Baye 9e - Chapter 14 - TB

Chapter 14-A Manager's Guide to Government in the Marketplace
Chapter 14
A Manager's Guide to Government in the Marketplace
Multiple Choice Questions
1. Which of the following is NOT a valuable role of government in a free market society?
A. To reduce negative externalities.
B. To enhance rent-seeking activities.
C. To reduce market power.
D. To provide public goods.
Answer: B
Learning Objective: 14-01
Topic: Market Failure
Blooms: Remember
AACSB: Knowledge Application
Difficulty: 01 Easy
2. The purpose of the Clean Air Act (1970) was to:

A. reduce market power.
B. control negative externalities.
C. improve competition across international markets.
D. help make information easily obtainable for producers and consumers.
Answer: B
Blooms: Remember
Difficulty: 01 Easy
3. Which of the following is true concerning negative externalities?

A. Firms tend to produce more than the efficient level of output.
B. Society gains because firms do not pay the external costs of production.
C. Perfect competition is better than monopoly from the viewpoint of society even in the
presence of negative externalities.
D. With negative externalities, a monopoly will always produce an output level less than is
socially efficient.
Answer: A
Blooms: Remember
Difficulty: 01 Easy
14-1
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4. The external marginal cost of producing coal is MCexternal = 6Q while the internal marginal
cost is MCinternal = 4Q. The inverse demand for coal is given by P = 120 − 2Q. What is the
socially efficient level of output?
A. 10
B. 20
C. 15
D. 8
Answer: A
Blooms: Apply
AACSB: Analytical Thinking
Difficulty: 02 Medium
cost is MCinternal = 4Q. The inverse demand for coal is given by P = 120 − 2Q. How much
output would a competitive industry produce?
A. 10
B. 20
C. 15
D. 8
Answer: B
Blooms: Apply
cost is MCinternal = 4Q. The inverse demand for coal is given by P = 120 − 2Q. How much
output would a monopoly produce?
A. 10
B. 20
C. 15
D. It cannot be determined because of incomplete information.
Answer: C
Blooms: Apply
14-2
cost is MCinternal = 4Q. The inverse demand for coal is given by P = 120 − 2Q. If the
government taxed output at $2 per unit, what would a competitive industry produce?
A. 10
B. 20
C. 15
D. 8
Answer: C
Blooms: Apply
Difficulty: 03 Hard
8. Insider trading is prohibited by the:

A. Security Exchange Act.
B. Lanham Act.
C. Clayton Act.
D. Robinson-Patman Act.
Answer: A
Blooms: Remember
Difficulty: 01 Easy
9. Which of the following is NOT a result of certification of skills?

A. A stated minimum standard of service is provided.
B. A price higher than that which would have been charged if there were no certification.
C. A bigger quantity exchanged than that which would have resulted if there were no
certification.
D. A profession is formed.
Answer: C
Blooms: Understand
14-3
10. Under the Lanham Act, in concert with the Clayton Act:
A. government will sue a firm for false advertising.
B. rival firms are not eligible to sue another firm for false advertising.
C. people harmed by deceptive advertising can sue the firm and receive compensation.
D. rival firms are not eligible to sue another firm for false advertising and people harmed by
deceptive advertising can sue the firm and receive compensation.
Answer: C
Blooms: Remember
Difficulty: 01 Easy
11. Which of the following is antitrust legislation?

A. Sherman Act
B. Securities and Exchange Act
C. Lanham Act
D. Sherman Act and Lanham Act
Answer: A
Blooms: Remember
Difficulty: 01 Easy
12. Under the merger guidelines written by the DOJ and FTC, a merger may not be
challenged if:
A. there is significant foreign competition.
B. the firms involved have monetary problems.
C. there is an emergence of new technology.
D. All of the statements associated with this question are correct.
Answer: D
Blooms: Understand
14-4
13. The presence of government in the market leads to:

A. benefits at no cost to society.
B. rent seeking.
C. externalities.
D. adverse selection.
Answer: B
Topic: Rent Seeking
Blooms: Understand
14. A price ceiling imposed on a monopoly may:

A. lead to a shortage.
B. lead to no shortage.
C. drive the monopolist out of business.
Answer: D
Blooms: Understand
15. If a price ceiling on a monopolist results in NO shortage:

A. the full economic price is lower than the one set by the ceiling.
B. rent seeking must be effective.
C. the firm is on the verge of leaving the market.
D. the firm must be making zero economic profits.
Answer: A
Blooms: Understand
16. Which of the following explains why big business typically spends more on rent-seeking
activities than consumers?
A. Lobbying is a public good to consumers.
B. Lobbying is a public good to businesses.
C. Labor unions in the involved firms.
D. Lobbying is a public good to businesses and labor unions in the involved firms.
Answer: A
14-5

Topic: Rent Seeking
Blooms: Understand
Difficulty: 01 Easy
17. Rent seeking:

A. involves resources paid to politicians to enhance one group at the expense of another.
B. results in less monopoly power.
C. results in externalities.
D. None of the statements are correct.
Answer: A
Topic: Rent Seeking
Blooms: Remember
18. Which of the following is a public good?

