BA 4309 – Regulation of Business, Spring 2004– Test 2. Peter Lewin.

Please read the following carefully:

Multiple Choice – 25 questions. Please use a 50 question scantron (882-ES) with a pencil. Hand in only the scantron (you may keep this question paper).

This is a closed book exam. Cheating will result in a zero (among other possible sanctions).

Among the possibilities given in each question select the best alternative.

Solution and grade distribution at end.

1. Why does the price tend toward the minimum possible average cost in a perfectly competitive industry? Because

a. producers want to save costs

b. buyers are picky

c. at any price above that firms will tend to enter the industry

d. at any price above that firms will tend to exit the industry

2. Why does the marginal cost curve serve as the supply curve for a perfectly competitive firm? Because

a. it connects any given price with the quantity that will be supplied at that price

b. it connects the average cost with the quantity that will be supplied

c. it never goes above the average cost curve

d. it never falls below the average cost curve

e. it wants to serve as the supply curve

3. Why is it unreasonable to expect a natural monopolist to price at marginal cost? Because

a. the price would be too high

b. the price would be below average cost

c. the price would be below average revenue

d. b and c of the above

4. Which of the following is true under perfect competition?

a. price = marginal cost

b. price = average cost

c. price = marginal revenue

d. all of the above

e. only a and b of the above

5. Imagine a perfectly competitive industry that is characterized by two kinds of firms, high cost firms (HCs) and low cost firms (LCs). Within each group the firms are identical. The LC’s costs are 10% below those of the HCs. Between them the LCs cannot produce enough to satisfy the market. Assume average cost is defined to include normal profit. In long run equilibrium;

a. the LCs will make an above normal profit of 10%

b. the HCs will not make any above normal profit

c. no firm will make an above normal profit

d. all firms will make a 10% profit

e. a and b of the above are true.

6. Which of the following cannot be fitted into the model of perfect competition

a. price competition

b. quality competition

c. innovation

d. b and c of the above

7. To establish that an incumbent is engaging in predatory behavior it is necessary to establish that

a. the price it charges is below its average cost

b. the price it charges is above average cost

c. it has the intention of raising the price once the competition has been eliminated

d. a and c of the above

e. b and c of the above

8. Under the dynamic view of Monopoly (for example as explained by Armentano), which of the following would be viewed as monopoly behavior?

a. the licensing of medical doctors

b. the establishment of a trade union with the legal power to negotiate wage rates for all workers employed

c. engaging in nasty advertising about one’s competitor

d. all of the above

e. a and b of the above

9. The high price of health insurance premiums is _________ the high price of health care services

a. a cause of

b. a result of

c. equivalent to

d. not related to

10. The initiative to redeem slaves in the Sudan

a. was motivated by good intentions

b. produced the desired result

c. produced a result that was the opposite of what was desired

d. a and b of the above

e. a and c of the above

11. Network effects refer to

a. the benefits of product differentiation

b. the benefits of networking the job market

c. the benefits that accrue to members of a network as a result of being able to interact with other members

d. the technology of the fishing industry

12. Which of the following is inconsistent (not consistent) with perfect competition?

a. many sellers

b. many buyers

c. product differentiation

d. a horizontal demand curve facing every firm

13. According to the neoclassical approach to the question of monopoly the main difference between competition and monopoly is

a. the monopolist faces a downward sloping demand curve while a perfect competitor faces a horizontal demand curve

b. the monopolist always faces decreasing costs throughout the range of production while the perfect competitor faces U shaped curves

c. the monopolist receives government protection against competition while a competitor does not

d. all of the above

e. a and b of the above

14. According to the dynamic approach to the question of monopoly the main difference between competition and monopoly is

a. the monopolist faces a downward sloping demand curve while a perfect competitor faces a horizontal demand curve

b. the monopolist always faces decreasing costs throughout the range of production while the perfect competitor faces U shaped curves

c. the monopolist receives government protection against competition while a competitor does not

d. all of the above

e. a and b of the above

15. Which of the following are not likely, under any approach, to be a good indication of monopoly power?

a. the measured elasticity of demand facing a producer

b. the firm’s market share

c. identified barriers to entry

d. predatory behavior

16. Which of the following is not an accurate statement?

a. a cartel is likely to be unstable – in the absence of government support

b. cartels that fix prices are prohibited by law, unless they are the result of government policy, like the dairy board

c. the most important problem for the OPEC cartel has been cheating by its members

d. the most successful cartel in the world is the peanut farmers marketing board

17. Which of the following are likely to be the consequences of prohibiting abortion?

a. abortions will become more expensive

b. abortions will, generally, become less safe

c. abortions will cease to be performed

d. a and b of the above

18. Which of the following is true about price discrimination?

a. it is a way of extracting additional consumer surplus

b. it is illegal in any form

c. both of the above

d. none of the above

19. A price discriminating seller will charge a higher price in the market

a. where the price elasticity of demand is lower

b. where the price elasticity of demand is higher

c. where the income elasticity of demand is lower

d. a and c of the above

20. Which of the following industries are protected by government imposed barriers to entry?

a. medical care

b. taxi cabs in New York city

c. dental care

d. all of the above

21. Which of the following is typical of natural monopoly

a. high fixed costs

b. falling average costs

c. constant total costs

d. all of the above

e. a and b of the above

22. Which of the following may plausibly be identified as a natural monopoly?

a. diamonds

b. cable TV

c. electricity distribution

d. all of the above

e. b and c of the above

23. What do a perfect competitor and a monopolist have in common?

a. they both charge the highest possible price

b. the both produce at the lowest possible cost

c. they both maximize profits where marginal revenue equals marginal cost

d. all of the above

e. a and b of the above

24. The argument that small firms are disadvantaged by the absence of sufficient capital to compete assumes

a. that the capital market cannot evaluate good investment projects as well as some regulator might

b. that regulators dislike small businesses

c. that capital markets are competitive

d. that capital markets don’t exist

25. Which of the following are examples of prices discrimination?

a. student discounts

b. senior discounts

c. advanced booking discounts on the airlines

d. all of the above

e. a and b of the above

GRADE DISTRIBUTION:

If you score is greater than or equal to: your grade is

22	A+
19	A
18	A-
17	B+
16	B
15	B-
14	C+
12	C
ELSE	C-

Solution:

1. c
2. a
3. b
4. d
5. e
6. d
7. d
8. e
9. b
10. e
11. c
12. c
13. a
14. c
15. a
16. d
17. d
18. a
19. a
20. d
21. e
22. e
23. c
24. a
25. d