Monopolies and Anti Trusts PDF

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MONOPOLY PRACTICE QUESTIONS 1.

Allowing an inventor to have the exclusive rights to market her new invention will lead to (i) a product that is priced higher than it would be without the exclusive rights. (ii) desirable behavior in the sense that inventors are encouraged to invent. (iii) higher profits for the inventor. a. (i) and (ii) b. (ii) and (iii) c. (i) and (iii) d. All of the above are correct.

2.

Antitrust laws allow the government to a. prevent mergers. b. break up companies. c. promote competition. d. All of the above are correct.

3.

Authors are allowed to be monopolists in the sale of their books in order to a. encourage authors to write more and better books. b. correct for the negative externalities that the internet and television impose. c. satisfy literary advocacy groups that exercise their lobbying power. d. promote a society in which people think for themselves and learn from whichever books they please.

4.

What happens to the price and quantity sold of a drug when its patent runs out? (i) The price will fall. (ii) The quantity sold will fall. (iii) The marginal cost of producing the drug will rise. a. (i) and (iii) b. (i) and (ii) c. (ii) and (iii) d. All of the above are correct.

5.

Singer Madonna has a monopoly over a scarce resource: herself. She is the only person who can produce a Whitney Houston concert. Does this fact imply that the government should regulate the prices of her concerts? Why or why not?

Madonna’s resource can be classified as an artistic production. Go 6.

For many years AT&T was a regulated monopoly, providing both local and long-distance telephone service. a. Explain why long-distance phone service was originally a natural monopoly. b. Over the past two decades, many companies have launched communication satellites, each of which can transmit a limited number of calls. How did the growing role of satellites change the cost structure of long-distance phone service?

After a lengthy legal battle with the government, AT&T agreed to compete with other companies in the long distance market. It also agreed to spin off its local phone service into the “Baby Bells,” which remain highly regulated. c. Why might it be efficient to have competition in long-distance phone service and regulated monopolies in local phone service?

7.

In 1969 the government charged IBM with monopolizing the computer market. The government argued (correctly) that a large share of all mainframe computers sold in the United States were produced by IBM. IBM argued (correctly) that a much smaller share of the market for all types of computers consisted of IBM products. Based on these facts, do you think that the government should have brought suit against IBM for violating the antitrust laws? Explain.

ANSWERS 1. D 2. D 3. A 4. A 5. Though Madonna has a monopoly on her own singing, there are many other singers in the market. If Madonna were to raise her price too much, people would substitute to other singers. So there is no need for the government to regulate the price of her concerts. 6. a. Long-distance phone service was originally a natural monopoly because installation of phone lines across the country meant that one firm's costs were much lower than if two or more firms did the same thing. b. With communications satellites, the cost is no different if one firm supplies them or if many firms do so. So the industry evolved from a natural monopoly to a competitive market. c. It is efficient to have competition in long-distance phone service and regulated monopolies in local phone service because local phone service remains a natural monopoly (being based on land lines) while long-distance 7.

IBM's monopoly power will be constrained to the extent that people can substitute other computers for mainframes. So the government might have looked at the demand curve facing IBM, or the divergence between IBM's price and marginal cost, to get some idea of how severe the monopoly problem was....