A. National defense
B. Telephones
C. Electricity
D. All of the statements associated with this question are public goods.
Answer: A
Blooms: Remember
Difficulty: 01 Easy
19. When the government imposes an effective price ceiling on a monopolist, what will be
sure to happen in the short run?
A. The dollar price will increase.
B. The dollar price will fall.
C. There will be a shortage of the product.
D. There will be a surplus of the product.
Answer: B
Blooms: Understand
14-6
20. When the government imposes an excise tax on foreign imports:

A. domestic consumers are harmed.
B. domestic firms benefit.
C. domestic firms are harmed.
D. domestic consumers are harmed and domestic firms benefit.
Answer: D
Topic: Government Policy and International Markets
Blooms: Understand
21. In the absence of price regulation, a monopolist:

A. charges a price below MR.
B. charges a price above MC.
C. charges a price equal to MR.
D. charges a price above MC and equal to MR.
Answer: B
Blooms: Understand
22. In order to eliminate the inefficiency brought about by a monopoly, the government wants
to impose a price ceiling on the monopoly. What is the optimal price to be imposed?
A. The competitive price
B. The competitive price, unless it is below ATC.
C. The competitive price, unless it is below MR.
D. The competitive price, unless it is above ATC.
Answer: B
Blooms: Understand
14-7
23. If the government imposes a price ceiling below the monopolist's average cost curve, then
in the long run the regulation makes:
A. consumers better off.
B. consumers worse off.
C. the monopolist better off.
D. None of the preceding statements is correct.
Answer: B
Blooms: Understand
24. Which of the following is true for a monopoly?

A. A monopoly always makes a positive profit.
B. A price ceiling on a monopoly is always desirable.
C. Price does not equal marginal cost.
D. A price ceiling on a monopoly is always desirable and price does not equal marginal cost.
Answer: C
Blooms: Remember
Difficulty: 01 Easy
25. In the United States, government is the sole property owner of:
A. labor.
B. air.
C. land.
D. knowledge.
Answer: B
Blooms: Remember
Difficulty: 01 Easy
26. The marginal cost of producing a good to society is the:

A. horizontal sum of the supply curve and the marginal cost of polluting.
B. vertical sum of the demand curve and the marginal cost of polluting.
C. horizontal sum of the demand curve and the marginal cost of polluting.
D. vertical sum of the supply curve and the marginal cost of polluting.
Answer: D
14-8

Blooms: Understand
27. The Clean Air Act and its amendments increase the production costs of the firms in a
covered industry through increased:
A. fixed costs while marginal cost is unchanged.
B. marginal cost while fixed costs remain the same.
C. fixed costs and increased marginal costs.
D. average cost while marginal cost is unchanged.
Answer: C
Blooms: Understand
28. According to the Clean Air Act, a new firm in the covered industry is required to:
A. obtain a permit to pollute.
B. at least match the most effective system existing in the industry.
C. obtain a permit to pollute and at least match the most effective system existing in the
industry.
Answer: C
Blooms: Understand
29. What is the immediate result of applying the Clean Air Act to a previously nonregulated
industry?
A. Price decreases and production is reduced.
B. Price increases and production is reduced.
C. Price decreases and production is enlarged.
D. Price increases and production is enlarged.
Answer: B
Blooms: Understand
14-9
30. The Clean Air Act aids new entrants in a regulated industry when demand increases and
provides an incentive for existing firms to invest in new antipollution technology by:
A. restricting pollution permits from being traded.
B. allowing pollution permits to be traded within the industry.
C. allowing pollution permits to be traded across industries.
D. allowing pollution permits to be traded within the industry and allowing pollution permits
to be traded across industries.
Answer: D
Blooms: Remember
Difficulty: 01 Easy
31. Which cost measures the pollution cost to society?

A. Internal cost
B. External cost
C. Social cost
D. External cost and social cost
Answer: B
Blooms: Remember
Difficulty: 01 Easy
32. Which cost measures the cost to society of producing a good?

A. Internal cost
B. External cost
C. Social cost
D. External cost and social cost
Answer: C
Blooms: Remember
Difficulty: 01 Easy
33. Which of the following statements is NOT true in the presence of externalities?
A. Social marginal cost equals the sum of internal and external marginal costs.
B. A competitive industry generally produces more than a monopoly.
C. A competitive industry always produces more than the socially efficient level of output.
D. A monopoly always produces more than the socially efficient level of output.
Answer: D
14-10

