T F 20.

A typing contract requires that sellers charge a price that is tied to the quantity of
output produced.

T F 21. Interlocking directorates refers to a situation in which the same individual is on the
board of directors of two or more competing corporations.

T F 22. Most antitrust suits in the United States are initiated by either the Department of
Justice of the Federal Trade Commission (FTC).

T F 23. Price collusion among firms is clearly and unequivocally prohibited by antitrust
laws.

T F 24. The Justice Department will generally challenge a horizontal merger if the
postmerger Herfindahlindez is less than 1,000

T F 25. Conscious parallelism refers to the adoption of similar policies by oligopolists as a

response to their recognized interdependence

T F 26. Predatory pricing refers to the case in which a firm produces a level of output
where marginal cost is equal to marginal revenue and charges a price such that demand exceed
supply.

T F 27. The purpose of deregulation is to increase competition and efficiency.

T F 28. An import tariff is a direct restriction on the quantity of a particular good that can
be imported during a given time period.
T F 29. An import tariff and an import quota both have the effect of protecting domestic
producers from foreign competition.

T F 30. Voluntary export restraints have the same effects as import tariffs, except that the
positive revenue effects are realized by the exporting country rather than the importing country.
Multiple Choice Questions

1. Which one of the following types of government regulation does not limit competition
and create artificial market power?
A. Licensing regulations
B. Patents
C. Copyrights
D. All of the above limit competition and create artificial market power

2. Which of the following is not a law designed to protect the consumers of products?
A. Warranty Act of 1975
B. Federal Trade Commission Act of 1914
C. 1990 Nutrition Labeling Act
D. All of the above are designed to protect the consumers of products.

3. If an increase in output by a firm imposes uncompensated costs on other firms, these

costs are referred to as
A. External diseconomies of production
B. External economies of production
C. External diseconomies of consumption
D. External economies of consumption

4. If an increase in output by a firm confers uncompensated benefits to other firms, these

benefits are referred to as
A. External diseconomies of production
B. External economies of production
C. External diseconomies of consumption
D. External economies of consumption

5. If the consumption expenditures of some individuals impose uncompensated costs on

other individuals, these costs are referred to as
A. External diseconomies of production
B. External economies of production
C. External diseconomies of consumption
D. External economies of consumption
6. If the consumption expenditures of some individuals confer uncompensated benefits to
other individuals, these benefits are referred to as
A. External diseconomies of production
B. External economies of production
C. External diseconomies of consumption
D. External economies of consumption
7. Government regulation of natural monopolies typically sets the market price so that the
level of output corresponds to the point of intersection between long-run
A. Marginal cost and marginal revenue
B. Marginal cost and demand
C. Average cost and marginal revenue
D. Average cost and demand

8. Natural monopolies will produce a socially optimal level of output if government

subsidies ensure an economic profit of zero and the market price is set by regulators at
the point of intersection between long-run
A. Marginal cost and marginal revenue
B. Marginal cost and demand
C. Average cost and marginal revenue
D. Average cost and demand

9. Which of the following is not a complication encountered by public regulatory

commissions when they set rates?
A. It is difficult to determine the economic value of a public utility’s fixed assets.
B. Public utilities typically engage in price discrimination, so many different rates must
be determined
C. The services provided by public utilities are typically jointly produced, so the
allocation of costs among different services is difficult or impossible.
D. All of the above are problems that are encountered when regulatory commissions set
rates

10. The Averch-Johnson effect refers to

A. The inefficiencies that result when regulators set public utility rates too high or too
low.
B. The tendency toward natural monopoly in firms that have downward-sloping long-run
average cost curves.
C. The 9 to 12 month time lag between recognition of a need for rate revision and action
by regulatory commissions.
D. All of the above are correct
11. Which of the following made monopolization and restraint of trade illegal?
A. Robinson-Patman Act
B. Sherman Act
C. Clayton Act
D. None of the above is correct

12. Which of the following prohibits tying contracts?

A. Robinson-Patman Act
B. Sherman Act
C. Clayton Act
D. None of the above is correct

13. Which of the following made it illegal to charge unreasonably low price with the
intention of destroying competition or eliminating competitors?
A. Robinson-Patman Act
B. Sherman Act
C. Clayton Act
D. None of the above is correct

14. Which of the following stated that “unfair methods of competition” are unlawful?
A. Robinson-Patman Act
B. Sherman Act
C. Clayton Act
D. None of the above is correct

15. The Wheeler-Lea Act was designed to protect consumers from

A. Monopoly
B. Unfair methods of competition
C. False or deceptive advertising
D. None of the above is correct

16. Most antitrust actions have been settled by means of

A. Dissolution and divestiture
B. An injunction
C. A consent decree
D. Fines and jail sentences

17. Which of the following is always illegal?

A. Price discrimination
B. Collusion
 C. Monopoly
D. Interlocking directorates

18. Which of the following industries was not deregulated during the 1970s and 1980s?
A. Airlines
B. Electricity generation and distribution
C. Telecommunications
D. Banking

19. Which of the following do not protect domestic producers from foreign competition?
A. Import tariffs
B. Import quotas
C. Voluntary export restrictions
D. All of the above protect domestic producers from foreign competition

20. Which of the following will not result from the imposition of an import tariff on a
commodity?
A. The supply of the commodity will increase
B. The price of the commodity will increase
C. Domestic production of the commodity will increase
D. All of the above will result from an import tariff.

