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Econometrics: competition, externalities, Herfindahl-Hirschman index, contestable markets, monopolies

Question 1
When a competitively produced product generates negative externalities in production, the industry will:
- over-produce the good because marginal social cost will exceed marginal social benefit in competitive equilibrium.
- over-produce the good because marginal private cost is less than marginal private benefit in competitive equilibrium.
- under-produce the good because marginal social cost will exceed marginal social benefit in competitive equilibrium.
- under-produce the good because marginal private social cost is less than marginal private benefit in competitive equilibrium in competitive equilibrium.

Question 2
The Herfindahl-Hirschman index is a measure of:
- market concentration.
- income distribution.
- technological progressiveness.
- price discrimination.

Question 3
In contestable markets:
- dominant firms do not worry about possible new competition if they raise their prices and increase profits.
- capital investments are not easily redeployable.
- market performance is consistent with competitive markets even if only a few firms dominate the industry.
- there is little freedom of entry or exit.

Question 4
As a policy option for regulating natural monopoly, average cost pricing is desirable because:
- consumers pay the lowest possible price that will generate sufficient revenue to cover the costs of the natural monopolist.
- allocative efficiency is achieved.
- price is set equal to the minimum value of long-run average cost.
- all of the above.

Question 5
_____ occur whenever a third party receives or bears costs arising from an economic transaction in which the individual (or group) is not a direct participant.
- Pecuniary benefits and costs
- Externalities
- Intangibles
- Monopoly costs and benefits

Question 6
The ____ is equal to the some of the squares of the market shares of all the firms in an industry.
- market concentration ratio
- Herfindahl-Hirschman index
- correlation coefficient
- standard deviation of concentration

Question 7
The antitrust laws regulate all of the following business decisions except:
- collusion.
- mergers.
- monopolistic practices.
- wage levels.

Question 8
Natural monopoly is said to exist when:
- the industry demand curve intersects the firm's average total cost curve at a rate of production below the rate of production consistent with minimum ATC.
- there are high barriers to entry.
- costs are the same for all companies in the industry.
- it is more cost efficient to have multiple firms.

Question 9
The Sherman Act prohibits:
- contracts in restraint of commerce.
- monopolization of an industry.
- marginal cost pricing.
- a and b.

Question 10
Regulatory agencies engage in all of the following activities except:
- controlling entry into the regulated industries.
- overseeing the quality of service provided by the firms.
- setting federal and state income tax rates on regulated firms.
- setting prices that consumers will pay.

Question 11
Patents have been defended by some on the grounds that they stimulate inventive activity. Others have argued for less patent protection because:
- resources are misallocated by the grant of a patent monopoly.
- patents may not be necessary to encourage inventive activity.
- the current patent monopoly period (about 20 years) is too short to encourage any inventive activity.
- a and b only.

Question 12
While the Coase Theorem argues that private voluntary bargaining can result in efficient activity levels when externalities are present, the theorem breaks down when:
- transactions costs are high.
- there are strategic holdouts.
- there are prohibitive notification costs.
- all of the above.

Question 13
Which of the following arguments can be made in favor of laws that mandate drivers to have liability insurance?
- The government knows what is best for society.
- By forcing everyone to have insurance, the cost of insurance falls.
- Asymmetric information is reduced when everyone has insurance.
- Externalities associated with the accidents caused by uninsured motorists impose costs on third parties.

Question 14
Barriers to entry affect market performance because
- competition may cease to become a disciplining force for existing firms.
- firms no longer have incentives to maximize profits.
- sellers can increase prices above minimum average cost without motivating new sellers to enter the industry.
- both a and c.

Question 15
Which of the following public policies restricts competition?
- Licensing
- Patents
- Import quotas
- All of the above

Solution Preview

Question 1
When a competitively produced product generates negative externalities in production, the industry will

- over-produce the good because marginal social cost will exceed marginal social benefit in competitive equilibrium.

Negative externalities impose a cost on society that is not borne by the producer. Because the producer faces lower costs than the making of the good actually creates, it is overproduced.

Question 2
The Herfindahl-Hirschman index is a measure of

- market concentration.

Question 3
In contestable markets

- market performance is consistent with competitive markets even if only a few firms dominate the industry.

See definition of contestable markets.

Question 4
As a policy option for regulating natural monopoly, average cost pricing is desirable because...

- consumers pay the lowest possible price that will generate sufficient revenue to cover the costs of the natural monopolist.

Price is set such that average total cost equals demand. Price still exceeds marginal cost and marginal social benefits exceed marginal social costs. Allocative and productive efficiency are therefore not achieved. Therefore the answer is A. ...

Solution Summary

Multiple choice questions relating to market concentration, externalities, and competition.

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