Blooms: Understand
34. A firm has a constant marginal social cost of producing that equals $2Q. What is the
socially efficient level of production for a firm facing an inverse demand P = 60 − 2Q?
A. 10
B. 15
C. 20
D. 25
Answer: B
Blooms: Apply
35. To prevent air pollution and breach of contract, which tools does the government use?
A. Penalties for both
B. Permits for both
C. Permits for pollution and penalties for breach
D. Penalties for pollution and permits for breach
Answer: C
Blooms: Understand
36. If a firm has been proven liable for a false ad, it has to:
A. terminate the false ad.
B. recall any product with the false claim on it.
C. compensate more than the damage it has caused.
Answer: D
Blooms: Understand
14-11
37. How can a firm in a merger avoid antitrust action by the government?
A. Prove that the industry's HHI is over 1800.
B. Prove that efficiency will improve from the resulting merger.
C. Prove that price will not increase from the resulting merger.
Answer: B
Blooms: Understand
38. The domestic demand and supply for sugar are Qd = 40,000 − 200P and QSD = 10,000 +
300P. The foreign supply is QSF = 20,000 + 100P. What is the total supply of sugar in the
domestic market?
A. Q = 50,000 + 100P
B. Q = 30,000 + 400P
C. Q = 15,000 + 200P
D. Q = 10,000 + 300P
Answer: B
Blooms: Apply
300P. The foreign supply is QSF = 20,000 + 100P. What is the domestic market price of
sugar?
A. 12.3
B. 15.0
C. 16.7
D. 18.3
Answer: C
Blooms: Apply
Difficulty: 03 Hard
14-12
300P. The foreign supply is QSF = 20,000 + 100P. Suppose an import quota of 5,000 is
imposed in the domestic market. What will be the new market price of sugar?
A. 20
B. 30
C. 40
D. 50
Answer: D
Blooms: Apply
Difficulty: 03 Hard
imposed in the domestic market. How many units of sugar will domestic producers supply
after the quota is imposed?
A. 20,000
B. 25,000
C. 30,000
D. 35,000
Answer: B
Blooms: Apply
Difficulty: 03 Hard
42. Which of the following raises domestic prices only when demand is relatively low?
A. Domestic subsidies
B. Lump sum tariff
C. Excise tariff
D. Lump sum tariff and excise tariff
Answer: B
Blooms: Understand
14-13
43. Which of the following raises domestic prices when demand is relatively high?
A. Domestic subsidies
B. Lump sum tariff
C. Excise tariff
D. Lump sum tariff and excise tariff
Answer: C
Blooms: Understand
44. As additional consumers obtain the benefits of a pure public good, such as national
defense, the benefits to the existing consumers will:
A. decrease.
B. increase.
C. stay the same.
D. increase in the short run, but decrease in the long run.
Answer: C
Blooms: Remember
Difficulty: 01 Easy
45. In producing the efficient amount of a public good, government should take into account:
A. only the demand from high-demand consumers.
B. only the demand from low-demand consumers.
C. the vertical sum of all individual inverse demand curves.
D. the horizontal sum of all individual inverse demand curves.
Answer: C
Blooms: Understand
14-14
46. Which of the following factors reduces the need for government involvement in the
marketplace?
A. The presence of externalities
B. The incentive to rent-seek
C. The need for public goods
D. Incomplete information
Answer: B
Topic: Rent Seeking
Blooms: Remember
Difficulty: 01 Easy
47. The main purpose of antitrust policy is to:

A. reduce market power.
B. control negative externalities.
C. help make information easily obtainable for producers and consumers.
Answer: A
Blooms: Remember
Difficulty: 01 Easy
cost is MC internal = 6Q. The inverse demand for coal is given by P = 180 − 4Q. What is the
socially efficient level of output?
A. 10
B. 20
C. 15
D. 18
Answer: A
Blooms: Apply
14-15
cost is MC internal = 6Q. The inverse demand for coal is given by P = 180 − 4Q. How much
output would a competitive industry produce?
A. 10
B. 20
C. 15
D. 18
Answer: D
Blooms: Apply
cost is MC internal = 6Q. The inverse demand for coal is given by P = 180 − 4Q. If the
government taxed output at $2 per unit, what would a competitive industry produce?
A. 10
B. 20
C. 15
D. 18
Answer: C
Blooms: Apply
51. Rent seeking:

A. results in less market share for the rent seekers.
B. involves lobbyists influencing government policies to benefit their interests.
C. results in more negative externalities.
Answer: B
Topic: Rent Seeking
Blooms: Remember
Difficulty: 01 Easy
14-16
52. Which of the following is NOT a pure public good?

A. Clean air
B. National defense
C. Telephones
D. All of the statements associated with this question are pure public goods.
Answer: C
Blooms: Remember
Difficulty: 01 Easy
53. The import tariffs that President Bush placed on imported steel likely had what effect?
A. Domestic steel producers were helped, but domestic steel consumers were hurt.
B. Both domestic steel consumers and foreign steel producers were helped.
C. Both domestic steel producers and domestic steel consumers were helped.
D. Foreign steel producers were helped, but domestic steel consumers were hurt.
Answer: A
Blooms: Understand
54. An unregulated monopolist will likely:

