Student name:__________

TRUE/FALSE - Write 'T' if the statement is true and 'F'

if the statement is false.
1) Price-fixing is illegal under Section 1 of the Sherman
Act.

⊚ true
⊚ false

2) Monopolization is illegal under Section 1 of the

Sherman Act.

⊚ true
⊚ false

3) The U.S. Justice Department, the Federal Trade

Commission, state attorneys general, and injured private
parties can independently file charges against firms under the
Sherman Act.

⊚ true
⊚ false

4) Anticompetitive mergers are illegal under provisions

of the Clayton Act (as amended).

⊚ true
⊚ false

5) Proposed ergonomics regulations are an example of

industrial regulation (rather than social regulation).

⊚ true
⊚ false

Version 1 1
6) Tying agreements are contracts by which retailers
agree to charge the prices that manufacturers set on branded
goods.

⊚ true
⊚ false

7) The Celler-Kefauver Act outlawed interlocking

directorates.

⊚ true
⊚ false

8) The regulation of natural monopolies has been

criticized because it creates a tendency for regulated firms to
use too much labor and too little capital in the production
process.

⊚ true
⊚ false

9) The Celler-Kefauver Act made vertical mergers legal,

provided each firm does not have more than 30 percent of its
relevant market.

⊚ true
⊚ false

10) The legal cartel theory indicates that in any industry regulation is mandatory
where market demand and the long-run average total cost and desirable.
curve intersect close to the latter's minimum, government

⊚ true
⊚ false

11) The Consumer

Version 1 2
Product Safety Commission engages in social regulation,
rather than industrial regulation.

⊚ true
⊚ false

12) The Americans with Disabilities Act of 1990 is an

example of industrial regulation.

⊚ true
⊚ false

13) The cornerstone of antitrust policy in the United States

is generally considered to be the Sherman Antitrust Act of
1890.

⊚ true
⊚ false

14) Antitrust policy pertains to government regulation of

firms’ prices within selected industries, such as utilities.

⊚ true
⊚ false

15) All price discrimination is deemed illegal in antitrust

legislation.

⊚ true
⊚ false

16) Unfair advertising practices are investigated by the

Federal Trade Commission.

⊚ true
⊚ false

Version 1 3
17) The government and courts have not been consistent
in interpreting and enforcing antitrust laws over the years.

⊚ true
⊚ false

18) The rule of reason in antitrust applications means that unfair advantage over its
if a firm has a dominant share of the market, it stands to rivals.
reason that it will exploit its monopoly power to gain an

⊚ true
⊚ false

19) "Behavioralists" in antitrust applications believe that a

firm that dominates a market is not necessarily behaving
unfairly.

⊚ true
⊚ false

20) If a market is defined more broadly, then the chances

that firms in that market will be found to be violating antitrust
laws based on having a monopoly structure will increase.

⊚ true
⊚ false

21) A conglomerate merger is a merger between firms at

different stages of the production process of a product, such
as a merger between a flour milling company and a baking
company.

⊚ true
⊚ false

Version 1 4
22) Strict enforcement of antitrust laws will generally
complement the economic objective of encouraging new
technologies that require large amounts of capital investment.

⊚ true
⊚ false

23) Public regulation rather than public ownership has

been the primary means used in the United States to ensure
that the behavior of natural monopolists is socially acceptable.

⊚ true
⊚ false

24) If the government regulates a natural monopoly and

sets a "fair return" pricing policy, then the regulated firm will
have greater incentive to improve its operating efficiency.

⊚ true
⊚ false

25) According to the legal cartel theory of regulation,

firms desire to have government regulation because it protects
them from competition.

⊚ true
⊚ false

26) Most economists conclude that deregulation has

reduced prices and led to more competition in deregulated
industries.

⊚ true
⊚ false

27) Social regulation

Version 1 5
consists of regulating the behavior of people in society in
order to promote the safety and harmony in neighborhoods.

⊚ true
⊚ false

28) One good example of a government agency involved

mainly in social regulation is the Food and Drug
Administration.

⊚ true
⊚ false

29) Supporters of social regulation contend that it has better environment, and
provided net benefits to society in the form of greater safety, a less discrimination.

⊚ true
⊚ false

MULTIPLE CHOICE - Choose the one alternative that

best completes the statement or answers the question.
30) All of the following can file antitrust charges under
the Sherman Act except

D) the Federal
A) the U.S. Justice Department. Energy Regulatory
B) state attorneys general. Commission.
C) injured private parties.

31) Movie producers A, B, and C secretly meet and agree government would most
to release their summer blockbuster films in sequence, rather likely file charges under
than at the same time. The U.S. Justice Department learns of the
the agreement and files an antitrust suit. The federal

C) Clayton Act.
A) Sherman Act, Section 1.
B) Sherman Act, Section 2.

Version 1 6
 D) Federal Trade Commission Act.

32) Which of the following is least likely to violate the

Sherman Act or the Clayton Act?

customers.
A) Competitive firms A, B, and C meet and agree to D) Large
charge a common price. dominant firm H forces
B) Competitive firms D and E, each with 35 percent buyers to purchase its
market shares, merge into a single firm. product X in order to buy
C) Competitive firms F and G independently charge its popular product Y.
lower prices to frequent customers than to occasional

33) The Sherman Act was designed to

D) make
A) exempt commercial banks from the antitrust laws. monopoly and acts that
restrain trade illegal.
B) make interlocking directorates legal.
C) prohibit misleading and antisocial advertising.

34) Which one of the following acts declared "every

contract, combination . . . or conspiracy, in restraint of trade
or commerce among the several states . . . to be illegal"?

D) the Interstate
A) the Wheeler-Lea Act Commerce Act
B) the Federal Trade Commission Act
C) the Sherman Act

35) The Clayton Act of 1914

commerce that tend to

A) outlawed price discrimination, tying contracts, reduce competition.
acquisition of stocks of competing corporations, and C) outlawed
interlocking directorates that lessen competition. vertical and conglomerate
B) prohibited unfair or deceptive acts or practices in mergers.

Version 1 7
 D) prohibited one firm from acquiring the assets of
another when the effect was to limit competition.

36) A function of the Federal Trade Commission is to

D) prevent insider
A) investigate instances of faulty and misleading trading in securities
advertising. markets.
B) establish railway rates for interstate railroads.
C) ban or recall unsafe consumer products.

37) Which one of the following is not prohibited by the

original Clayton Act?

lessen competition
A) the purchase of the stocks of rival firms that D) price
lessens competition discrimination that lessens
B) the purchase of the assets of rival firms that competition
lessens competition
C) an exclusive dealer or tying agreements that

38) Which of the following is directly illegal under the

Sherman Act?

D) interlocking
A) price discrimination directorates
B) tying contracts
C) price-fixing

39) Tying contracts are illegal under the

D) Celler-
A) Wagner Act of 1935. Kefauver Act of 1950.
B) Clayton Act of 1914.
C) FTC Act of 1914.

Version 1 8
40) Suppose Slow Ketchup requires that, as a condition of available its new sales
purchase, all restaurants using its product must buy and make product. This arrangement
is an example of

D) price
A) price-fixing. discrimination.
B) an interlocking directive.
C) a tying contract.

41) Which of the following laws prohibited mergers by

stock acquisition if the effect was to lessen competition?

D) Sherman Act
A) Celler-Kefauver Act of 1950 of 1890
B) Wheeler-Lea Act of 1938
C) Clayton Act of 1914

42) Which of the following gave the Federal Trade and misleading
Commission responsibility to protect the public against false advertising?

D) Sherman Act
A) Celler-Kefauver Act of 1950 of 1890
B) Wheeler-Lea Act of 1938
C) Clayton Act of 1914

43) Which of the following amended the Clayton Act's

prohibition against mergers that substantially lessen
competition?

D) Sherman Act
A) Celler-Kefauver Act of 1950 of 1890
B) Wheeler-Lea Act of 1938
C) Clayton Act of 1914

44) Which of the following made monopoly and restraints

of trade criminal offenses against the federal government?

Version 1 9
 D) Sherman Act
A) Celler-Kefauver Act of 1950 of 1890
B) Wheeler-Lea Act of 1938
C) Clayton Act of 1914

45) Tying agreements

their products.
A) establish common boards of directors for D) prohibit firms
previously competing firms. from selling their products
B) obligate a purchaser of product X to also buy outside of specified
product Y from the same seller. geographic areas.
C) allow manufacturers to specify the retail prices of

46) Responsibility for enforcing the antitrust laws rests

D) solely with the

A) with the Interstate Commerce Commission. Department of Justice.
B) with both the Department of Justice and the
Federal Trade Commission.
C) solely with the Federal Trade Commission.

47) The Celler-Kefauver Act of 1950

D) created the
A) outlawed price-fixing. Civil Aeronautics Board
B) amended the Sherman Act. (CAB).
C) amended the Clayton Act.

48) The Celler-Kefauver Act of 1950

D) prohibited any
A) modified patent legislation by reducing the firm from buying the stock
number of years over which a patent is applicable. of another firm where the
B) prohibited any firm from acquiring the real assets effect was to lessen
of another firm where the effect was to lessen competition. competition.
C) declared all conglomerate mergers to be illegal.

Version 1 10
49) Suppose the courts declare that XYZ Corporation pay ABC Corporation a
violated the antitrust laws and as a result ABC Corporation monetary award of
lost $100 million of profits. XYZ Corporation will have to

C) $150 million.
A) $100 million. D) $300 million.
B) $33.3 million.

50) Price-fixing

D) is illegal under
A) is prohibited by Section 7 of the Clayton Act. terms of the Federal Trade
B) is a per se violation of the antitrust laws. Commission Act.
C) may be either legal or illegal depending on
whether or not it produces above-normal profits.

