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Chapter 07 - The Nature of Industry

Ch The Nature of I Multiple Choice Questions

1. 1. Which Which of of the the following following are are measures measures of of industry industry concentration? concentration? A. Four-firm concentration ratio B. HHI index C. Consumer surplus D. D. Four-firm Four-firm concentration concentration ratio ratio and and HHI HHI index index Answer: D Learning Learning Objective: Objective: 07-01 07-01 Topic: Market Structure Blooms: Remember AACSB: AACSB: Knowledge Knowledge Application Application Difficulty: 01 Easy 

2. A firm has a marginal cost of of $20 and charges a price of of $40. The Lerner index index for is: A. 0.20. B. 0.50. C. 0.33. D. 0.75. Answer: B Learning Learning Objective: Objective: 07-01 07-01 Topic: Conduct Blooms: Apply AACSB: AACSB: Analytical Analytical Thinking Thinking Difficulty: 01 Easy 

3. 3. An An industry industry is is comprised comprised of of 20 20 firms, firms, each each with an equal market share. What is the firm firm concentration concentration ratio ratio of of this this industry? industry? A. 0.2 B. 0.4 C. 0.6 D. 0.8 Answer: A Learning Learning Objective: Objective: 07-01 07-01 T i M k t St t

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Chapter 07 - The Nature of Industry

4. A firm's average cost is $20, and it charges a price of $20. The Lerner Lerner index for thi A. 0.20. B. 0.50. C. 0.33. D. insufficient information. Answer: D Learning Learning Objective: Objective: 07-01 07-01 Topic: Conduct Blooms: Apply AACSB: AACSB: Analytical Analytical Thinking Thinking Difficulty: 02 Medium 

5. An industry is comprised of 10 firms, each with an equal market share. What is the firm firm concentration concentration ratio ratio of of this this industry? industry? A. 0.2 B. 0.4 C. 0.6 D. 0.8 Answer: B Learning Learning Objective: Objective: 07-01 07-01 Topic: Market Structure Blooms: Apply AACSB: AACSB: Analytical Analytical Thinking Thinking Difficulty: 01 Easy 

6. 6. An An unregulated unregulated industry industry has has aa Lerner Lerner index index of of zero. zero. These These numbers: numbers: A. A. reveal reveal that that social social welfare welfare would would be be improved improved by regulating the firms. B. B.are areconsistent consistentwith withthe theindustry industrybeing beingmonopolistically monopolisticallycompetitive. competitive. C. C.are areconsistent consistentwith withthe theindustry industrybeing beingperfectly perfectlycompetitive. competitive. D. D. reveal reveal that that social social welfare welfare would would be be improved improved by by regulating regulating the the firms firms and and are are consi consi with withthe theindustry industrybeing beingmonopolistically monopolisticallycompetitive. competitive. Answer:C

Learning Learning Objective: Objective: 07-05 07-05 Topic: Conduct Blooms: Analyze AACSB: AACSB: Analytical Analytical Thinking Thinking Difficulty: 03 Hard 

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Chapter 07 - The Nature of Industry

7.7.The Theconcentration concentrationand andHerfindahl Herfindahlindices indicescomputed computedby bythe theU.S. U.S.Bureau Bureauof ofCensus Censusm interpreted interpreted with with caution caution because: because: A. A. they they overstate overstate the the actual actual level level of of concentration concentration in in markets markets served served by by foreign foreign firms. firms. B. B.they theyunderstate understatethe thedegree degreeof ofconcentration concentrationininlocal localmarkets, markets,such suchthe thegasoline gasolinemar ma C. Both A and B are correct. D. None of the statements are correct. Answer: C Learning Learning Objective: Objective: 07-01 07-01 Topic: Market Structure Blooms: Understand AACSB: AACSB: Knowledge Knowledge Application Application Difficulty: 02 Medium