A. charge a price below MR.
B. charge a price above MC.
C. charge a price equal to MR.
D. charge a price below MR and above MC.
Answer: B
Blooms: Remember
Difficulty: 01 Easy
14-17
500P. The foreign supply is QSF = 20,000 + 100P. What is the domestic market price of
sugar?
A. $15
B. $20
C. $30
D. $45
Answer: B
Blooms: Apply
500P. The foreign supply is QSF = 20,000 + 100P. What is the domestic quantity supplied at
the domestic market price?
A. 22,000
B. 10,000
C. 52,000
D. 30,000
Answer: D
Blooms: Apply
imposed in the domestic market. What will be the new market price of sugar?
A. $15
B. $20
C. $30
D. $45
Answer: C
Blooms: Apply
14-18
500P. The foreign supply is QSF = 20,000 + 100P. How many units of sugar will domestic
producers supply after the quota is imposed?
A. 35,000
B. 30,000
C. 58,000
D. 23,000
Answer: A
Blooms: Apply
59. The unregulated monopoly in the figure below will earn profit of:
Price
10
2 MC = AC
Demand
4 8 Quantity
MR
A. $16.
B. $8.
C. $4.
D. $0.
Answer: A
Blooms: Apply
Difficulty: 01 Easy
14-19
60. Consumer surplus in the unregulated monopoly market in the figure below is:
Price
10
2 MC = AC
Demand
4 8 Quantity
MR
A. $16.
B. $8.
C. $4.
D. $0.
Answer: B
Blooms: Apply
Difficulty: 01 Easy
14-20
61. How much would the monopoly in the figure below spend to prevent its price being
regulated to marginal (or average) cost?
Price
10
2 MC = AC
Demand
4 8 Quantity
MR
A. $16
B. $8
C. $4
D. $0
Answer: A
Topic: Rent Seeking
Blooms: Apply
14-21
62. How much would consumers in the figure below spend to persuade politicians to regulate
the monopoly's price to marginal (or average) cost?
Price
10
2 MC = AC
Demand
4 8 Quantity
MR
A. $24
B. $16
C. $8
D. $0
Answer: A
Topic: Rent Seeking
Blooms: Apply
14-22
63. Consider the monopoly in the figure below with price regulated at $2 per unit. In this
market, ___________ units will be exchanged.
Price
$10
$7 MC
$6
$2 Regulated Price
Demand
3 4 5 8 Quantity
MR
A. 3
B. 4
C. 5
D. 8
Answer: A
Blooms: Apply
14-23
64. Consider the monopoly in the figure below with price regulated at $2 per unit. Consumer
surplus at the regulated price is:
Price
$10
$7 MC
$6
$2 Regulated Price
Demand
3 4 5 8 Quantity
MR
A. $9.
B. $8.
C. $4.50.
D. There is insufficient information to determine consumer surplus.
Answer: C
Blooms: Apply
14-24
65. Consider the monopoly in the figure below with price regulated at $2 per unit. The
regulated price will result in a:
Price
$10
$7 MC
$6
$2 Regulated Price
Demand
3 4 5 8 Quantity
MR
A. surplus of 2 units.
B. shortage of 2 units.
C. surplus of 5 units.
D. shortage of 5 units.
Answer: D
Blooms: Apply
14-25
deadweight loss under the regulated price is:
Price
$10
$7 MC
$6
$2 Regulated Price
Demand
3 4 5 8 Quantity
MR
A. $4.50.
B. $5.
C. $8.
D. There is insufficient information to compute the deadweight loss at the regulated price.
Answer: B
Blooms: Apply
14-26
67. Consider the monopoly in the figure below with price regulated at $2 per unit. Monopoly
profits at the regulated price (assuming the presence of fixed costs) are:
Price
$10
$7 MC
$6
$2 Regulated Price
Demand
3 4 5 8 Quantity
MR
A. $12.
B. $16.
C. $5.
D. There is insufficient information to determine the monopoly profits.
Answer: D
Blooms: Apply
Difficulty: 03 Hard
14-27
68. Consider the monopoly in the figure below with price regulated at $2 per unit.
Deadweight loss resulting from the unregulated monopoly price is _________ than the
deadweight loss resulting from the regulated price.
Price
$10
$7 MC
$6
$2 Regulated Price
Demand
3 4 5 8 Quantity
MR
A. greater
B. less
C. no different
D. There is insufficient information to determine the difference in the deadweight loss
between the regulated and unregulated prices.
Answer: B
Blooms: Apply
Difficulty: 03 Hard
69. Which of the following is true about a lump-sum tariff?

A. Domestic firms' marginal cost curves are shifted up by the amount of the lump-sum tariff.
B. Foreign firms' average cost curves are shifted up by the amount of the lump-sum tariff.
C. Domestic firms' average cost curves are shifted up by the amount of the lump-sum tariff.
D. Foreign firms' marginal cost curves are shifted up by the amount of the lump-sum tariff.
Answer: B
Blooms: Understand
14-28
70. A lump-sum tariff imposed on foreign competitors will:

A. always remove foreign competitors from the market.
B. increase the profits of domestic firms when demand is high.
C. have no impact on domestic firms' profits when demand for domestic goods is high.
D. decrease the profits of domestic firms when demand is high.
Answer: C
Blooms: Understand
Difficulty: 03 Hard
71. An excise tariff imposed on foreign competitors will:

A. increase domestic firms' profits at all levels of demand.
B. increase domestic firms' profits only when demand is high.
C. increase domestic firms' profits only when demand is low.
D. have no impact on domestic firms' profits when demand for domestic goods is high.
Answer: A
Blooms: Understand
Difficulty: 03 Hard
72. Which of the following is true about an excise tariff?

A. Domestic firms' marginal cost curves are shifted up by the amount of the excise tariff.
B. Foreign firms' average cost curves are shifted down by the amount of the excise tariff.
C. Domestic firms' average cost curves are shifted up by the amount of the excise tariff.
D. Foreign firms' marginal cost curves are shifted up by the amount of the excise tariff.
Answer: D
Blooms: Understand
Difficulty: 03 Hard
73. According to the Department of Justice's Horizontal Merger Guidelines, a post-merger

HHI _______ is considered _____________________.
A. below 1,000; low resulting in a high likelihood that a merger will be permitted
B. above 1,800; low resulting in a high likelihood that a merger will be permitted
C. below 1,000; high resulting in high likelihood that a merger will be blocked
D. below 1,800; high resulting in high likelihood that a merger will be blocked
Answer: A
14-29

Blooms: Remember
Difficulty: 01 Easy
74. In highly concentrated markets, an increase in the HHI of more than _________ raises
potential concerns.
A. 5 points
B. 10 points
C. 30 points
D. 50 points
Answer: D
Blooms: Remember
75. Which of the following are characteristics of public goods?