51) The antitrust laws are based on the

D) view that all

A) creative destruction view of competition. negative externalities
B) idea that competition leads to greater economic should be eliminated by
efficiency than does a monopoly. government action.
C) view that nonprice competition should be strictly
regulated by government.

52) The Sherman Act

D) exempted the
A) was declared unconstitutional in 1895. railroad and
B) provided for government regulation of the communications industries
railroads. from the antitrust laws.
C) declared monopoly and restraints of trade to be
illegal.

53) The main purpose

of the antitrust laws is

Version 1 11
 D) to regulate
A) to encourage firms to produce where P > MC. natural monopolies.
B) to eliminate both negative and positive
externalities.
C) to prevent the monopolization of industries.

54) The antitrust laws are enforced by the

Commission.
A) Federal Bureau of Investigation. D) Department of
B) Antimonopoly Court of Appeals. Commerce.
C) Federal Justice Department and the Federal Trade

55) Interlocking directorates are

Act of 1950.
A) legal if the two firms have small market shares. D) illegal under
B) illegal under provisions of the Federal Trade provisions of the Clayton
Commission Act of 1914. Act of 1914.
C) illegal under provisions of the Celler-Kefauver

56) The Federal Trade Commission

D) regulates such
A) is empowered to hold public hearings to transportation industries as
investigate unfair practices. railroads and trucking.
B) prohibits interlocking directorates in interstate
industries.
C) regulates airline fares.

57) The government was successful in gaining an antitrust

conviction in the

D) DuPont
A) U.S. Steel case. cellophane case.
B) IBM case.
C) Alcoa case.

Version 1 12
58) In which of the following cases did the final court
decision result in a breakup of the firm into competing
businesses?

D) DuPont
A) Microsoft case cellophane case
B) Standard Oil case
C) U.S. Steel case

59) In which of the following cases was the firm found

not guilty of violating the Sherman Act?

D) DuPont
A) Standard Oil case cellophane case
B) Microsoft case
C) Alcoa case

60) In the Microsoft antitrust case, the federal government

said in essence that

Clayton Act.
A) the mere presence of monopoly violated the D) the case was
Sherman Act, irrespective of Microsoft's behavior. similar to the U.S. Steel
B) Microsoft was a "bad monopoly." case of 1920.
C) Microsoft was generally a "good monopoly" but
that its tying contracts involving Internet Explorer violated the

61) In which of the following sets of antitrust cases did the

government gain convictions?

D) the U.S. Steel

A) the U.S. Steel case and the Microsoft case case and the Alcoa case
B) the Alcoa case and the Microsoft case
C) the DuPont cellophane case and the AT&T case

62) In which of the following pairs of antitrust cases did the firms prevail against

Version 1 13
the antitrust charges leveled against them?

D) the U.S. Steel

A) the Alcoa case and the Microsoft case case and the Microsoft
B) the U.S. Steel case and the Alcoa case case
C) the DuPont cellophane case and the U.S. Steel
case

63) The "rule of reason" indicated that

violation of the antitrust

A) if less than four firms account for three-fourths of laws.
an industry's sales, the industry is in violation of the Sherman D) only contracts
Act. and combinations that
B) social regulation should not be enforced unreasonably restrain trade
unreasonably so that costs exceed benefits. violate the antitrust laws.
C) the mere possession of monopoly power is a

64) In the Alcoa case of 1945, the courts held that

antitrust legislation.
A) the mere possession of monopoly power is a D) firms that sell
violation of the antitrust laws. more than one-half of their
B) only contracts and combinations that output overseas are exempt
unreasonably restrain trade are in violation of the Sherman from antitrust.
Act.
C) retail and wholesale firms are exempt from

65) The basic issue in the DuPont cellophane case was

D) the rule of
A) whether trade crossed state lines. reason.
B) defining the relevant market.
C) structure versus behavior.

66) Suppose a court

rules that the ABC

Version 1 14
Corporation is in violation of the antitrust laws because it decision is consistent with
produces 70 percent of the output of its industry. This the

D) legal cartel
A) U.S. Steel case. theory of regulation.
B) Alcoa case.
C) behavioralist approach to antitrust.

67) The Alcoa case

D) decision was
A) was based on an approach to antitrust based on consistent with an
monopoly structure. approach focusing on
B) struck down the treble damages provision of the monopoly behavior.
antitrust laws.
C) called for federal regulation of any industry with a
four-firm concentration ratio in excess of 50 percent.

68) In the U.S. Steel case of 1920, the courts held that

D) the fact that

A) the structure of an industry is more important than U.S. Steel possessed
its behavior in determining violations of the antitrust laws. monopoly power was a
B) any firm that faces substantial import competition violation of the Sherman
is exempt from the antitrust laws. Act.
C) although U.S. Steel possessed monopoly power, it
had not violated the Sherman Act because it had not
unreasonably used that power.

69) Restructuring of a major industry resulted from the

D) DuPont
A) U.S. Steel case. cellophane case.
B) AT&T case.
C) IBM case.

70) In the U.S. Steel case, the court ruled that

Version 1 15
 illegal, per se.
A) even though a firm's behavior might be legal, the D) the company
mere possession of monopoly power was in violation of the violated the Clayton Act
Sherman Act. and therefore should be
B) only monopolies that unreasonably restrain trade dissolved into several
are subject to antitrust action under the Sherman Act. competing firms.
C) when made by dominant firms, tying contracts are

71) The decision in the U.S. Steel case

companies.
A) reflected a monopoly behavior approach to D) ruled that U.S.
antitrust. Steel had engaged in
B) reflected a monopoly structure approach to illegal price-fixing.
antitrust.
C) divided U.S. Steel into a number of smaller

72) Which of the following is most likely to increase the

Herfindahl index of a particular industry?

industry's major firms

A) a horizontal merger between two of the industry's D) an agreement
largest firms by all the industry firms to
B) a vertical merger between one of an industry's divide up the market
largest firms and one of the many input suppliers in the among them
resource market
C) a conglomerate merger involving one of the

73) Which of the following findings would be the most merger under terms of the
likely to lead the U.S. Justice Department to block a corporate Clayton Act?

the industry
A) a buyer-seller relationship between the two firms D) evidence that
one of the firms is highly
B) a high pre-merger Herfindahl index in the industry unprofitable
and a large boost in the index because of the merger
C) a low pre- and post-merger concentration ratio in

Version 1 16
74) A merger between an automobile manufacturer and a
maker of automobile tires is an example of a

D) tying contract.
A) conglomerate merger.
B) horizontal merger.
C) vertical merger.

75) Which one of the following is most likely to increase

the Herfindahl index of a particular industry?

firms
A) a conglomerate merger D) a horizontal
B) a vertical merger merger
C) a price-fixing arrangement among all the industry

76) A merger between a maker of household detergents

and a fast-food chain would be an example of

D) a tying
A) a horizontal merger. contract.
B) an interlocking directorate.
C) a conglomerate merger.

77) A conglomerate merger

producing the same or

A) can extend the line of products sold, extend the similar products and
territories in which products are sold, or combine totally selling them in the same
unrelated products. geographical market.
B) is defined as a merger involving two firms that D) is illegal, per
previously had a buyer-seller relationship. se.
C) is defined as a merger involving two firms

78) A vertical merger involves a combining of one or

more firms

Version 1 17
 D) operating at
A) as the result of one firm purchasing the assets of the same stage of the
the other. production process.
B) that are operating in entirely different industries.
C) operating at different stages of the production
process in a particular industry.

79) A merger of several firms operating in different chain, and a brokerage

industries—for example, a trucking company, a fast—food house—is called

D) a horizontal
A) an integrated merger. merger.
B) a conglomerate merger.
C) a vertical merger.

80) A firm charged with monopolizing a market is less

likely to be convicted if

means.
A) the court accepts a broad definition of the market. D) it sells its
product to other firms,
B) the court accepts a narrow definition of the rather than directly to
market. consumers.
C) it has gained its monopoly through abusive

81) Price-fixing is considered to be a per se violation of

the antitrust laws because

D) a guilty verdict
A) a guilty verdict requires proof of injury to need only show that there
consumers. was a conspiracy to fix
B) a guilty verdict requires proof of injury to other prices, not that it
competitors. succeeded.
C) the rule of reason is applicable.

82) Conspiracies to fix

prices are

Version 1 18
 D) more tolerated
A) illegal under the Clayton Act. by government today than
B) illegal under the Celler-Kefauver Act. two or three decades ago.
C) per se violations of the antitrust laws.

83) Which of the following is correct?

D) Conglomerate
A) Vertical mergers are more likely to be acceptable mergers occur when two or
under antitrust laws than are horizontal mergers. more firms at various
B) A vertical merger entails the merging of two or stages in a good's
more competing firms. production are combined.
C) Horizontal mergers are more likely to be
acceptable under antitrust laws than are vertical mergers.

84) Which one of the following is not correct?

D) In antitrust
A) In antitrust cases defendants attempt to define the cases the prosecution
relevant market broadly. attempts to define the
B) The courts have varied over time in their relevant market narrowly.
interpretations of the antitrust statutes.
C) Antitrust suits can be originated only by the
Federal Trade Commission.

85) Antitrust authorities are least likely to take action

against

D) price-fixing.
A) conglomerate mergers.
B) horizontal mergers.
C) interlocking directorates.

