Final Exam ECON 201 Fall 2010 Circle exam to dropped: 1 2 3
MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers
1) Highly concentrated industries 1) _______
A) never require government intervention.
B) cannot cooperate to set price and output levels.
C) may not yield the efficient level of output.
D) may increase consumer surplus.
E) always are more efficient than competitive industries.
2) The Sherman Antitrust Act of 1890 2) _______
A) was intended to decrease competition and make firm profits more
B) helped the trusts keep their market power.
C) outlawed monopoly.
D) helped re-develop the South.
E) was intended to protect consumers from unsafe products and new
3) A vertical merger 3) _______
A) is when one firm purchases another firm that either lies above it
or below it in the production stream.
B) is not likely to hurt competition in the market for the products
produced by either firm.
C) is when firms in unrelated industries merge.
D) rarely occurs in the real world.
E) is when two firms in the same industry or market combine.
4) A horizontal merger 4) _______
A) is when firms in unrelated industries merge.
B) rarely occurs in the real world.
C) is when two firms in the same industry or market combine.
D) is not likely to hurt competition in the market for the products
produced by either firm.
E) is when one firm purchases another firm that either lies above it
or below it in the production stream.
5) If Coca-Cola and Pepsi were to merge and become a single company, 5) _______
this would be
A) unlikely to be blocked by the Justice Department and the Federal
B) a conglomerate merger.
C) a horizontal merger.
D) likely to increase competition.
E) a vertical merger.
6) If McDonalds merged with Coca-Cola Company, one of its major 6) _______
suppliers, to become a single company, this would be
A) a horizontal merger.
B) a vertical merger.
C) a conglomerate merger.
D) unlikely to be investigated by the Justice Department and the
Federal Trade Commission.
E) likely to increase competition.
7) A cost or benefit of the production or consumption of a good or service 7) _______
that falls on parties that are not directly involved in the transaction is
A) a non-rival good.
B) an externality.
C) a private good.
D) a non-excludable good.
E) a public good.
8) Externalities 8) _______
A) can only bring benefits.
B) can only impose costs.
C) can only affect other citizens not firms.
D) can bring benefits or costs.
E) can only affect other producers not citizens or consumers.
9) Deadweight losses caused by externalities can be offset 9) _______
A) only if the participants creating the externality agree.
B) through taxes or subsidies.
C) by leaving resource allocation to the market and keeping
D) only in a limited set of cases.
E) if bargaining costs are low.
10) Marketable permits are 10) ______
A) a subsidy given to firms that reduce their pollution.
B) tradeable rights that allow the firms that hold them to emit a
certain quantity of effluents per year.
C) a Pigouvian tax on firms based on the amount of output they
produce of a product that generates an externality.
D) a tax on firms based on the amount of effluents they produce
rather than output.
E) legislative targets for reducing pollution by adopting specific
practices or technology.
11) The benchmark for how efficient a market is would be the 11) ______
A) pricing and output level associated with monopoly.
B) marginal cost pricing and output levels under perfect competition.
C) pricing and output level associated with oligopoly.
D) pricing and output levels under monopolistic competition.
E) pricing under perfect competition, but the output under
12) The Department of Justice and the Federal Trade Commission have the 12) ______
power to do all of the following except
A) sue firms in order to prevent the formation of very large firms that
would be anticompetitive.
B) sue firms in order to reduce their profit margins.
C) impose fines on companies guilty of violating antitrust law.
D) force violators to stop anticompetitive practices.
E) break up existing firms into smaller ones for violations of antitrust
13) The type of merger most likely to reduce competition is 13) ______
14) Regulation is intended to 14) ______
A) redistribute gains from firms to consumers.
B) increase the power of markets in making decisions in an industry.
C) protect the profits of existing firms.
D) protect the market shares of existing firms.
E) decrease economic efficiency.
15) Market failure occurs when the free market 15) ______
A) does not produce the number of units where the marginal social
cost equals the marginal social benefit.
B) does not produce the number of units where the marginal private
cost equals the marginal private benefit.
C) efficiently allocates society's resources.
D) produces the number of units where the marginal private cost
equals the marginal private benefit.
E) produces the number of units where the marginal social cost
equals the marginal social benefit.
16) Marginal external cost is 16) ______
A) the extra cost that a firm pays in order to produce a product.
B) the marginal cost of production that accrues to individuals and
firms not directly involved in the transaction.
C) paid entirely by parties paying for a transaction and not by non-
D) all the costs incurred by people affected by a transaction, both the
direct paying parties and the bystanders.
E) the extra cost that a consumer pays in order to purchase one more
unit of a product.
17) In the case of negative production externalities, the marginal social cost 17) ______
is ____ the marginal private cost and producers will ____ the product in
a free market.
A) greater than; underproduce
B) equal to; underproduce
C) less than; overproduce
D) greater than; overproduce
E) less than; underproduce
18) Which of the following is correct? If production is left to the free 18) ______
A) the marginal social cost will be less than the marginal private cost
in the case of negative production externalities.
B) the marginal social cost will be greater than the marginal private
cost in the case of positive production externalities.
C) the marginal social cost will be greater than the marginal private
cost in the case of negative production externalities.
D) the marginal social benefit will be less than the marginal social cost
in the case of positive production externalities.
E) the marginal social benefit will be smaller than the marginal
private benefit in the case of positive production externalities.
19) Pigouvian taxes do all of the following except 19) ______
A) Compensate for the negative external cost
B) Correct for the effects of an externality
C) Raise the prices paid by consumers
D) Increase efficiency
E) Move the equilibrium output level farther from the socially
20) If the EPA sets the quantity of permits correctly, 20) ______
A) firms that need greater quantities of emissions to continue
operating will be unable to get them.
B) deadweight losses from the externality will increase.
C) every firm will reduce its pollution.
D) it achieves the reduction in emissions it wants at minimal cost.
E) firms that have low costs to reduce pollution will have no
economic incentive to do so.
21) Both positive and negative externalities lead to 21) ______
A) the correct amount being produced but the wrong price being
charged by the free market.
B) too much of the product being produced by free markets.
C) efficient resource allocation.
D) deadweight losses.
E) too little of the product being produced by free markets.
22) If the proper-sized Pigouvian tax is imposed in the case of an 22) ______
A) the market supply curve would shift to the right.
B) the output produced would increase.
C) production costs would be reduced.
D) the market price of the product would fall.
E) the deadweight loss would be eliminated.
SHORT ANSWER. Briefly explain your answer, providing a clearly labeled graph if it will
help clarify your explanation
23) When negative externalities exist, how do free markets 23) _____________
24) Describe the three types of mergers. Which types are most 24) _____________
likely to draw the attention of government regulators? Why?
25) Describe the forms government intervention might take and 25) _____________
how they would correct the problem in the case of addressing
23) Products with negative externalities are over-produced by a free market.
24) Conglomerate mergers are between firms in unrelated industries. They are not likely to
reduce competition, so the government is unlikely to intervene. Vertical mergers combine
two firms in the production chain of a single final product. This could lessen competition,
because control over an input is potentially an entry barrier in the market for final goods
and services. The FTC is likely to monitor vertical mergers, but will pay the closest
attention to horizontal mergers. In a horizontal merger, rival firms in a particular market
are becoming one; this has the most potential to reduce competition, since it increases
25) The government can use legislation to ban activities, require activities, set quotas or specific
regulations that apply. The government can use Pigouvian taxes on output to fix the
misallocation of resources or subsidies in the case of positive externalities. The government
can instead tax the amount of effluents or emissions themselves. The government can issue
marketable permits that can be re-sold.