A. Nonrivalry
B. Nonchivalrous
C. Nonexclusionary
D. Nonrivalry and nonexclusionary
Answer: D
Blooms: Remember
Difficulty: 01 Easy
76. Nonrivalry, as it relates to public goods, means that:

A. consumer rivalry does not exist in this market.
B. producer rivalry does not exist in this market.
C. consumer–producer rivalry does not exist in this market.
D. government–producer rivalry does not exist in this market.
Answer: A
Blooms: Remember
Difficulty: 01 Easy
14-30
77. Nonexclusionary, as it relates to public goods, means that:

A. no producer can be excluded from providing the good.
B. no one can be excluded from consuming the good, once it is provided.
C. the government can only exclude consumers from consuming the good.
D. producer–consumer rivalry exists.
Answer: B
Blooms: Remember
Difficulty: 01 Easy
78. A negative externality:

A. is a payment received to parties not involved in the production or consumption of a good.
B. is a cost borne by parties not involved in the production or consumption of a good.
C. results from the absence of well-defined property rights.
D. is a cost borne by parties not involved in the production or consumption of a good and
results from the absence of well-defined property rights.
Answer: D
Blooms: Remember
Difficulty: 01 Easy
79. If the government regulates a monopoly's price below the socially efficient level, then:
A. deadweight loss increases and there is a surplus output.
B. deadweight loss decreases and there is a shortage of output.
C. deadweight loss increases and there is a shortage of output.
D. deadweight loss decreases and there is a surplus of output.
Answer: C
Blooms: Understand
14-31
80. Suppose a monopolist has positive fixed costs and constant marginal costs. If the
government regulates a monopoly's price to marginal cost, in the long run:
A. the monopolist will earn a profit if ATC > MC.
B. the monopolist will exit the industry.
C. the monopolist will earn a profit if ATC > P.
D. the monopolist will earn zero profits.
Answer: B
Blooms: Understand
81. Which of the following pieces of legislation is NOT aimed at curbing the negative effects
of asymmetric information?
A. Robison-Patman Act
B. Securities and Exchange Act
C. Lanham Act
D. Truth in Lending Simplification Act
Answer: A
Blooms: Remember
Difficulty: 01 Easy
82. Which of the following pieces of legislation is aimed at curbing the negative effects of
externalities?
A. Robison-Patman Act
B. Clean Air Act
C. Lanham Act
D. Truth in Lending Simplification Act
Answer: B
Blooms: Remember
Difficulty: 01 Easy
14-32
83. Suppose a monopoly faces an inverse demand curve of P = 100 − 2Q and has constant
marginal cost of 6Q. If the government is considering legislation that would regulate price to
the competitive level, what is the maximum amount the monopoly would spend on (legal)
lobbying activities designed to thwart the regulation?
A. $62.50
B. $500
C. $562.50
D. None of the preceding answers is correct.
Answer: D
Topic: Rent Seeking
Blooms: Apply
Difficulty: 03 Hard
84. Suppose a monopoly faces an inverse demand curve of P = 6 − Q and has constant
marginal cost of 2. If the government is considering legislation that would regulate price to
A. $2
B. $4
C. $6
D. None of the answers are correct.
Answer: B
Topic: Rent Seeking
Blooms: Apply
Difficulty: 03 Hard
85. An import quota is:

A. a fixed fee that an importing firm must pay the domestic government in order to have the
legal right to sell the product in the domestic market.
B. the fee an importing firm must pay to the domestic government on each unit it brings into
the domestic market.
C. a restriction limiting the quantity of imported goods that can legally enter a domestic
market.
Answer: C
Blooms: Remember
Difficulty: 01 Easy
14-33
86. An excise tariff is:

market.
Answer: B
Blooms: Remember
Difficulty: 01 Easy
87. A lump-sum tariff is:

market.
Answer: A
Blooms: Remember
Difficulty: 01 Easy
88. The domestic demand and supply for sugar are Qd = 700 − 2P and QSD = 100 + 4P. The
foreign supply is QSF = 150 + 3P. What is the total supply of sugar in the domestic market?
A. Q = 250 + 7P
B. Q = 800 + 2P
C. Q = 850 + P
D. Q = 150 + 3P
Answer: A
Blooms: Apply
14-34
foreign supply is QSF = 150 + 3P. What is the domestic market price of sugar?
A. 100
B. 110
C. 90
D. 150
Answer: C
Blooms: Apply
Difficulty: 03 Hard
foreign supply is QSF = 150 + 3P. Suppose an import quota of 100 is imposed in the domestic
market. What will be the new market price of sugar?
A. 62.50
B. 90
C. 100
D. 110
Answer: A
Blooms: Apply
Difficulty: 03 Hard
foreign supply is QSF = 150 + 3P. Suppose an import quota of 100 is imposed in the domestic
market. How many units of sugar will domestic producers supply after the quota is imposed?
A. 500
B. 350
C. 560
D. 640
Answer: B
Blooms: Apply
Difficulty: 03 Hard
14-35
92. Consider the monopoly in the figure below with price regulated at $20 per unit. In this
market, ___________ units will be exchanged.
Price
$300
$200 MC
$164
$20 Regulated Price