86)

Market Firms in
Share of Industry

Version 1 19
I 1 2 3 4 5 6 a5 5
n p
d p
u a
s D2 2 2 2 1 1
t e0 0
r l
y t
A3 3 2 2 - - a
l0 0 The table shows market
p
shares of firms in
h
hypothetical industries.
a
Assume these are distinct
B8 1 5 3 1 1
industries with no buyer-
e0 0
t seller relationships or
a competition among them.
K2 2 2 2 - -
The Herfindahl index for
Kappa is

C) 100,000.
A) 2,500. D) 5,000.
B) 100.

87)

Market a
Share of B8 1 5 3 1 1
Firms in e0 0
Industry t
I 1 2 3 4 5 6 a
n K2 2 2 2 - -
d a5 5
u p
s p
t a
r
D2 2 2 2 1 1
y
e0 0
A3 3 2 2 - - l
l0 0 t
p a
h

Version 1 20
The table shows market shares of firms in hypothetical with the greatest market
industries. Assume these are distinct industries with no buyer- power as measured by the
seller relationships or competition among them. The industry Herfindahl index is

C) Kappa.
A) Beta. D) Delta.
B) Alpha.

88)

Market K2 2 2 2 - -
Share of a5 5
Firms in p
Industry p
I 1 2 3 4 5 6 a
n D2 2 2 2 1 1
d e0 0
u l
s t
t a
r The table shows market
y
shares of firms in
A3 3 2 2 - - hypothetical industries.
l0 0
Assume these are distinct
p
industries with no buyer-
h
a seller relationships or
competition among them.
B8 1 5 3 1 1
e0 0
A merger between Firm 2
t and Firm 3 in Alpha would
a be a

D) conglomerate
A) vertical merger. merger.
B) horizontal merger.
C) diagonal merger.

Version 1 21
 Market The table shows market
Share of shares of firms in
Firms in hypothetical industries.
each Assume these are distinct
Industry industries with no buyer-
I 1 2 3 4 5 6 seller relationships or
n competition among them.
d
A merger between Firm 1
u
in Alpha and Firm 2 in
s
t Delta would be a
r
y
A3 3 2 2 - -
l0 0
p
h
a
B8 1 5 3 1 1
e0 0
t
a
K2 2 2 2 - -
a5 5
p
p
a
D2 2 2 2 1 1
e0 0
l
t
a

Version 1 22
 D) diagonal
A) vertical merger. merger.
B) horizontal merger.
C) conglomerate merger.

90)

Market K2 2 2 2 - -
Share of a5 5
Firms in p
Industry p
I 1 2 3 4 5 6 a
n D2 2 2 2 1 1
d e0 0
u l
s t
t a
r The table shows market
y
shares of firms in
A3 3 2 2 - - hypothetical industries.
l0 0
Assume these are distinct
p
industries with no buyer-
h
a seller relationships or
competition among them.
B8 1 5 3 1 1
e0 0
The government would be
t most likely to challenge a
a merger between

D) Firm 4 in
A) Firm 1 in Alpha and Firm 6 in Delta. Alpha and Firm 3 in
B) Firms 3 and 4 in Beta. Kappa.
C) Firms 1 and 2 in Kappa.

91)

Market I 1 2 3 4 5 6
Share of n
Firms in d
Industry u

Version 1 23
s D2 2 2 2 1 1
t e0 0
r l
y t
A3 3 2 2 - - a
l0 0 The table shows market
p shares of firms in
h hypothetical industries.
a
Assume these are distinct
B8 1 5 3 1 1 industries with no buyer-
e0 0 seller relationships or
t
competition among them.
a
Those who focus on
K2 2 2 2 - -
monopoly structure would
a5 5
most likely assert that there
p
p is a violation of antitrust
a law in which industry?

C) Kappa
A) Alpha D) Delta
B) Beta

92) Suppose the firms in a five-firm industry have market Herfindahl index for the
shares of 30, 30, 20, 10, and 10 percent, respectively. The industry is

C) 90.
A) 1,900. D) 10,000.
B) 2,400.

93) Suppose that two firms in an industry with a to 5,500. The antitrust
Herfindahl index of 5,000 announce a merger. The U.S. authorities will most likely
Justice Department concludes the merger will boost the index

possible.
A) ignore this merger because of the relatively small D) prevent the
increase in the Herfindahl index. merger, contending that it
B) allow the merger but watch the new firm carefully violates the Clayton Act.
for future violations of the antitrust laws.
C) allow the merger if foreign entry to the industry is

Version 1 24
94) Suppose that two firms in an industry that has a to 1,050. The antitrust
Herfindahl index of 1,000 announce a merger. The U.S. authorities will most likely
Justice Department concludes the merger will boost the index

D) allow the
A) ignore this merger because of the relatively small merger but watch the new
size of, and increase in, the Herfindahl index. firm carefully for future
B) prevent the merger, contending that it violates the violations of the antitrust
Clayton Act. laws.
C) allow the merger if foreign entry to the industry is
possible.

95) The view that the antitrust laws should be enforced

relatively leniently because of the tendency for monopoly
power to erode over time is consistent with the view that

sufficient.
A) monopoly structure is a sufficient basis for D) an active
breaking up monopolies. antitrust policy is required.
B) only firms behaving as monopolists should be
broken up.
C) a laissez-faire perspective on antitrust is

96) The view that the antitrust laws need to be strongly

enforced to prevent illegal business behaviors,
monopolization of markets, and allocative inefficiency is
known as the

D) active antitrust
A) structuralist view of antitrust. perspective.
B) behavioralist view of antitrust.
C) laissez-faire perspective on antitrust.

97) Economists who adhere to the laissez-faire antitrust

perspective

A) view

Version 1 25
competition as a long-run dynamic process in which firms D) contend that
battle for dominance of markets but rarely can sustain such large, dominant firms
dominance once it is achieved. should be broken into
B) believe the antitrust laws are as important today as smaller competitive firms
they were when they were passed in the early 1900s. and then government
C) say that an industry's structure, which is based on should stand back and let
economies of scale, usually predicts the behavior of the competition prevail.
industry firms.

98) A firm is likely to be a natural monopoly

range of output.
A) when the demand for its product or service is D) because
inelastic. government grants it an
B) if it is producing an inferior good. exclusive franchise.
C) if economies of scale are experienced over the full

99) Which of the following is characteristic of a regulated

natural monopoly?

C) the provision
A) extensive economies of scale of an essential service
B) the wasteful duplication of capital facilities in the D) all of these
event of competition

100) Suppose the transportation industry has been regulated action. This is consistent
for many years. Government now proposes to deregulate the with the
industry, only to find that firms in the industry oppose this

D) Alcoa and U.S.

A) public interest theory of regulation. Steel court decisions.
B) theory of natural monopolies.
C) legal cartel theory of regulation.

101) Using antitrust law to split up an unregulated natural

monopoly into several competing firms

Version 1 26
 product price.
A) would reduce product price. D) would reduce
B) would increase product price. average total cost.
C) might either increase product price or reduce

102) A major criticism of industrial regulation is that

D) regulatory
A) it has been applied to virtually all major U.S. commissions have
corporations in the post-Second World War period. frequently caused natural
B) marginal cost pricing has created an monopolies to go bankrupt.
underallocation of resources.
C) by allowing a fair return price, it gives natural
monopolists little incentive to contain costs.

103) Critics of the regulation of natural monopolies contend

that

occur.
A) regulation increases the incentive of firms to D) the industry
lower costs. may "capture" or control
B) regulated firms may use creative accounting to the regulatory commission.
reduce costs, prices, and profits.
C) when rates of return are based on the value of real
capital, an uneconomic substitution of labor for capital may

104) A market in which the entire demand for a good or

service can be satisfied at the least cost by a single firm is a

D) perfect market.
A) horizontal market.
B) natural monopoly.
C) contestable market.

105) The legal cartel

theory of regulation argues
that

Version 1 27
 D) the
A) regulation encourages firms to inflate their government is the logical
production costs. agency to protect
B) firms in certain industries want to be regulated consumers from natural
rather than face the rigors of competition. monopolies.
C) social regulation has been carried beyond the
point at which marginal benefits and marginal costs are equal.

106) The public interest theory of industrial regulation

contends that

D) firms in some
A) while industrial regulation is sound in theory, industries want to be
bureaucrats allow monopolists to obtain excessive profits. regulated.
B) regulated monopolies are tantamount to legal
cartels.
C) the objective of regulation is to protect the public
from the market power inherent in natural monopolies.

107) Which one of the following is concerned with

industrial regulation, as distinct from social regulation?

D) Environmental
A) Occupational Safety and Health Administration Protection Agency
B) Consumer Products Safety Commission
C) Federal Communications Commission

108) All of the following are regulatory commissions

dealing with industrial regulation (as distinct from social
regulation) except the

D) 50 state public
A) Food and Drug Administration. utility commissions.
B) Federal Energy Regulatory Commission.
C) Federal Communications Commission.

109) Where there is natural monopoly, government is most likely to implement

Version 1 28
 D) an externality
A) social regulation. containment policy.
B) antitrust policy.
C) industrial regulation.

110) The main purpose of industrial regulation is to

D) reduce X-
A) lower price to marginal cost. inefficiency.
B) lower price to average total cost such that the firm
earns a fair return.
C) break monopolies into competing firms.

111) Critics of industrial regulation say that such regulation

D) suffers from
A) contributes to X-inefficiency. the free-rider problem.
B) benefits small firms at the expense of large firms.
C) creates insurmountable principal-agent problems.

112) Critics of industrial regulation say that such regulation

D) has resulted
A) benefits small firms at the expense of large firms. mainly from the paradox of
voting.
B) perpetuates monopoly long after new technology
has eroded natural monopoly.
C) creates insurmountable principal-agent problems.