8. 8. The The industry industry elasticity elasticity of of demand demand for for gadgets gadgets is 2, 2, while while the the elasticity elasticity of of demand demand f individual individual gadget gadget manufacturer's manufacturer's product product is is 2. 2. Based Based on on the the Rothschild Rothschild approach approach to to measuring measuring market market power, power, we we conclude conclude that: that: A. A. there there is is little little monopoly monopoly power power in in this this industry. industry. B. B.there thereis is significant significantmonopoly monopolypower power in inthis this industry. industry. C. C. the the Herfindahl Herfindahl index index for for this this industry industry is is 2. D. D. the the Herfindahl Herfindahl index index for for this this industry industry is is 2. 2. −

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Answer: B Learning Learning Objective: Objective: 07-01 07-01 Topic: Market Structure Blooms: Understand AACSB: AACSB: Knowledge Knowledge Application Application Difficulty: 02 Medium

9. 9. A A Herfindahl Herfindahl index index of of 10,000 10,000 suggests: suggests: A. perfect competition. B. B. monopolistic monopolistic competition. competition. C. monopoly. D. oligopoly. Answer: C Learning Learning Objective: Objective: 07-01 07-01 Topic: Market Structure Blooms: Understand AACSB: AACSB: Knowledge Knowledge Application Application Difficulty: 02 Medium

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Chapter 07 - The Nature of Industry Learning Learning Objective: Objective: 07-01 07-01 Topic: Market Structure Blooms: Understand AACSB: AACSB: Knowledge Knowledge Application Application Difficulty: 02 Medium

11. A Lerner index of 0 suggests: A. monopoly. B. B. monopolistic monopolistic competition. competition. C. oligopoly. D. perfect competition. Answer: D Learning Learning Objective: Objective: 07-01 07-01 Topic: Conduct Blooms: Understand AACSB: AACSB: Knowledge Knowledge Application Application Difficulty: 02 Medium

12. 12. When Wheneconomies economiesof of scale scaleare arelarge, large, firms firmscan canreduce reducetheir their average averagetotal totalcost costby: by: A. selling off off their subsidiaries. B. merging into even larger firms. C. C. eliminating eliminating the the bureaucratic bureaucratic costs. costs. D. hiring professional managers. Answer: B Learning Learning Objective: Objective: 07-02 07-02 Topic: Conduct Blooms: Understand AACSB: AACSB: Knowledge Knowledge Application Application Difficulty: 2 Medium

13. 13. Which Which of of the the following following is is NOT NOT one one class of a market structure? A. Perfect competition B. Dictatorship C. Monopoly D. D. Monopolistic Monopolistic competition competition Answer: B Learning Learning Objective: Objective: 07-05 07-05 Topic: Topic: Overview Overview of of the the Remainder Remainder of of the the Book Book Blooms: Remember AACSB: AACSB: Knowledge Knowledge Application Application

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Chapter 07 - The Nature of Industry

14. 14. Which Which of of the the following following kinds kinds of of market market structure structure are are NOT NOT associated associated with market marke A. Oligopoly B. Perfect competition C. C. Monopolistic Monopolistic competition competition D. D. Perfect Perfect competition competitionand andmonopolistic monopolistic competition competition Answer: Learning LearningBObjective: Objective: 07-05 07-05 Topic: Topic: Overview Overview of of the the Remainder Remainder of of the the Book Book Blooms: Understand AACSB: AACSB: Knowledge Knowledge Application Application Difficulty: 02 Medium

15. 15.Monopolistic Monopolisticcompetition competitionisischaracterized characterizedby: by: A. heterogeneous products. B. B.employing employing labor laborfrom from aa perfectly perfectly competitive competitive labor labor market. market. C. no free entry. D. large markets. Answer: A Learning Learning Objective: Objective: 07-05 07-05 Topic: Topic: Overview Overview of of the the Remainder Remainder of of the the Book Book Blooms: Remember AACSB: AACSB: Knowledge Knowledge Application Application Difficulty: 01 Easy

