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Principles of Microeconomics for AP® Courses 2e

Steven A. Greenlaw, David Shapiro, Timothy Taylor

Chapter 11

Monopoly and Antitrust Policy

Educators

EA

Problem 1

Is it true that a merger between two firms that are already in the top four by size can affect both the four-firm concentration ratio and the Herfindahl-Hirshman Index? Explain briefly.

Daniel C.
Numerade Educator

Problem 2

Is it true that the four-firm concentration ratio puts more emphasis on one or two very large firms, while the Herfindahl-Hirshman Index puts more emphasis on all the firms in the entire market? Explain briefly.

Mihir N.
Numerade Educator

Problem 3

Some years ago, two intercity bus companies, Greyhound Lines, Inc. and Trailways Transportation System, wanted to merge. One possible definition of the market in this case was “the market for intercity bus service.” Another possible definition was “the market for intercity transportation, including personal cars, car rentals, passenger trains, and commuter air flights.” Which definition do you think the bus companies preferred, and why?

Daniel C.
Numerade Educator

Problem 4

As a result of globalization and new information and communications technology, would you expect that the definitions of markets that antitrust authorities use will become broader or narrower?

Mihir N.
Numerade Educator

Problem 5

Why would a firm choose to use one or more of the anticompetitive practices described in Regulating
Anticompetitive Behavior?

Daniel C.
Numerade Educator

Problem 6

Urban transit systems, especially those with rail systems, typically experience significant economies of scale in operation. Consider the transit system data in Table 11.4. Note that the quantity is in millions of riders. Draw the demand, marginal revenue, marginal cost, and average cost curves. Do they have the normal shapes?

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Problem 7

From the graph you drew to answer Exercise 11.6, would you say this transit system is a natural monopoly? Justify. Use the following information to answer the next three questions. In the years before wireless phones, when telephone technology required having a wire running to every home, it seemed plausible that telephone service had diminishing average costs and might require regulation like a natural monopoly. For most of the twentieth century, the national U.S. phone company was AT&T, and the company functioned as a regulated monopoly. Think about the deregulation of the U.S. telecommunications industry that has occurred over the last few decades. (This is not a research assignment, but a thought assignment based on what you have learned in this chapter.)

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Problem 8

What real world changes made the deregulation possible?

Mihir N.
Numerade Educator

Problem 9

What are some of the benefits of the deregulation?

Daniel C.
Numerade Educator

Problem 10

What might some of the negatives of deregulation be?

Mihir N.
Numerade Educator

Problem 11

What is a corporate merger? What is an acquisition?

Daniel C.
Numerade Educator

Problem 12

What is the goal of antitrust policies?

Mihir N.
Numerade Educator

Problem 13

How do we measure a four-firm concentration ratio? What does a high measure mean about the extent of competition?

Daniel C.
Numerade Educator

Problem 14

How do we measure a Herfindahl-Hirshman Index? What does a low measure mean about the extent of
competition?

Mihir N.
Numerade Educator

Problem 15

Why can it be difficult to decide what a “market” is for purposes of measuring competition?

Daniel C.
Numerade Educator

Problem 16

What is a minimum resale price maintenance agreement? How might it reduce competition and when
might it be acceptable?

Mihir N.
Numerade Educator

Problem 17

What is exclusive dealing? How might it reduce competition and when might it be acceptable?

Daniel C.
Numerade Educator

Problem 18

What is a tie-in sale? How might it reduce competition and when might it be acceptable?

Mihir N.
Numerade Educator

Problem 19

What is predatory pricing? How might it reduce competition, and why might it be difficult to tell when it
should be illegal?

Daniel C.
Numerade Educator

Problem 20

If public utilities are a natural monopoly, what would be the danger in deregulating them?

Mihir N.
Numerade Educator

Problem 21

If public utilities are a natural monopoly, what would be the danger in splitting them into a number of
separate competing firms?

Daniel C.
Numerade Educator

Problem 22

What is cost-plus regulation?

Mihir N.
Numerade Educator

Problem 23

What is price cap regulation?

Daniel C.
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Problem 24

What is deregulation? Name some industries that have been deregulated in the United States.

Mihir N.
Numerade Educator

Problem 25

What is regulatory capture?

EA
Erwin A.
Numerade Educator

Problem 26

Why does regulatory capture reduce the persuasiveness of the case for regulating industries for the benefit of consumers?

Mihir N.
Numerade Educator

Problem 27

Does either the four-firm concentration ratio or the HHI directly measure the amount of competition in an industry? Why or why not?

Daniel C.
Numerade Educator

Problem 28

What would be evidence of serious competition between firms in an industry? Can you identify two
highly competitive industries?

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Problem 29

Can you think of any examples of successful predatory pricing in the real world?

Daniel C.
Numerade Educator

Problem 30

If you were developing a product (like a web browser) for a market with significant barriers to entry,
how would you try to get your product into the market successfully?

Mihir N.
Numerade Educator

Problem 31

In the middle of the twentieth century, major U.S. cities had multiple competing city bus companies.
Today, there is usually only one and it runs as a subsidized, regulated monopoly. What do you suppose
caused the change?

Daniel C.
Numerade Educator

Problem 32

Why are urban areas willing to subsidize urban transit systems? Does the argument for subsidies make
sense to you?

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Problem 33

Deregulation, like all changes in government policy, always has pluses and minuses. What do you think some of the minuses might be for airline deregulation?

Daniel C.
Numerade Educator

Problem 34

Do you think it is possible for government to outlaw everything that businesses could do wrong? If
so, why does government not do that? If not, how can regulation stay ahead of rogue businesses that push the limits of the system until it breaks?

Mihir N.
Numerade Educator

Problem 35

Use Table 11.5 to calculate the four-firm concentration ratio for the U.S. auto market. Does this indicate a concentrated market or not?

Daniel C.
Numerade Educator

Problem 36

Use Table 11.5 and Table 11.6 to calculate the Herfindal-Hirschman Index for the U.S. auto market.
Would the FTC approve a merger between GM and Ford?

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Problem 37

If the transit system were allowed to operate as an unregulated monopoly, what output would it supply and what price would it charge?

Daniel C.
Numerade Educator

Problem 38

If the transit system were regulated to operate with no subsidy (i.e., at zero economic profit), what
approximate output would it supply and what approximate price would it charge?

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Problem 39

If the transit system were regulated to provide the most allocatively efficient quantity of output, what
output would it supply and what price would it charge? What subsidy would be necessary to insure this efficient provision of transit services?

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