Problems

Etch-A-Ketch Boat cleaning uses an acid solution to clean the hulls of boats. The market
for boat cleaning is perfectly competitive, so Etch-A-Ketch is a price taker. The market supply
and demand functions for these services are defined below, where price (P) is in thousands of
dollars and quantity (Q) is in hulls cleaned per day. Use this information to answer Problems 1
and 2.

Supply: Q= 2 P
Demand: Q= 16 – 2 P

1. Plot the market supply and demand curves on the graph below. Determine the market
equilibrium price and quantity of boat cleaning services.
2. An employee of Etch-A-Ketch has filed a civil suit claiming that acid solutions are a
health hazard to the public. The court has determined that hull-cleaning results in a social
cost of $2,000 per hull over and above the market price. If a tax is used to impose the
social cost on Etch-A-Ketch and all the other boat cleaners, what will the new
equilibrium price and quantity be and how much will the boat cleaners pay in taxes? Plot
the effect of the tax on the graph from Problem 1.

A college education contributes to individual well-being by enhancing earning

opportunities and by providing intellectual enrichment. The market for college educations
is perfectly competitive. The market supply and demand functions for college educations
are given below, where the price (P) is defined in tens of thousands of dollars per college
education and quantity (Q) is measured in hundreds of thousands of college educations
completed per year. Use this information to answer Problems 3 and 4.
Supply: Q= -0.5 + 0.5 P
Demand: Q= 12 – 2 P

3. Plot the market supply and demand curves on the graph below. Determine the market
equilibrium price and quantity of college educations.
4. College educations provide social benefits that exceed their private benefits. A college
educated individual is more likely to be a healthy, productive citizen. Suppose that an
appropriate measure of the social benefit of a college education is $1,000 greater than its
private cost. If a subsidy to students is used to compensate for the social cost value of
college educations, what will the new equilibrium price and quantity be and how much
will the government pay in subsidies? Plot the effect of the subsidy on the graph from
Problem 3.

True-False Answers
1 F 7 T 13 F 19 T 25 T
2 T 8 F 14 F 20 F 26 F
3 T 9 T 15 F 21 T 27 T
4 T 10 T 16 T 22 F 28 F
5 F 11 F 17 T 23 T 29 T
6 T 12 T 18 F 24 F 30 T

Multiple Choice Answers

 1 D 5 C 9 D 13 A 17 B
2 D 6 D 10 A 14 D 18 B
3 A 7 D 11 B 15 C 19 D
4 B 8 D 12 C 16 C 20 A

Solutions to Problems

1. The equilibrium price is calculated by setting the market supply and demand functions
equal to each other and then solving for P. Equilibrium quantity is calculated by
substituting the equilibrium price into either the supply or the demand function.
2 P = 16 – 2 P which implies that P=4
Q= 2 P = (2)(4)= 8

2. A $2,000 tax will shift the supply curve by $2,000. To see the effect of this shift on the
supply function, the function is inverted and then 2,000 is added to the right side if the
function.

Q= 2 P becomes P = 0.5 Q after inversion

P= 0.5 Q becomes P = 2 + 0.5 Q when the tax is added
P= 2 + 0.5 Q becomes Q = -4 + 2 P when it is returned to its original form
The new equilibrium price and quantity are found by application of the same procedure
used in Problem 1.
-4 + 2 P = 16 – 2 P which implies that P=5
Q= -4 + 2 P = -4 + (2)(5)= 6
 The amount of tax collected is (2)(6)= 12.

3. The equilibrium price is calculated by setting the market supply and demand functions,
equal to each other and then solving for P. equilibrium quantity is calculated by
substituting the equilibrium price into either the supply or the demand function.
-0.5 + 0.5 P = 12 -2 P which implies that P=5
Q= 12 – 2 P = 12- (2)(5)= 2

4. A $1,000 subsidy paid to students will shift the demand curve by $1,000. To see the
effect of this shift on the demand function, the function is inverted and then 1,000 is
added to the right side of the function.
Q= 12 – 2 P becomes P= 6 – 0.5 Q after inversion
P= 6 – 0.5 Q becomes P= 7 – 0.5 Q when the subsidy is added
P= 7 – 0.5 Q becomes Q= 14 -2 P when it is returned to its original form
The new equilibrium price and quantity are found by application of the same procedure
used in Problem 3.
-0.5 + 0.5 P = 14 -2 P which implies that P=5.8
Q= 14 – 2 P = 14- (2)(5.8)= 2.4
The amount of subsidy paid to student is (1)(2.4)= 2.4