16. 16. Oligopoly Oligopoly differs differs from from monopoly monopoly as as follows: follows: A. A. Oligopoly Oligopolyinvolves involves aafew few firms; firms; monopoly monopoly involves involves aa single firm. B. B.Oligopoly Oligopolydoes doesuse useadvertisement; advertisement;monopoly monopolydoes doesnot notuse useadvertisement. advertisement. C. C.Oligopoly Oligopolyinvolves involvesfree freeentry; entry;monopoly monopolyinvolves involvesno nofree freeentry. entry. D. D. Oligopoly Oligopolyinvolves involves aafew few firms; firms; monopoly monopoly involves involves aasingle single firm firm and and oligopoly oligopoly inv inv free free entry; entry; monopoly monopoly involves involves no no free free entry. entry. Answer: A Learning Learning Objective: Objective: 07-05 07-05 Topic: Topic: Overview Overview of of the the Remainder Remainder of of the the Book Book Blooms: Remember AACSB: AACSB: Knowledge Knowledge Application Application Difficulty: 01 Easy

17. 17. In In perfect perfect competition, competition, which which is is NOT NOT true? true? A. Every firm has a small but perceivable perceivable market power. B Th l b f fi

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Chapter 07 - The Nature of Industry Blooms: Understand AACSB: AACSB: Knowledge Knowledge Application Application Difficulty: 02 Medium

18. 18. Which Which of of the the following following is is used used to to measure measure market market structure and and performance? A. Four-firm concentration ratio B. HHI (Herfindahl-Hirschman index) C. C. Dansby-Willig Dansby-Willig Performance Performance index index D. All of the answers are correct. Answer: D Learning Learning Objective: Objective: 07-01 07-01 Topic: Market Structure Topic: Performance Blooms: Remember AACSB: AACSB: Knowledge Knowledge Application Application Difficulty: 01 Easy

19. Suppose that there are two industries, A and B. There are five firms in industry A sales sales at at$5 $5 million, million, $2 $2 million, million, $1 $1 million, million, $1 $1million, million, and and $1 $1 million, million, respectively. respectively. Th Th four four firms firms in in industry industry B B with with equal equal sales sales of of $2.5 $2.5 million for each firm. The four-firm concentration concentration ratio ratio for for industry industry A A is: is: A. 0.9. B. 1.0. C. 0.8. D. 0.7. Answer: A Learning Learning Objective: Objective: 07-01 07-01 Topic: Market Structure Blooms: Apply AACSB: AACSB: Analytical Analytical Thinking Thinking Difficulty: 02 Medium

20. Suppose that there are two industries, A and B. There are five firms in industry A sales sales at at$5 $5 million, million, $2 $2 million, million, $1 $1 million, million, $1 $1million, million, and and $1 $1 million, million, respectively. respectively. Th Th four four firms firms in in industry industry B B with with equal equal sales sales of of $2.5 $2.5 million for each firm. The HHI for in A is: A. 3,200. B. 2,800. C. 1,800. D 2 500

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Chapter 07 - The Nature of Industry AACSB: AACSB: Analytical Analytical Thinking Thinking Difficulty: 02 Medium

21. Suppose that there are two industries, A and B. There are five firms in industry A sales sales at at$5 $5 million, million, $2 $2 million, million, $1 $1 million, million, $1 $1million, million, and and $1 $1 million, million, respectively. respectively. Th Th four four firms firms in in industry industry B B with with equal equal sales sales of of $2.5 $2.5 million for each firm. The four-firm concentration concentration ratio ratio for for industry industry B B is: is: A. 0.9. B. 1.0. C. 0.8. D. 0.7. Answer: B Learning Learning Objective: Objective: 07-01 07-01 Topic: Market Structure Blooms: Apply AACSB: AACSB: Analytical Analytical Thinking Thinking Difficulty: 02 Medium

22. Suppose that there are two industries, A and B. There are five firms in industry A sales sales at at$5 $5 million, million, $2 $2 million, million, $1 $1 million, million, $1 $1million, million, and and $1 $1 million, million, respectively. respectively. Th Th four four firms firms in in industry industry B B with with equal equal sales sales of of $2.5 $2.5 million for each firm. The HHI for in is: A. 2,500. B. 1,800. C. 3,200. D. 2,800. Answer: A Learning Learning Objective: Objective: 07-01 07-01 Topic: Market Structure Blooms: Apply AACSB: AACSB: Analytical Analytical Thinking Thinking Difficulty: 02 Medium