113) Overall, economists believe that deregulation of

industries formerly subjected to industrial regulation

society.
A) has been a clear failure.
B) is neutral in its impact on society's well-being,
creating minimal net benefits at best.
C) has produced large net benefits for consumers and

Version 1 29
 D) has produced sizable efficiency gains in the
communications industry, but not in the transportation
industry (railways, trucking, airlines).

Version 1 30
114) The largest efficiency gains from deregulation have
occurred in the

D) airlines,
A) natural gas and cable television industries. trucking, and railroad
B) cable television and railroad industries. industries.
C) communications and stock-brokering industries.

115) Social, as distinct from industrial, regulation is the

major focus of the

D) Consumer
A) Federal Trade Commission. Product Safety
B) Federal Energy Regulatory Commission. Commission.
C) Federal Communications Commission.

116) Defenders of social regulation point out that

over the past two decades.

A) social regulation is a better alternative than D) social
unregulated natural monopoly. regulations reduce product
B) critics who stress the high administrative and prices.
compliance costs of social regulation underestimate the social
benefits that the regulations produce.
C) the number of regulatory agencies has declined

117) Social regulation differs from industrial regulation in

that

D) industrial
A) social regulation applies to virtually all industries, regulation regulates
while industrial regulation applies to a restricted number. products, whereas social
B) industrial regulation is involved in the details of regulation regulates prices.
the production process, while social regulation is not.
C) social regulation has expanded less rapidly in
recent years than has industrial regulation.

Version 1 31
118) Critics of social regulation argue that it

for large firms.

A) causes deflation. D) improves
B) violates the due process clause of the U.S. allocative efficiency.
Constitution.
C) is a relatively greater burden for small firms than

119) Which one of the following is concerned with social

regulation?

D) Federal Energy
A) Equal Employment Opportunity Commission Regulatory Commission
B) Federal Communications Commission
C) Sherman Commission

120) The optimal amount of social regulation occurs where

the marginal benefit of such regulation

D) is at its
A) equals the marginal cost. maximum.
B) exceeds the marginal cost by the greatest amount.
C) is zero.

121) Congressional representatives have called for if passed, would be a good

extensive ergonomics regulations to reduce strains and example of
injuries from repetitive activities by workers. Such regulation,

D) social
A) industrial regulation. regulation.
B) the principal-agent problem.
C) the free-rider problem.

122) (Consider This) The Consider This box "Of Sea Fish recent antitrust cases
and eBooks (and Other Things in Common)" lists examples of involving

Version 1 32
 D) horizontal
A) monopolization. mergers.
B) tying contracts.
C) price-fixing.

123) (Consider This) According to the Consider This box

"Of Sea Fish and eBooks (and Other Things in Common)",
which of the following firms were convicted for horizontal
price-fixing?

D) Apple, Harper
A) Dell and Gateway (personal computer makers) Collins, and Penguin (e-
B) Boeing and Airbus (aircraft manufacturers) books)
C) Heinz and Del Monte (food product firms)

124) (Consider This) According to the Consider This box to fix the price of
"Of Sea Fish and eBooks (and Other Things in Common)", construction rebar in the
firms from which country, in 2018, were fined for colluding United States?

C) Japan
A) Korea D) Germany
B) France

125) (Last Word) In 1994, the U.S. Department of Justice

stopped which of the following practices?

browsers
A) airlines explicitly agreeing to divide the market so D) price-fixing by
that each carrier could have a local monopoly Japanese, German, and
B) airlines preposting fare changes as a form of tacit Swedish auto parts makers
collusion
C) Microsoft using its monopoly power to coerce
computer manufacturers to favor Internet Explorer over rival

126) (Last Word) In

2000, Microsoft was fined
$2.7 billion for

Version 1 33
 D) deliberately
A) using anticompetitive means to promote its pricing Windows 95 and
Internet Explorer web browser. 98 below marginal cost to
B) monopolizing the market for word processing monopolize the market for
software. operating systems for
C) conspiring with Netscape and Sun to monopolize personal computers.
the market for Internet browsers.

127) (Last Word) Google was fined $5 billion by European

Union antitrust officials for

D) using its
A) conspiring with Microsoft to ensure that Google monopoly power to require
and Microsoft products were bundled. all computers sold in
B) coercing smartphone manufacturers to install Europe to support Google
Google search bars over competing companies search bars. Chrome.
C) using pricing algorithms to price-fix with other
Internet sellers.

128) (Last Word) What problem is created for antitrust

regulators by online pricing algorithms?

discovering price-fixing.
A) Even if the algorithms produce collusive prices, D) Online pricing
the lack of an agreement makes it difficult to prosecute under algorithms are
current antitrust law. programmed to ensure that
B) The encrypted data does not allow regulators to there is just enough of a
determine whether prices are converging to a level consistent gap between prices across
with collusion. firms that collusion would
C) Online pricing algorithms are programmed to be impossible to prove.
randomly vary prices to prevent antitrust regulators from

129) Laws and government actions designed to prevent

monopoly and to promote competition are the focus of

C) antitrust
A) social regulation.
B) industrial regulation.

Version 1 34
policy.
D) incomes policy.

Version 1 35
130) Government regulation of firms’ prices or "rates" in
selected industries is the focus of

D) incomes
A) social regulation. policy.
B) industrial regulation.
C) antitrust policy.

131) Antitrust laws are essentially

D) anti-
A) anti-monopoly. competition.
B) anti-banking.
C) anti-finance.

132) The basic purpose of antitrust laws is to

D) enforcelaws
A) provide subsidies for American business. that restrict competition.
B) limit monopoly power in industry.
C) control prices to protect consumers.

133) Dominant firms that formed in several industries in the single decision group, were
U.S. in the 1870s and 1880s, which assigned control to a referred to as

D) single-seller
A) trusts. monopoly.
B) mergers.
C) tying contracts.

134) Which of the following results will not occur in a

monopolistic market?

B) The price will

A) The monopolist will maximize profits by setting a be higher than what would
price that's higher than marginal cost. prevail in a competitive

Version 1 36
market. competitive market.
C) In monopoly pricing, income is, in effect,
transferred from consumers to the monopolist.
D) The output level will be higher than in a

135) The cornerstone of antitrust legislation in the U.S. is

the

D) Federal Trade
A) Clayton Act. Commission Act.
B) Sherman Act.
C) Celler-Kefauver Act.

136) The Sherman Act of 1890 outlawed

D) foreign trade
A) monopoly pricing and foreign trade. and monopolization.
B) price discrimination and monopoly profits.
C) restraint of trade and monopolization.

137) Which antitrust act provided that injured parties could

file suit and, if successful, collect triple damages from
monopolistic violators?

D) Celler-
A) Wheeler-Lea Act Kefauver Act
B) Clayton Act
C) Sherman Act

138) The legislation that prohibited "every contract . . . or

conspiracy, in restraint of trade and commerce" is the

D) Sherman Act.
A) Federal Trade Commission Act.
B) Clayton Act.
C) Celler-Kefauver Act.

Version 1 37
139) Those who may file antitrust lawsuits against violators
of the Sherman Act include the following, except

D) the U.S.
A) injured private parties. Department of Justice.
B) state attorneys general.
C) the U.S. Department of Labor.

140) Which act specifically outlawed price discrimination differences and when it
when such discrimination is not justified based on cost reduces competition?

D) Federal Trade
A) Sherman Act Commission Act
B) Clayton Act
C) Wheeler-Lea Act

141) Tying contracts, which are prohibited under the

Clayton Act, refers to the situation where a producer requires
that a buyer

buying the desired product.

A) can resell the product but only at a higher price D) cannot ever
than the original purchase price. resell the product bought.
B) cannot buy a similar product from other producers
if that buyer wants to continue buying its product.
C) buy another of its products as a condition for

142) If a buyer who wants product A is required by the

seller to buy its products B and C as well, this is called

D) a tying
A) an exclusive contract. contract.
B) profit maximization.
C) competitive pricing.

143) Suppose that you

own a toy store and want

Version 1 38
to buy 100 talking robots. Your supplier will sell you the
robots only if you also agree to buy 200 dolls. This is an
illegal practice called

C) a cartel.
A) monopolistic. D) discriminatory.
B) a tying contract.

144) Which of the following gave the Federal Trade responsibility to enforce
Commission and the U.S. Justice Department the antitrust laws?

D) the Federal
A) the Sherman Act Trade Commission Act
B) the Wheeler-Lea Act
C) the Clayton Act

145) Which act sharpened and clarified the provisions of firms might use to gain
the Sherman Act and sought to outlaw the techniques that monopoly power?

D) Federal Trade
A) Clayton Act Commission Act
B) Wheeler-Lea Act
C) Celler-Kefauver Act

146) A major shortcoming of the Sherman Act was that

D) it did not
A) it was too specific. explicitly state which
B) it was never enforced by the courts. activities were illegal.
C) violators of the act were forced out of business.

147) Interlocking directorates refers to a situation where

C) competing
A) a director of one firm is also a board member of a
competing firm.
B) members of the board of directors of a firm could
not agree on a clear strategy for the firm.

Version 1 39
firms have separate and different members in their boards.
D) a company's board splits into two rival camps
locked in constant struggle.

Version 1 40
148) The legislation that prohibits the acquisition of assets
of another company if the transaction would significantly
reduce competition, thereby closing a loophole in the Clayton
Act, is the

D) Celler-
A) Sherman Act. Kefauver Act.
B) Federal Trade Commission Act.
C) Wheeler-Lea Act.

149) The legislation that prohibited acquisition of stock of

another company if this would significantly lessen
competition is the

D) Wheeler-Lea
A) Federal Trade Commission Act. Act.
B) Clayton Act.
C) Celler-Kefauver Act.