Demand
10 14 25 28 Quantity
MR
A. 10
B. 25
C. 42
D. 50
Answer: A
Blooms: Apply
14-36
93. Consider the monopoly in the figure below with price regulated at $20 per unit. Consumer
surplus at the regulated price is:
Price
$300
$200 MC
$164
$20 Regulated Price

Demand
MR
A. $500.
B. $3,920.
C. $2,300.
D. There is insufficient information to determine consumer surplus.
Answer: C
Blooms: Apply
14-37
regulated price will result in a:
Price
$300
$200 MC
$164
$20 Regulated Price

Demand
MR
A. surplus of 3 units.
B. shortage of 3 units.
C. surplus of 18 units.
D. shortage of 18 units.
Answer: D
Blooms: Apply
14-38
deadweight loss under the regulated price is:
Price
$300
$200 MC
$164
$20 Regulated Price

Demand
MR
A. $150.
B. $1,350.
C. $2,300.
D. There is insufficient information to compute the deadweight loss at the regulated price.
Answer: B
Blooms: Apply
14-39
96. Consider the monopoly in the figure below with price regulated at $20 per unit. Monopoly
profits at the regulated price are:
Price
$300
$200 MC
$164
$20 Regulated Price

Demand
MR
A. $100.
B. $200.
C. $1,350.
D. There is insufficient information to determine the monopoly profits.
Answer: A
Blooms: Apply
Difficulty: 03 Hard
97. Suppose a monopoly faces an inverse demand curve of P = 300 − 10Q and has constant
marginal cost of 20. If the government is considering legislation that would regulate price to
A. $280
B. $1,960
C. $2,240
D. None of the preceding statements is correct.
Answer: B
Topic: Rent Seeking
Blooms: Apply
Difficulty: 03 Hard
14-40
Essay Questions
98. In the 1990s the Mobil Oil Corporation acquired the rights to increase pollution by 900
pounds of sulfur dioxide per day at its Torrance, California, refinery. These rights were
purchased from South Gate, California, at a price of $3 million after the latter acquired them
from General Motors. As a result of this change, Mobil increased its output of noxious vapors
in Torrance, California, by 900 pounds per day. Do you think the environment was harmed as
a result of the sale of these pollution rights? Explain.
Answer:
Mobil will be polluting the air far less than General Motors did when it had the rights. The sale of pollution
rights, as allowed under the Clean Air Act as amended in 1990, allows firms to reduce pollution in the cost-
minimizing way.
Blooms: Understand
99. In the 1990s Japan reduced its exports of automobiles to the United States by 28 percent.
If you were the manager of a Buick dealership, how would this affect your pricing strategy?
Explain.
Answer:
If the dealer has no market power, the reduction in Japanese sales in the United States leads to a reduction in the
domestic supply of automobiles. This, in turn, drives up the equilibrium price for U.S. automobiles. Thus, the
typical American car dealer should charge higher prices for cars in order to maximize profits. If the dealer has
market power, the demand for his cars will increase as a result of the quota, which also suggests that the dealer
should raise prices.
Blooms: Understand
100. Suppose a firm has 10 employees, all of whom desire a more pleasant work environment.
Accordingly, they are considering removing litter from the grounds of the plant. Each
employee has an inverse demand for "clean grounds" of P = 100 – 2Q, where Q is the number
of empty beer cans removed from the premises. The marginal cost of removing beer cans is
$1 per can.
a. What is the socially efficient quantity of cans to remove?
b. How much would each person have to pay per can to remove the socially efficient
quantity?
Answer:
14-41
a. Vertically sum the inverse demand over all 10 employees to get the demand for the public good: P = 1000 −
20Q. The socially efficient level of output is where P = MC, or in this case, 1000 − 20Q = 1. Thus, the socially
efficient quantity of cans to remove is Q = 49.95 cans.
b. 10 cents per can, for a total cost of $5 per employee.
Blooms: Apply
Difficulty: 01 Easy
101. Three years ago the CEO of a large firm instituted a plan that encourages division
managers to share information obtained about the demographic characteristics of those who
purchase the firm's final product. Since the plan was implemented, however, the CEO has
noticed that less information is available than ever. Why do you think the CEO's plan
backfired?
Answer:
There is a free rider problem caused by the public-goods nature of obtaining information. If the manager of one
division expends effort gathering information and shares it, then other division managers receive the benefits
without having to bear any of the costs. Unfortunately, when all division managers think this way, the result is
that very little effort is spent within the firm on information gathering efforts.
Blooms: Understand
Difficulty: 01 Easy
102. XYZ Labs—the sole producer of Diamatine—charges a price for its drug that is
significantly above the firm's marginal cost. It takes XYZ Labs 10 years of research and
development before products like Diamatine are finally sold in the market. Do you think
government regulators would be wise to impose price ceilings on Diamatine in order to bring
the price in line with marginal costs? Explain.
Answer:
In situations where economies of scale are large relative to market demand, regulating price at marginal cost
would likely result in a situation where the firm was unable to cover its average costs of production. Since a
large amount of XYZ Lab's costs are fixed R&D expenditures, they might be forced into bankruptcy if regulated
at marginal cost.
Blooms: Understand
Difficulty: 01 Easy
14-42
103. You are the manager of a monopoly that faces an inverse demand curve P  100  10Q ,
and has constant average and marginal costs of $20 per unit. The government is considering
legislation that would regulate your firm's price at $20 per unit. What is the maximum amount
your firm should be willing to spend to lobby against the regulation?
Answer:
If the regulation passes, price will be regulated at $20 and the firm will earn zero profits. If not, the firm can
continue to produce the monopoly output and charge the monopoly price. The monopoly output is determined by
the point where MR = MC:
100 − 20Q = 20.
Solving for Q yields the monopoly output of QM = 4 units. The monopoly price is obtained by inserting this
quantity into the demand function to obtain
PM = 100 − 10(4) = 60.
Since the firm stands to lose monopoly profits of (P M − $20)QM = $160 if the regulation is imposed, the most it
should be willing to spend on lobbying activities is $160.
Topic: Rent Seeking
Blooms: Apply
104. Acme Water is a privately owned company that is the sole supplier of water to a rural
town in Pennsylvania. The owner of the firm has provided the manager of the company an
incentive to maximize the firm's profits, and the manager is currently selling 100,000 gallons
of water per week at a price of $.05 per gallon. The marginal cost of water is zero, but the
firm's average cost of this level of output is $.01 per gallon.
a. Determine Acme Water's profits.
b. Now suppose that the local government imposes a price ceiling on water at a price of $.01
per gallon. Will the firm earn economic profits of zero as a result of this price ceiling?
Explain.
c. Does the price ceiling of $.01 per gallon result in a shortage of water in Acme's service
area?
Answer:
a. Acme's profits are ($.05 − $.01)100,000 = $4,000 per week.
b. Economic profits will be positive. As a result of the ceiling, Acme will expand output to the point where
demand is satisfied at the ceiling price of $.01. Since average costs are declining (since all costs are fixed),
