econ 201 practice exam 4

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					Final Exam ECON 201 Fall 2010                                  Circle exam to dropped:   1     2   3
Name___________________________________

MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers
the question.
       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
              stable.
           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
              technology.

      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
               Trade Commission.
            B) a conglomerate merger.
            C) a horizontal merger.
            D) likely to increase competition.
            E) a vertical merger.




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 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
    called
      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
         government out.
     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
         monopoly.


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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
         law.

13) The type of merger most likely to reduce competition is                      13) ______
      A) vertical.
      B) diagonal.
      C) conglomerate.
      D) horizontal.
      E) subsidized.

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-
        paying bystanders.
     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.




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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) ______
    market,
     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
         optimal output

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.




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     22) If the proper-sized Pigouvian tax is imposed in the case of an      22) ______
         externality,
            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) _____________
           misallocate resources?




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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
    negative externalities.




                                                    6
 1) C
 2) C
 3) A
 4) C
 5) C
 6) B
 7) B
 8) D
 9) B
10) B
11) B
12) B
13) D
14) A
15) A
16) B
17) D
18) C
19) E
20) D
21) D
22) E
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
    industry concentration.
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.




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