150) Anticompetitive price discrimination, interlocking

directorates, and tying contracts were banned by the

D) Celler-
A) Federal Trade Commission Act. Kefauver Act.
B) Clayton Act.
C) Sherman Act.

151) The administrative agency charged with enforcing the

provisions of the Clayton Act (1914) was established by
additional legislation in the same year. This legislation was
the

D) Federal Trade
A) Celler-Kefauver Act. Commission Act.
B) Wheeler-Lea Act.
C) Sherman Act.

Version 1 41
152) The agency responsible for investigating instances of
fraudulent or misleading advertising is the

D) Uniform
A) Federal Trade Commission. Business Practices
B) Interstate Commerce Commission. Commission.
C) Federal Communications Commission.

153) The Clayton Act prohibits the acquisition of another firm when the
____________ of competing corporations when the acquisition would lessen
acquisition would lessen competition; the Celler-Kefauver competition.
Act prohibits the acquisition of ____________ of one firm by

D) stock; bonds
A) stock; assets
B) assets; stock
C) stock; customers

154) Which of the following does not necessarily violate

antitrust laws?

D) interlocking
A) deceptive advertising directorates
B) price discrimination
C) price-fixing

155) Over the years since the early 1900s, the U.S. enforcing antitrust laws
government’s and courts’ aggressiveness in interpreting and have

D) been declining.
A) been generally increasing.
B) mostly been quite lax.
C) fluctuated between tough and lax.

156) Differences in the

interpretation and the

Version 1 42
enforcement of antitrust laws are in part rooted on the issue of
focus. One such issue pertains to the question of whether the
policy focus should be on

D) monopoly
A) domestic firms versus multinationals. behavior versus monopoly
B) intrastate trade versus interstate trade. structure.
C) monopoly output versus monopoly pricing

157) Differences in the application of antitrust laws are in

part rooted on the issue of how broadly antitrust authorities
should define the relevant

C) price.
A) market. D) firm.
B) product.

158) In the 1911 Standard Oil case, the U.S. Supreme Court
found Standard Oil

D) not guilty of
A) guilty of tax evasion for merger activity. monopolizing the
B) not guilty of tax evasion for merger activity. petroleum industry.
C) guilty of monopolizing the petroleum industry.

159) The so-called rule of reason, based on the 1920 U.S.

Steel case, stipulates that a merger of two firms in an industry
is

of trade.
A) illegal if the firms are large. D) legal because
B) illegal because it increases the monopoly power of the firm will be subject to
the resulting firm. regulatory control.
C) legal if there is no resulting unreasonable restraint

160) The U.S. Steel case of 1920 and the Alcoa case of
1945 dealt with which antitrust question?

Version 1 43
 D) Should
A) To what extent should firms be limited in buying mergers be permitted
plant and equipment from other firms? between firms in closely
B) Should an industry be judged by its behavior or related industries?
by its structure?
C) Should the steel and aluminum industries be
considered natural monopolies?

161) The argument that a large firm dominating an industry laws should be based on
will not necessarily act like a monopolist, as expressed in the firm
1920 U.S. Steel case, suggests that the application of antitrust

D) concentration
A) behavior. ratios.
B) structure.
C) efficiency.

162) The view that the mere possession of monopoly power

is a violation of the antitrust laws, as in the Alcoa case of
1945, suggests that the application of antitrust laws should be
based on industry

C) efficiency.
A) behavior. D) structure.
B) size.

163) The so-called rule of reason in interpreting antitrust should be based on

legislation suggests that the application of antitrust laws industry

C) behavior.
A) efficiency. D) structure.
B) concentration ratios.

164) Which of the following cases established that the mere

possession of monopoly power violated antitrust laws?

A) IBM case of

Version 1 44
1982 D) AT&T case of
B) Microsoft case of 1998 1982
C) Alcoa case of 1945

165) Which of the following U.S. Supreme Court cases are violating antitrust
ruled that only monopolies that "unreasonably restrain trade" laws?

D) AT&T case of
A) DuPont cellophane case of 1956 1982
B) U.S. Steel case of 1920
C) Alcoa case of 1945

166) The decision on the DuPont cellophane case of 1956

dealt with the issue of

D) price-fixing in
A) unfair advertising practices. the chemical industry.
B) determining the relevant market for a particular
product.
C) DuPont's ownership of General Motors stock.

167) One main difference in the rulings on the 1945 Alcoa

case and the 1956 DuPont cellophane case is that the Alcoa
case

D) defined the
A) focused on structure, whereas the DuPont case market narrowly, whereas
focused on behavior. the DuPont case defined
B) focused on behavior, whereas the DuPont case the market broadly.
focused on structure.
C) defined the market broadly, whereas the DuPont
case defined the market narrowly.

168) Which of the following beliefs is not strongly

espoused by the "active antitrust perspective" in policy
enforcement?

Version 1 45
 monopolies.
A) Firms occasionally use illegal tactics to gain over D) When
competitors. competition is insufficient,
B) Antitrust authorities must act like officials in a allocative inefficiencies
football game. will occur.
C) Competition and creative destruction could lead to

169) Which of the following beliefs is not strongly

espoused by the "laissez-faire perspective" in antitrust policy?

D) Monopoly
A) Competition among firms is a battle for pricing and profits create
dominance. incentives for firms that
B) The focus of antitrust policy should be on market are economically
structure rather than behavior. beneficial.
C) Competition and creative destruction could lead to
monopolies.

170) The idea that competition is in some circumstances associated with which
insufficient to achieve allocative efficiency and ensure antitrust perspective?
fairness to consumers and competing firms is most closely

C) passive
A) laissez-faire D) active
B) Herfindahl

171) Which of the following statements is true?

D) The laissez-
A) The active antitrust perspective believes that faire perspective believes
competitive market forces will automatically and actively that an active enforcement
reduce a firm's monopoly power in the long run. of antitrust policy is the
B) The active antitrust perspective believes that the only way to reduce the
government should play the role of officials and umpires and monopoly power of giant
enforce the rules of the competitive game. firms.
C) The laissez-faire perspective views firms as
players in a competitive game who will sometimes violate the
rules in order to gain a huge advantage over others.

Version 1 46
172) In the 1982 AT&T antitrust case, the resolution was an
out-of-court settlement involving a

D) takeover of
A) change in the business practices of AT&T. AT&T by another
B) cease-and-desist order. company.
C) breakup of AT&T into several smaller firms.

173) In the 2000 decision on the Microsoft antitrust case,

the eventual remedy involved a

D) takeover of
A) change in the business practices of Microsoft. Microsoft by the
B) merging of Microsoft with another company. government.
C) breakup of Microsoft into smaller firms.

174) Conglomerate mergers are combinations of

D) firms operating
A) many small firms. at different stages in a
B) firms producing the same product. given production process.
C) firms producing unrelated products.

175) A merger between one firm and another firm that is its
supplier is known as a

D) parallel
A) horizontal merger. merger.
B) vertical merger.
C) conglomerate merger.

176) A merger between McDonald's and Burger King

would be an example of a

B) horizontal
A) conglomerate merger. merger.

Version 1 47
 C) vertical merger.
D) parallel merger.

177) If Tyson Corporation, a firm that raises and processes resulting merger would be
chickens, combined with Kentucky Fried Chicken, the an example of a

D) conglomerate
A) horizontal merger. merger.
B) geographic merger.
C) vertical merger.

178) An example of a horizontal merger is one between an

airline and

D) a car rental
A) a chain of hotels. company.
B) another airline.
C) an aluminum company.

179) The merger of a firm in one industry with another firm

in the same industry that sells similar products is called a

D) conglomerate
A) vertical merger. merger.
B) secondary merger.
C) horizontal merger.

180) A merger that is neither horizontal nor vertical is

called a

D) natural merger.
A) tying merger.
B) conglomerate merger.
C) Herfindahl merger.

Version 1 48
181) Which type of merger is most likely to be the focus of
antitrust scrutiny and enforcement?

C) vertical
A) conglomerate D) natural
B) horizontal

182) Which of the following indexes is used in Federal

merger guidelines?

D) Herfindahl
A) consumer price index index
B) unemployment benefits index
C) employment cost index

183) The sum of the squared values of market shares of

firms in an industry is referred to as the

C) variance value.
A) concentration ratio. D) antitrust index.
B) Herfindahl index.

184) The Herfindahl index measures the

a conglomerate merger.
A) size of the market share of the four largest firms D) effect of per se
in an industry. violation in antitrust cases.
B) sum of the squared values of market shares of
firms in an industry.
C) increase in economic concentration resulting from

185) An industry has a single firm and is found to have for this industry would
violated antitrust laws. The government breaks it up into two change from
firms that will share the market equally. The Herfindahl index

C) 100,000 to
A) 100 to 50.
B) 10,000 to 2,500.

Version 1 49
50,000.
D) 10,000 to 5,000.

Version 1 50
186) An industry has five firms, each with a market share because the Herfindahl
of 20 percent. There is no foreign competition, entry into the index for the industry is
industry is difficult, and no firm is on the verge of
bankruptcy. If two of the firms in the industry seek to merge,
this action would most likely be opposed by the government

500.
A) 2,000 and the merger would increase the index by D) 2,500 and the
500. merger would increase the
B) 2,000 and the merger would increase the index by index by 1,200.
800.
C) 2,500 and the merger would increase the index by

187) If the market is defined more narrowly to include only

a more restricted range of products, then the Herfindahl index
will

D) either increase
A) increase. or decrease.
B) decrease.
C) not be affected.