average total cost at this higher level of output is less than $.01 per gallon, so the firm makes positive profits.
c. No shortage results.
Blooms: Analyze
14-43
105. The gadget industry is comprised of 10 firms, each with a 10 percent market share. What
is the Herfindahl-Hirschman index for the industry? Based on the U.S. Department of Justice
Merger Guidelines described in the text, do you think the Justice Department would be likely
to block a merger between two of the firms?
Answer:
HHI = 10,000[10(.10)2] = 1,000. Given current merger guidelines, the merger is unlikely to be challenged.
Blooms: Apply
106. We learned in this chapter that there are laws against price discrimination. Yet, many
firms openly engage in such practices. For instance, most hotel chains offer discounts to
senior citizens that translate into prices that are about 10 percent lower than prices charged to
other hotel guests. Why are such firms allowed to engage in such practices?
Answer:
While the Clayton Act (1914) and the Robinson-Patman Act (1936) make price discrimination designed to lessen
competition illegal, they do not explicitly rule out all types of price discrimination. Examples of legal forms of
price discrimination include those that arise due to cost differences, those required to meet competition, and
those that do not lessen competition. Notice that the discounts offered to senior citizens are not designed to drive
other hotels out of business, and thus do not lessen competition.
Blooms: Understand
107. The manager of a paper mill is preparing for her most important test yet. On Tuesday
morning, she must testify before a Senate committee to "justify" the firm's high price. One
senator is particularly angry with the firm because its price is twice the firm's marginal cost.
On Tuesday afternoon, the manager is scheduled to appear before the House Subcommittee
on the Environment to explain why the firm should not be slapped with a per-unit tax on the
firm's output to compensate for the pollution it discharges into a major river. What do you
think will be the manager's game plan?
Answer:
Her best shot would probably be to point out that absent externalities, the fact that her firm has market power
means that price is too high and output too low. Absent market power, the fact that her firm creates an
externality means that production is too high and price is too low. But since her firm operates in an environment
of both market power and externalities, the two forces might exactly balance. In other words, her firm might
actually be producing the socially efficient output and charging the socially efficient price.
Blooms: Analyze
Difficulty: 03 Hard
14-44
108. Section 16(a) of the Securities and Exchange Act of 1934, as amended in 1990, requires
that the officers, directors, and principal shareholders of companies disclose the extent of their
ownership of equity securities of the company and any changes in the ownership. Section
16(b) permits companies to recover trading profits realized by such people arising from short-
swing transactions in company securities. Do you think that, as a result of these laws, the
government will be forced to spend more money on its auditing and enforcement efforts?
Explain.
Answer:
No. These changes in the law allow the company that is affected by insider trading to reap the benefits from
stopping the action or reporting it. Therefore, the market itself helps enforce the law.
Blooms: Understand
109. The manager of Roy's Video noticed a newspaper advertisement by a rival store that
erroneously claimed, "We are the only firm in town that does not sell pornographic videos."
He initially dismissed the deceptive advertisement but decided to reconsider his course of
action when the rival refused to stop running the advertisement. In the interim, numerous
churches and other organizations boycotted Roy's Video, resulting in an estimated loss of
$25,000. Do you think it would be advisable for Roy to seek legal counsel? Explain.
Answer:
The Lanham Act, in concert with the Clayton Act, allows someone who is harmed by deceptive advertising to
stop the deceptive practice and receive treble damages. Roy should seek legal counsel to see whether he might be
entitled to $75,000 in damages.
Blooms: Understand
110. You are the CEO of a firm with an industry HHI equal to 1,000. Your firm currently
controls 20 percent of the market. The board of trustees wants you to consider merging with a
firm that controls 10 percent of the market. Should you be concerned about antitrust
proceedings? Explain.
Answer:
14-45
Before merging, the two firms have a total contribution to the industry HHI of
10,000 [(0.2)2 + (0.1)2)] = 500.
After merging, the firms have a contribution of
(0.3)2 × 10,000 = 900
to the HHI. That is, the merger will lead to an increase in HHI from 1,000 to 1,400. The new merger guidelines
written by the FTC stipulate that if the HHI is less than 1,500, the merger is likely to be allowed. Therefore, you
should not be concerned about antitrust proceedings.
Blooms: Apply
111. Suppose the external marginal cost of pollution is MCexternal = 5Q and the internal
marginal cost is MCinternal = 10Q. Further, assume the inverse demand for the product, Q, is
given by P = 90 – Q.
a. What is the socially efficient level of output?
b. How much output would a competitive industry produce?
c. How much output would a monopoly produce?
d. Discuss three ways government can induce firms to produce the socially efficient level of
output.
Answer:
a. The socially efficient level of output is such that P = MCexternal + MCinternal. Given these cost and demand
conditions, this implies 90 − Q = 15Q, or Q = 5.625 units.
b. A competitive industry would produce such that P = MCinternal, which in this case reduces to 90 − Q = 10Q.
Solving for Q yields a competitive industry output of Q = 8.18 units.
c. A monopoly would produce such that MR = MCinternal. In this case, this condition implies 90 − 2Q = 10Q.
Solving for Q yields the monopoly output of 7.5 units.
d. The government could sell permits to the firms to allow them to emit negative externalities, or impose a
production tax on the firms in the industry. Notice that, since the monopoly is closest to the socially efficient
level of output, a lower tax would be required for it than for the competitive industry.
Blooms: Apply
112. Suppose the supply of wine by domestic firms is QSD = 5 + P and the supply of wine by
foreign firms is QSF = 5 + P. The domestic demand for wine is given by Qd = 40 – P.
a. In the absence of a quota, what is the total supply of wine?
b. What are the equilibrium price and quantity of wine?
c. Suppose a quota of 5 units is imposed. What is the total supply of wine?
d. Determine the equilibrium price and quantity of wine in the domestic market under the
quota of 5 units.
e. What is the loss in consumer surplus caused by the quota?
Answer:
14-46
a. The total supply of wine is the horizontal sum of domestic and foreign supplies:
QSTotal = QSD + QSF = (5 + P) + (5 + P) = 10 + 2P
b. Equating QSTotal with Qd yields 10 + 2P = 40 − P, or P = $10. The equilibrium total quantity is given by Q Total =
40 − 10 = 30 units.
c. With a quota of 5 units, Q STotal = QSD + 5 = 10 + P.
d. With the quota, the equilibrium price and quantity of wine is such that
QSTotal = Qd
10 + P = 40 – P
2P = 30
P = 15
Q = 25
e. The lost consumer surplus is ($5)(25) + .5($15 − $10)(30 − 25) = $137.50. Of this lost consumer surplus,
($5)(25) = $125 is transferred to producers, while the other $12.50 is part of the deadweight loss of the quota.
Blooms: Apply
Difficulty: 03 Hard
14-47

