Multiple Choice Questions

1. The two roles the government has historically taken with respect to
imperfectly competitive industries are: first to

(a) promote competition through antitrust laws, and second to promote
    competition by regulating industries.
(b) restrict competition through antitrust laws, and second to restrict
    competition by regulating industries.
(c) promote competition through antitrust laws, and second to restrict
    competition by regulating industries.
(d) restrict competition through antitrust laws, and second to promote
    competition by regulating industries.


2. The Sherman Act

(a) established the rule of reason.
(b) declared monopoly and trade restraint illegal.
(c) outlawed specific monopoly behaviors such as tying contracts, price
    discrimination, and unlimited mergers.
(d) required that existing monopolies, other than natural monopolies, be
    broken up into smaller competing firms.


3. The government can block a merger only if

(a) the firms remaining would all earn economic profits.
(b) it can be established that the merger would substantially lessen
    competition.
(c) the firms remaining would be able to charge a price above marginal
    cost.
(d) the firms that are merging are producing similar products.


4. The copier paper industry has three firms. The market shares of each
firm are: Best Copier Paper, 70%; Copier Paper Plus, 20%; and Paper 
Galore, 10%. What is the Herfindahl-Hirschman Index?

(a) 100.
(b) 1000.
(c) 5400.
(d) 108,000.


5. A doctor charges an insured patient $1,000 for a minor surgical
procedure. The same doctor charges an uninsured patient $500 for the same
minor surgical procedure. This is an example of 

(a) price fixing.
(b) price discounting.
(c) price discrimination.
(d) competitive pricing.


6. Antitrust laws are based on the proposition that

(a) regulation is the best way to achieve efficiency.
(b) public ownership is the best way to achieve efficiency.
(c) increasing market power is the best way to achieve efficiency.
(d) competition is the best way to achieve efficiency.


7. Many states have contracted with profit-making firms to run prisons in
their states. This is an example of 

(a) price discrimination. 
(b) output regulation. 
(c) privatization.
(d) the Averch-Johnson effect. 


8. The one exception to the rule that efficiency is best achieved through
competitive markets is that of the

(a) patent monopoly.
(b) contestable market.
(c) natural monopoly.
(d) price discriminating monopolist.


9. Two companies manufacturing cardboard boxes have proposed a merger.
This merger will raise the Herfindahl-Hirschman Index by 90 points. The
Justice Department has decided to challenge this merger. Which of the
following statements must be TRUE? 

(a) The pre-merger Herfindahl-Hirschman Index must be between 1000 and
    1800 if a merger that increases the index by 90 points will be
    challenged. 
(b) Regardless of how concentrated the industry is prior to this merger,
    any merger that will increase the Herfindahl-Hirschman Index by 90
    points will be challenged. 
(c) This industry must be considered concentrated for a merger that would
    raise the Herfindahl-Hirschman Index by 90 points to be challenged. 
(d) The pre-merger Herfindahl-Hirschman Index has no bearing on whether or
    not a merger will be challenged by the Justice Department. It only
    matters what the increase in the index will be as a result of the
    merger. 


10. A merger between a paper producer and a book publisher is an example
of 

(a) a vertical merger. 
(b) a horizontal merger. 
(c) a conglomerate merger. 
(d) a complementary products merger. 
 

1. You are analyzing mergers (where two firms become one firm) for the
U.S. government using Herfindahl-Hirschmann Indexes (HHI).  According to
the merger guidelines, if the HHI reaches the range of 1000-1800 after a
merger, you will not allow the merger if it increased the HHI by 100
points or more.  Suppose you are analyzing a market where there are 13
firms: 1 firm has 20% of the market, 4 firms have 10% of the market each,
and 8 firms have 5% of the market each.

A) Calculate the HHI for this market.

B) Would you allow a merger between 2 firms that had 5% market share each?
Why or why not!

C) Would you allow a merger between 2 firms that had 10% market share
each?