188) The argument that an industry that is highly should be based on

concentrated will act like an anticompetitive monopolist industry
would support the case that the application of antitrust laws

C) regulation.
A) mergers. D) behavior.
B) structure.

189) In antitrust law, "price-fixing" refers to

C) competitors
A) the government fixing the prices of products of
antitrust violators.
B) a company fixing the price of its own product
regardless of the degree of competition.

Version 1 51
colluding to set their prices collectively.
D) a company paying its suppliers a fixed price for
certain inputs.

Version 1 52
190) In recent years, the strictest application of antitrust
laws has been for

D) limiting
A) breaking up firms with monopoly power. foreign competition.
B) prosecuting firms for price-fixing activity.
C) blocking vertical mergers.

191) Per se violations in antitrust law refer to

D) antitrust cases
A) activities that are illegal in and of themselves. that are pending resolution.
B) violations that are alleged but not yet proven.
C) cases that are subject to the rule of reason.

192) Which of the following is a per se violation?

D) horizontal
A) price discrimination merger
B) price-fixing
C) extremely high Herfindahl index

193) If there was a conspiracy to fix prices, but the

conspiracy did not succeed, the government can still take the
conspiring firm to court for improper conduct. This situation
would be an example of

D) tying contracts.
A) the rule of reason.
B) a cease-and-desist order.
C) a per se violation.

194) Which business practice is rarely challenged by the

government under antitrust laws?

A) price-fixing

Version 1 53
 D) interlocking
B) tying contracts directorates
C) price discrimination

195) The degree of strictness in the enforcement of antitrust

laws often depends on

D) per se
A) political appointments. violations.
B) the rule of reason.
C) use of the Herfindahl index.

196) Antitrust legislation in the United States in recent

decades has

and being ignored.

A) been vigorously and consistently enforced. D) destroyed the
B) been uniformly ignored with respect to American dream for the
enforcement. nation's entrepreneurs.
C) varied between the extremes of being enforced

197) Most economists agree that, overall, U.S. antitrust

policy has been most successful in

mergers.
A) promoting competition and efficiency. D) breaking up
B) remedying existing anticompetitive behavior. monopolies.
C) deterring price-fixing and anticompetitive

198) Which of the following has tended to reduce the

importance of antitrust law, according to some economists?

D) rapidly
A) industrial policy changing technology
B) conglomerate mergers
C) the rule of reason decision

Version 1 54
199) The situation where a single firm can supply the market were split among a
product to an entire market at a lower unit cost than if the number of competing
firms, is called a

D) trust.
A) dominant firm oligopoly.
B) structured market.
C) natural monopoly.

200) Generally speaking, if a firm faces decreasing average

total costs of production throughout its entire range of output,
then

D) the firm is able

A) more firms will enter the market. to earn only a normal
B) it will be unable to remain in business. profit.
C) the firm is a natural monopoly.

201) If economies of scale in an industry are so extensive

that a single firm could serve the entire market at a lower cost
than if the market was split between two or more firms, this
industry is called a(n)

D) restraint of
A) conglomerate trade.
B) natural monopoly.
C) oligopoly.

202) Which of the following is most likely to be a natural

monopoly?

D) steel
A) aircraft manufacturing production
B) auto manufacturing
C) electric utilities

203) What is a major characteristic of a natural monopoly?

Version 1 55
 D) There is a large
A) The firm is a single seller of a resource. range for economies of
B) It sets price equal to marginal revenue. scale.
C) There is extensive product advertising.

204) What is most likely to happen as the output of a

natural monopoly increases over the range of market demand?

D) Average total
A) There is a small decrease in average total cost and cost decreases as output
then it increases as output increases. increases.
B) There is an increase in average total cost and then
it decreases as output increases.
C) Average total cost increases as output increases.

205) The two alternative ways of promoting better

outcomes when a natural monopoly exists are

D) breaking and
A) subsidy and taxation. merging.
B) public ownership and regulation.
C) pricing and incorporation.

206) Industrial regulation generally applies in cases where

organized as a monopoly.
A) society would benefit if a monopoly is prevented D) foreign
from evolving in a certain market. competition in the form of
B) a monopoly already exists, and the government imports is prevalent in the
believes that society would benefit if it is dissolved. market.
C) there is an economic reason for an industry to be

207) The principal objective of industrial regulation is to

C) protect the
A) increase product safety. consuming public from the
B) promote improvements in the quality of life. market power of natural

Version 1 56
monopolies. the problems of water and
D) solve problems associated with industry, such as air pollution.

208) An example of a government organization involved natural monopolies would

primarily in public regulation or industrial regulation of be the

D) Occupational
A) Food and Drug Administration. Safety and Health
B) Environmental Protection Agency. Administration.
C) Federal Energy Regulatory Commission.

209) Legislation designed to regulate natural monopolies

would be based on which theory of regulation?

C) public interest
A) social D) price-fixing
B) legal cartel

210) The public interest theory of regulation stipulates that order to achieve all of the
government regulation of a natural monopoly is necessary in following, except

monopoly power.
A) preventing the natural monopoly from harming D) eventually
society through its monopoly pricing. breaking up the monopoly
B) garnering for society at least part of the cost to achieve competition
reductions from being a natural monopoly. within the industry.
C) avoiding the reduction in output associated with

211) Which would be an example of public ownership as a

response to natural monopolies?

D) U.S. Postal
A) Federal Energy Regulatory Commission Service
B) Federal Trade Commission
C) U.S. Food and Drug Administration

Version 1 57
212) Which is the most valid criticism of the regulation of
natural monopolies and other firms subject to regulation by
regulatory commissions?

D) Regulated
A) It is difficult to find enough honest people to firms may have little
serve on regulatory commissions. incentive to contain costs
B) Such regulation is unnecessary and amounts to since they are assured a
creeping socialism. "fair" return above costs.
C) Many members of such commissions are
appointed rather than being elected.

213) A labor market application of the legal cartel theory of

regulation would be

D) occupational
A) unemployment benefits. licensing.
B) the Full Employment Act.
C) Equal Employment Opportunities provisions.

214) Which theory of regulation assumes that the industry achieve cartel-like
wants to be regulated, in order to reduce competition and conditions?

D) public
A) public interest theory ownership theory
B) legal cartel theory
C) price-fixing theory

215) Regulation of business, according to the legal cartel

theory, stems from

D) firms wanting
A) the public wanting protection from potentially to be regulated in order to
capricious firms. shut off competition.
B) economists who see greater efficiency in
regulated industries.
C) lawyers whose jobs are more secure in cartels.

Version 1 58
216) The public interest theory of regulation

D) guarantees
A) says that industries should be regulated to insure higher rates for natural
quality service at reasonable prices. monopolies.
B) says higher costs may not be passed through to
consumers.
C) protects industries from new competition.

217) The effectiveness of regulation is sometimes criticized

because

with the industries they

A) regulators try to please everybody. regulate.
B) of the high profits in regulated industries.
C) regulators don't know how to regulate industries.
D) regulators usually have been closely associated

218) Which legislative act provided for the industrial

regulation of the railroad industry by the Federal government?

C) Sherman Act
A) Interstate Commerce Act D) Clayton Act
B) Railway Labor Act

219) The theory of regulation developed to deal with

"natural monopolies" is called

D) social
A) legal cartel theory. regulation theory.
B) public interest theory.
C) potential competition theory.

220) What development in the 1970s and 1980s is policy in the last half-
considered one of the most extensive experiments in industrial century?

B) increased
A) extensive antitrust enforcement breakups of monopolies

Version 1 59
 C) deregulation of industries
D) fostering natural monopolies

221) Most economists agree that deregulation in the 1970s

and 1980s greatly benefited consumers in all of the following
industries except

C) airlines.
A) automotive. D) trucking.
B) railroads.

222) The general conclusion of most economists about

deregulation of previously regulated industries in the United
States is that it resulted in

D) decreased
A) increased monopoly power. prices of goods and
B) lower rates of innovation. services.
C) increased bureaucratic control.

223) Government regulation concerning the conditions

under which goods are produced, the impact of production on
society, and the physical qualities of the goods is known as

D) antitrust
A) industrial regulation. regulation.
B) social regulation.
C) economic regulation.

224) Which of the following is mainly involved in social

regulation?

D) the Interstate
A) the Social Security Administration Commerce Commission
B) the Federal Communications Commission
C) the Food and Drug Administration

Version 1 60
225) Social regulation

living of society rather

A) was developed as a substitute for industrial than with details of
regulation. production processes.
B) has declined in importance in recent years.
C) applies more broadly and affects more people than
industrial regulation.
D) is more concerned with the overall standard of

226) The Occupational Safety and Health Administration is

mainly involved in

D) public utility
A) industrial regulation. regulation.
B) social regulation.
C) antitrust regulation.

227) Which of the following is a primary concern of social

regulation?

D) industry
A) price-fixing concentration
B) per se violation
C) product design

228) A major difference between industrial regulation and

social regulation is that industrial regulation

D) focuses on
A) covers many industries across the economy. product design,
B) has expanded rapidly since the 1970s. employment conditions,
C) is targeted at the prices charged, the costs of and the production process.
production, and amount of profit.

229) Which of the following is not a true statement about how social regulation

Version 1 61
differs from industrial regulation?

domain of the federal

A) Social regulation applies to many industries government.
across the board, whereas industrial regulation is more D) Social
specific to one industry. regulation has expanded
B) Social regulation intrudes into the day-to-day rapidly during the same
production processes of companies more so than industrial period in which industrial
regulation. regulation has waned.
C) Social regulation is enforced by state and local
governments, whereas industrial regulation tends to be the

230) Supporters of social regulation contend that

better society.
A) the existence of natural monopoly requires a D) the benefits of
regulatory response from government. public ownership of
B) there is a pressing need to eliminate price-fixing businesses are greater than
in U.S. business. the costs.
C) higher costs are the price that must be paid for a

231) A criticism of social regulation is that it

D) results in many
A) contributes to the growth of natural monopoly. unintended and costly side
B) increases the rate of innovation in the economy. effects.
C) decreases the influence of the Federal government
on business.