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Chapter 14-A Manager's Guide to Government in the Marketplace

Multiple Choice Questions

2. The purpose of the Clean Air Act (1970) was to:

3. Which of the following is true concerning negative externalities?

8. Insider trading is prohibited by the:

9. Which of the following is NOT a result of certification of skills?

11. Which of the following is antitrust legislation?

13. The presence of government in the market leads to:

14. A price ceiling imposed on a monopoly may:

15. If a price ceiling on a monopolist results in NO shortage:

Learning Objective: 14-06

17. Rent seeking:

18. Which of the following is a public good?

20. When the government imposes an excise tax on foreign imports:

21. In the absence of price regulation, a monopolist:

24. Which of the following is true for a monopoly?

26. The marginal cost of producing a good to society is the:

Topic: Market Failure

31. Which cost measures the pollution cost to society?

32. Which cost measures the cost to society of producing a good?

Learning Objective: 14-03

47. The main purpose of antitrust policy is to:

51. Rent seeking:

52. Which of the following is NOT a pure public good?

54. An unregulated monopolist will likely:

69. Which of the following is true about a lump-sum tariff?

70. A lump-sum tariff imposed on foreign competitors will:

71. An excise tariff imposed on foreign competitors will:

72. Which of the following is true about an excise tariff?

73. According to the Department of Justice's Horizontal Merger Guidelines, a post-merger

Learning Objective: 14-02

75. Which of the following are characteristics of public goods?

76. Nonrivalry, as it relates to public goods, means that:

77. Nonexclusionary, as it relates to public goods, means that:

78. A negative externality:

85. An import quota is:

86. An excise tariff is:

87. A lump-sum tariff is:

$20 Regulated Price

$20 Regulated Price

$20 Regulated Price

$20 Regulated Price

$20 Regulated Price

QSTotal = QSD + QSF = (5 + P) + (5 + P) = 10 + 2P

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