firm's marginal revenue product curve. If the firm maximizes its profit and the hourly wage is $15, how many hours of labor will the firm demand? A) smaller than 30 hours B) between 30 hours and 40 hours C) between 40 hours and 50 hours D) greater than 50 hours 39) Figure 17.1 depicts a firm ' s marginal revenue product curve. The marginal revenue product curve is negatively sloped because decreases as the firm uses more labor. A) the hourly wage B) the marginal product of labor C) the product price D) none of the above Page 12

13 Page 13 40) The market demand curve for labor is the relationship between the wage and the quantity of labor that: A) all workers are willing to provide. B) any given worker is willing to provide. C) all firms are willing to employ. D) any given firm is willing to employ. 41) Which of the following is a long-run impact of an increase in the wage? A) The quantity demanded of labor increases because there is no diminishing returns. B) The quantity demanded of labor increases because the marginal revenue product curve shifts upward due to a higher product price. C) The quantity demanded of labor decreases because firms face a higher degree of diminishing returns. D) The quantity demanded of labor decreases because firms will have an incentive to use more of other inputs instead of labor. 42) The relationship between the wage and the quantity of labor that all workers are willing to provide is called: A) individual labor demand. B) market labor demand. C) individual labor supply. D) market labor supply. 43) According to the substitution effect of labor supply, when the wage rate goes up: A) it becomes more costly to consume leisure, so people will work more. B) it becomes less costly to consume leisure, so people will work more. C) the opportunity cost of enjoying leisure goes down. D) firms will hire more workers since people are more willing to work. Page 13

14 Page 14 44) If the wage paid to workers increases, the labor demand curve: A) will not shift. B) shifts to the left and fewer workers are hired. C) shifts to the right and more workers are hired. D) shifts to the right and fewer workers are hired. 45) Consider a labor market in equilibrium. If both demand curve and supply curve of labor shift to the right, then the wage rate in the market will. A) increase B) decrease C) remain unchanged D) either increase or decrease or remain unchanged 46) The supply of workers in a particular occupation could be relatively small if: A) training costs are high. B) job features are undesirable. C) there are few people with the required skills. D) All of the above are correct. 47) Given their skills and education, steelworkers earn higher incomes than they would in other occupations. This is partly because : A) steel workers face the higher risk of getting injured or killed. B) it is costly to acquire skills necessary for jobs at steel mills. C) few people have skills and knowledge required for jobs at steel mils. D) All of the above Page 14

15 Page 15 48) Given their skills and education, American workers in hostile regions such as Iraq earn higher incomes than American workers in the homeland. This is partly because: A) American workers in Iraq face the higher risk of getting kidnapped and killed. B) jobs in Iraq in general require more education. C) the U.S. government restricts the number of American workers to work in Iraq. D) only few people have skills necessary for jobs in Iraq. 49) Which of the following is partially responsible for the male-female wage gap in the United States? A) Women have, on average, less education than their male counterparts. B) Women have, on average, less work experience than their male counterparts. C) Women have been denied access to many occupations, leading to increased supply in a few occupations. D) All of the above are correct. 50) Which of the following explains the differences in earnings by race? A) differences in productivity B) racial discrimination C) differences in education and work experience D) all of the above 51) One reason that college graduates earn higher wages than non -graduates is because college graduates: A) acquire additional skills to allow them to work in more industries than non-graduates. B) always work in more dangerous jobs than non-graduates. C) are always more intelligent than non-graduates. D) are less equipped to deal with technological change, as their skills are technology-specific. Page 15

16 Page 16 52) The poverty rate in the U.S. is highest for: A) married couples. B) childless households. C) female headed households D) single people. 53) The poverty rate in the U.S. is lowest for: A) whites. B) blacks. C) Hispanics. D) Asians. 54) A means tested government program is one that: A) is pilot tested to see if it works. B) provides assistance to those below a certain income level. C) is temporary and ends after a short period of time. D) all of the above. 55) Suppose that we compare shares of income earned by different U.S. groups by dividing all households into five groups. Which of the following statements about the income distribution in the U.S. is correct? A) Shares of income remain roughly constant as we move from the lowest quintile to the highest quintile. B) Shares of income decrease as we move from the lowest quintile to the highest quintile. C) Shares of income increase as we move from the lowest quintile to the highest quintile. D) none of the above Page 16

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