232) A caption that could serve as a warning to proponents

of social regulation is

D) "Protect the
A) "There is no free lunch." greatest number."
B) "The rule of reason will prevail."
C) "The public interest will prevail."

Version 1 62
233) A caption that could serve as a retort to opponents of social regulation would be

D) "Restraints of
A) "There is no free lunch." trade must be outlawed."
B) "You can't push on a string."
C) "Less government is not always better."

234) Critics of social regulation would argue that it

D) decreases
A) decreases prices. product innovation.
B) increases output.
C) increases competition.

235) Which of the following is not a major criticism of

social regulation?

D) It will impose
A) It is anticompetitive. a larger burden on small
B) It will increase product prices. firms compared to large
C) It will increase the rate of innovation in the firms.
economy.

236) (Consider This) In 2018, tuna companies StarKist and

Bumble Bee were charged with which antitrust violation?

D) dividing up the
A) monopoly structure market
B) price-fixing
C) tying contracts

237) (Consider This) In 2013, Apple was convicted, along Macmillan, of which
with five publishers, including Harper Collins, Penguin, and antitrust violation?

D) dividing up the
A) monopoly structure market
B) price-fixing
C) tying contracts

Version 1 63
238) (Last Word) Using the Internet, some firms are now charging for similar
employing software that uses pricing algorithms to constantly products. This is making it
adjust their online prices in response to what rivals are easier for the

D) government to
A) firms to collude tacitly in their pricing schemes. enforce industrial
B) government to prove price-fixing. regulation.
C) firms to gain monopoly power over their rivals.

239) (Last Word) A 2000 ruling by a Federal court found

that Microsoft, with its very popular Windows operating
system,

monopoly patents.
A) controlled 95 percent of the PC operating system D) conspired to
market and thus was an illegal monopoly. fix prices on its Windows
B) used anticompetitive practices to maintain and software.
broaden its monopoly power.
C) illegally lobbied members of Congress to obtain

ESSAY. Write your answer in the space provided or on a

separate sheet of paper.
240) What are the basic purposes of antitrust policy?

241) Briefly describe the historical background that gave

rise to antitrust laws and regulation in the United States.

Version 1 64
242) Describe the importance and major features of the
Sherman Act of 1890.

243) How did the Clayton Act of 1914 strengthen and

clarify the intent of the Sherman Act of 1890?

244) What was the importance of the Federal Trade

Commission Act of 1914?

245) Describe the Wheeler-Lea Act of 1938 and name the

company and the amount of that company’s fine for their
2016 violation of this act.

246) How do economists view the overall effectiveness of

antitrust policy?

Version 1 65
247) Why has one presidential administration enforced the
antitrust laws more or less strictly than another?

248) How effective have antitrust laws been in breaking up

existing monopolies?

249) Describe the three types of mergers and give real-

world examples.

250) Why are horizontal mergers more likely to be opposed

than vertical and conglomerate mergers?

Version 1 66
252) How is price discrimination treated under antitrust
laws?

253) What are tying contracts? How are tying contracts

treated by antitrust enforcers?

254) What is a natural monopoly? List the two possible

alternatives for promoting better economic outcomes where
natural monopoly exists.

255) What have been the major outcomes from

deregulation of industry? Give three examples of changes in
particular industries.

256) What is industrial regulation? As a federal regulatory Communications

commission, what is the jurisdiction of the Federal Commission (FCC)?

Version 1 67
257) What is social regulation? As a federal social agency,
what is the jurisdiction of the Food and Drug Administration
(FDA)?

258) What are four criticisms of social regulation?

259) What do critics of social regulation need to remember

about government?

Version 1 68
Answer Key

Test name: Chap 21_22e_Micro_Static

1) TRUE
2) FALSE
3) TRUE
4) TRUE
5) FALSE
6) FALSE
7) FALSE
8) FALSE
9) FALSE
10) FALSE
11) TRUE
12) FALSE
13) TRUE
14) FALSE
15) FALSE
16) TRUE
17) TRUE
18) FALSE
19) TRUE

Version 1 69
20) FALSE
21) FALSE
22) FALSE
23) TRUE
24) FALSE
25) TRUE
26) TRUE
27) FALSE
28) TRUE
29) TRUE
30) D
31) A
32) C
33) D
34) C
35) A
36) A
37) B
38) C
39) B
40) C

Version 1 70
41) C
42) B
43) A
44) D
45) B
46) B
47) C
48) B
49) D
Firms found guilty of violating antitrust laws required to pay
are subject to paying triple (or treble) $300 million to
damages. If, for example, ABC Corporation ABC.
loses $100 million in profits because of a
violation by XYZ Corporation, XYZ will be
50) B
51) B
52) C
53) C
54) C
55) D
56) A
57) C

Version 1 71
58) B
59) D
60) B
61) B
62) C
63) D
64) A
65) B
66) B
67) A
68) C
69) B
70) B
71) A
72) A
73) B
74) C
75) D
76) C
77) A
78) C

Version 1 72
79) B
80) A
81) D
82) C
83) A
84) C
85) A
86) A
To calculate the Herfindahl Index, take the Kappa industry is
sum of the squared market shares of each firm 2,500 [= (25) 2 +
in the industry. The Herfindahl Index for the (25) 2 + (25) 2 +
(25) 2].
87) A
The industry with the greatest market power the sum of the
will be the one with the highest Herfindahl squared market
Index. To calculate the Herfindahl Index, take shares of each firm
in the industry.
88) B
If two firms within an industry merge, that is example, a wood
considered a horizontal merger. Mergers furniture
between two firms from different, unrelated manufacturing
industries are considered conglomerate company merging
mergers. Vertical mergers would involve with a lumber
firms mergers between two firm from company).
different stages in a production process (for

Version 1 73
89) C
90) C
The government is most likely to challenge They are least likely
horizontal mergers that further concentrate to object to
market power in the top firms in an industry. conglomerate
mergers.
91) B
92) B
To calculate the Herfindahl Index, take the
sum of the squared market shares of each firm
in the industry.
93) D
94) A
95) C
96) D
97) A
98) C
99) D
100) C
101) C
102) C
103) D

Version 1 74
104) B
105) B
106) C
107) C
108) A
109) C
110) B
111) A
112) B
113) C
114) D
115) D
116) B
117) A
118) C
119) A
120) A
121) D
122) C
123) D
124) A

Version 1 75
125) B
126) A
127) B
128) A
129) C
130) B
131) A
132) B
133) A
134) D
135) B
136) C
137) C
138) D
139) C
140) B
141) C
142) D
143) B
144) D
145) A

Version 1 76
146) D
147) A
148) D
149) B
150) B
151) D
152) A
153) A
154) B
155) C
156) D
157) A
158) C
159) C
160) B
161) A
162) D
163) C
164) C
165) B
166) B

Version 1 77
167) D
168) C
169) B
170) D
171) B
172) C
173) A
174) C
175) B
176) B
177) C
178) B
179) C
180) B
181) B
182) D
183) B
184) B
185) D
186) B
To calculate the Herfindahl Index, take the sum of the squared

Version 1 78
market shares of each firm in the industry. If government is not
two firms merge, the Herfindahl Index would likely to oppose a
rise by 800. In an industry comprised of only a merger.
handful of equal-sized firms, the government
will likely oppose a merger. In a larger
industry, such as with 10 or more firms, the
187) A
188) B
189) C
190) B
191) A
192) B
193) C
194) C
195) A
196) C
197) C
198) D
199) C
200) C
201) B
202) C

Version 1 79
203) D
204) D
205) B
206) C
207) C
208) C
209) C
210) D
211) D
212) D
213) D
214) B
215) D
216) A
217) D
218) A
219) B
220) C
221) A
222) D
223) B

Version 1 80
224) C
225) C
226) B
227) C
228) C
229) C
230) C
231) D
232) A
233) C
234) D
235) C
236) B
237) B
238) A
239) B
240) The underlying purpose of antitrust competition, and
policy is to prevent monopolization, promote achieve allocative
efficiency. <i>
241) Just after the U.S. Civil War (1861– mechanized
1865), local markets widened into national production methods,
markets because of improved transportation, and sophisticated

Version 1 81
corporate structures. In the 1870s and 1880s, trusts. Responding
dominant firms formed in several industries, to that, government
including petroleum, meatpacking, railroads, officials in the late
sugar, lead, coal, whiskey, and tobacco. Some 1800s and early
of these oligopolists, near-monopolists, or 1900s instituted two
monopolists were known as trusts, businesses alternative means of
that assign control to a single group of control as
decision makers (trustees). These dominant substitutes for, or
firms used questionable tactics in supplements to,
consolidating their industries, charging high market forces:
prices to customers and extracting price regulatory agencies
concessions from resource suppliers. Farmers, and antitrust laws.
small business owners, consumers, labor
unions, and economists began to oppose the
242) The public resentment of trusts that trade (for example,
emerged in the 1870s and 1880s culminated in collusive price-
the Sherman Act of 1890. This cornerstone of fixing and dividing
antitrust legislation is brief and directly to the up markets) and
point. The core of the act resides in two Section 2 outlawed
provisions: Section 1 outlawed restraints of monopolization. <i>
243) The Clayton Act of 1914 elaborated on other) of its
the Sherman Act. Four sections were designed products as a
to strengthen and make explicit the intent of condition for
the Sherman Act. Section 2 outlaws price obtaining a desired
discrimination when such discrimination is not product. Section 7
justified on the basis of cost differences and prohibits the
when it reduces competition. Section 3 acquisition of stocks
prohibits tying contracts, in which a producer of competing
requires that a buyer purchase another (or corporations when

Version 1 82
the outcome would be less competition. as a preventive
Section 8 prohibits, in large corporations, the measure. Section 2
formation of interlocking directorates, of the Sherman Act,
situations where a director of one firm is also by contrast, was
a board member of a competing firm, when aimed more at
the effect would be reduced competition. The breaking up existing
Clayton Act also outlawed the techniques that monopolies. <i>
firms might use to develop monopoly power
244) The Federal Trade Commission Act and, if necessary,
created the five-member Federal Trade issue cease-and-
Commission (FTC), which has joint federal desist orders in
responsibility with the U.S. Justice cases where it
Department for enforcing the antitrust laws. discovers “unfair
The act gave the FTC the power to investigate methods of
unfair competitive practices on its own competition in
initiative or at the request of injured firms. It commerce.”
can hold public hearings on such complaints
245) The Wheeler-Lea Act of 1938 amended deceptive
the Federal Trade Commission Act to give the advertising statutes.
FTC the additional responsibility of policing In 2016, the FTC
“deceptive acts or practices in commerce.” In fined German
so doing, the FTC tries to protect the public automaker
against false or misleading advertising and Volkswagen $10
product misrepresentation. Thus, the Federal billion for ads that
Trade Commission Act, as modified by the falsely claimed that
Wheeler-Lea Act, (1) established the FTC as Volkswagen
an independent antitrust agency and (2) made vehicles generated
unfair and deceptive sales practices illegal. low emissions.
The FTC is highly active in enforcing the

Version 1 83
246) Most economists conclude that, overall, somewhat effective
U.S. antitrust policy has been moderately against abusive
effective in achieving its goal of promoting monopoly behavior.
competition and efficiency. Much of the This effectiveness is
success of antitrust policy arises from its diminished by a
deterrent effect on price-fixing and slow legal process.
anticompetitive mergers. Antitrust policy has
not been effective at restricting the rise of or
breaking up monopolies but has been
247) The main reason is differences in view, competition is
political philosophies. The active antitrust a long-run dynamic
perspective holds that competition is process in which
insufficient in some circumstances to achieve firms battle against
allocative efficiency and ensure fairness to one another for
consumers and competing firms. Thus, active, market dominance.
strict enforcement of the antitrust laws is Therefore,
needed to stop illegal business practices, government should
prevent anticompetitive mergers, and remedy not try to break up a
monopoly. In this view, the antitrust monopoly. Rather,
authorities need to act much like the officials it should stand aside
in a football game. They must observe the and allow the long-
players, spot infractions, and enforce the rules. run competitive
The laissez-faire perspective holds that process to work. <i>
antitrust intervention is largely unnecessary,
particularly as it relates to monopoly. In this
248) Citing the rule of reason, the government will sue a firm only
has generally been lenient in applying antitrust if it has a very high
laws to monopolies that have developed market share and
naturally. Generally, the federal government there is evidence of

Version 1 84
abusive conduct in achieving, maintaining, or breakup of
extending its market dominance. Even if the Microsoft. Instead
federal government wins the antitrust lawsuit, of a structural
there is still the matter of remedy: What remedy, the
actions should the court order to correct the eventual outcome
anticompetitive practices of the monopoly that was a behavioral
lost the lawsuit? As part of an out-of-court remedy in which
settlement between the government and Microsoft was
AT&T, in 1982 AT&T agreed to divest itself prohibited from
of its 22 regional telephone-operating engaging in a set of
companies. In 2000, a lower court ordered that specific
Microsoft be split into two competing firms. A anticompetitive
court of appeals upheld the lower-court business practices.
finding of abusive monopoly but rescinded the
249) A horizontal merger occurs between two mergers can extend
competitors that sell similar products in the
same geographic market. A real-world
example of such mergers is Heinz purchasing
Kraft. A vertical merger occurs between firms
at different stages of the production process.
Vertical mergers are mergers between firms
that have buyer-seller relationships. A real-
world example of such mergers are PepsiCo’s
mergers with Pizza Hut, Taco Bell, and KFC.
PepsiCo supplies soft drinks to each of these
fast-food outlets. A conglomerate merger is
any merger that is not horizontal or vertical; in
general, it is the combination of firms in
different industries or firms operating in
different geographic areas. Conglomerate

Version 1 85
the line of products sold, extend the territory
in which products are sold, or combine totally
unrelated companies. A real-world example of
conglomerate mergers is the merger between
Amazon (e-commerce) and the Whole Foods
Markets (supermarkets). <i>

Version 1 86
250) The U.S. government uses Section 7 of generally allowed if
the Clayton Act to block horizontal mergers they do not lessen
that will substantially lessen competition. It is competition in
likely to challenge a horizontal merger if the either of the two
postmerger Herfindahl index would be above markets.
1,800 and if the merger has substantially Conglomerate
increased the index (added 100 or more mergers are
points). However, other factors, such as generally permitted
economies of scale, the degree of foreign since this will not
competition, and the ease of entry of new result in increased
firms, are also considered. In addition, market share for
horizontal mergers are usually allowed if one either of the firms.
of the merging firms is suffering major and
continuing losses. Vertical mergers are
251) Evidence of price-fixing, even by small show only that there
firms, will bring antitrust action, as will other was a conspiracy to
collusive activities such as scheming to rig fix prices, rig bids,
bids on government contracts or dividing up or divide up
sales in a market. In antitrust law, these markets, not that the
activities are known as per se violations; they conspiracy
are “in and of themselves” illegal, and succeeded or caused
therefore they are not subject to the rule of serious damage to
reason. To gain a conviction, the government other parties.
or other party making the charge needs to
252) Price discrimination is a common a strategy to block
business practice that rarely reduces entry or drive out
competition and therefore is rarely challenged competitors. <i>
by government. The exception occurs when a
firm engages in price discrimination as part of

Version 1 87
253) A tying contract is a requirement buy the projection
imposed by a seller that a buyer purchase rights to a full
another (or other) of its products as a package of films as
condition for buying a desired product; a a condition of
practice forbidden by the Clayton Act. The showing a
federal government strictly enforces the blockbuster movie.
prohibition of tying contracts, particularly by <i>
dominant firms. For example, it stopped
movie distributors from forcing theaters to
254) A natural monopoly exists when alternatives are: (1)
economies of scale are so extensive that a public ownership,
single firm can supply the entire market at a and (2) public
lower average total cost than could a number regulation. <i>
of competing firms. The two possible
255) The overwhelming consensus among has unleashed a
economists is that deregulation has produced wave of
large net benefits for consumers and society. technological
Most of the gains from deregulation have advances that
occurred in three industries: airlines, railroads, resulted in new and
and trucking. Airfares (adjusted for inflation) improved products
declined by about one third, and airline safety and services,
has continued to improve. Trucking and including cell
railroad freight rates (again, adjusted for phones, fiber-optic
inflation) dropped by about one-half. cable, microwave
Significant efficiency gains were also realized communication
in long-distance telecommunications, and systems, and the
there have been slight efficiency gains in cable Internet. <i>
television, stock brokerage services, and the
natural gas industry. Moreover, deregulation

Version 1 88
256) Industrial regulation, or public CB radios, and ham
regulation, refers to government regulation of operators. <i>
firms’ prices (or rates) in natural monopolies.
The FCC has jurisdiction over telephones,
television, cable television, radio, telegraph,
257) Social regulation is government play a role. The
regulation that is concerned with the jurisdiction of the
conditions under which goods and services are FDA is the safety
produced, the impact of production on society, and effectiveness of
and the physical qualities of the goods food, drugs, and
themselves. The federal government carries cosmetics. <i>
out most social regulation, although states also
258) There are several criticisms of social deaths a year
regulation and one general criticism is that because auto
regulation has expanded to the point where the manufacturers have
marginal costs exceed the marginal benefits. reduced the weight
Other criticisms are: (1) social regulation laws of vehicles to meet
are poorly written, with difficult-to-understand the higher miles-
regulatory objectives and standards. As a per-gallon
result, regulators pursue goals well beyond the standards; (4)
original intent of the legislation; (2) decisions opponents of social
must often be made, and rules formed, on the regulation say that
basis of inadequate information. Such laws, the regulatory
say critics, lead to excessive regulation of agencies may attract
business; (3) critics argue that social overzealous workers
regulations produce many unintended and who are hostile
costly side effects. For instance, the federal toward the market
gas mileage standard for automobiles has been system and believe
blamed for an estimated 2,000 to 3,900 traffic

Version 1 89
too fervently in regulation resulting in
overregulation. <i>

Version 1 90
259) Opponents of social regulation need to reports of unsafe
remember that less government is not always workplaces, unsafe
better than more government. While the products,
market system is an engine for producing discriminatory
goods and services and generating income, it hiring, deceived
has flaws and can camouflage abuses. With loan customers, and
appropriate amounts of social regulation, the like. Social
government can increase economic efficiency regulation helps the
and thus society’s well-being. Ironically, by market system
“taking the rough edges off of capitalism,” deliver not only
social regulation may be a strong pro- goods and services
capitalism force. Properly conceived and but also a “good
executed, social regulation helps maintain society.”
political support for the market system. Such
support might quickly wane should there be

Version 1 91