23. A student in a managerial managerial economics economicsclass classcalculated calculatedthe thefour-firm four-firmconcentration concentrationr HHI for industries A and B. What is the proper proper conclusion conclusion she she can draw from the foll fol findings? Industry A Industry B Four-firm C 0.9 1 HHI 3,200 2,500

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Chapter 07 - The Nature of Industry

A. Industry B is a monopoly. B. The market power of firms in industry industry A A is is greater greater than than that that in in industry industry B. B. C. C4is is higher higher for for industry industry A A while while the the HHI HHI is is higher higher for for industry industry B. B. This This inconsisten be due due to to a calculation error. error. D. D. Neither Neither industry industry is is perfectly perfectly competitive. competitive. Answer: D Learning Learning Objective: Objective: 07-05 07-05 Topic: Topic: Overview Overview of of the the Remainder Remainder of of the the Book Book Blooms: Analyze AACSB: AACSB: Analytical Analytical Thinking Thinking Difficulty: 02 Medium

24. As a general rule of thumb, thumb, industries industries with with aaHerfindahl Herfindahl index indexbelow below ______ ______ are considered consideredtotobe becompetitive, competitive,while whilethose thoseabove above______ ______are areconsidered considerednoncompetitiv noncompetiti A. 1,000, 1,800 B. 1,800, 1,000 C. 1,000, 3,000 D. 1,800, 3,000 Answer: A Learning Learning Objective: Objective: 07-01 07-01 Topic: Market Structure Blooms: Remember AACSB: AACSB: Knowledge Knowledge Application Application Difficulty: 01 Easy

25. 25.The Theranking rankingof ofindustries industriesby bythe thefour-firm four-firmconcentration concentrationratio ratiousually, usually,but butnot notalwa alw reveals reveals the the same same pattern pattern as as ranking ranking by by HHI. When a discrepancy is found it is usually the following: A. A. The The four-firm four-firm concentration concentration index index contains contains data data on only only the the largest largest four four firms, wh HHI is based on data for all firms in the industry. B. The HHI is based on squared squared market market shares, shares, while while the the four-firm four-firm concentration concentration rati rati C. C. The The four-firm four-firm concentration concentration index index contains contains data data on on only only the the largest largest four four firms, firms, whi whi HHI is based on data for all firms in the industry industry and and the the HHI HHI is is based based on on squared squared ma shares, shares, while while the the four-firm four-firm concentration concentration ratio ratio is is not. not. D. D. The The two two indices indices are are designed designed to to measure measure two different attributes of markets. markets. Answer: C Learning Learning Objective: Objective: 07-01 07-01 Topic: Market Structure

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Chapter 07 - The Nature of Industry

26. 26. A A student student figured figured out out that that the HHI for an industry was 15,000. What is the proper conclusion? A. The market is monopolistic. B. The market is close to perfectly perfectlycompetitive competitiveor ormonopolistically monopolisticallycompetitive. competitive. C. C. The The student student made made some some computational computational errors. errors. D. There is free entry in the market. Answer: C Learning Learning Objective: Objective: 07-01 07-01 Topic: Market Structure Blooms: Understand AACSB: AACSB: Knowledge Knowledge Application Application Difficulty: 02 Medium

27. In the 1960s, each each firm firm in in the the computer computer industry industry was was able able to to make make extremely large margins, margins,some someas ashigh highas as50 50to to60 60percent. percent.The Themargin margindecreased decreasedto to20 20to to40 40percent percenti 1970s 1970sand andto to10to 10to20 20percent percentin inthe the1980s. 1980s.We Weconclude concludethat: that: A. A. market market power power increased increased in in the the two two decades. decades. B. B. the the industry industry evolved evolved from from oligopolistic oligopolistic to toaamore more competitive competitive industry industry in in the the two two de d C. lower profit margins were due to the government's government's regulation regulation to to protect protect consumers consumers D. D. lower lower profit profit margins margins were were largely largely due due to to the the mismanagement of of computer firms. Answer: B Learning Learning Objective: Objective: 07-05 07-05 Topic: Topic: Overview Overview of of the the Remainder Remainder of of the the Book Book Blooms: Understand AACSB: AACSB: Knowledge Knowledge Application Application Difficulty: 02 Medium

28. 28. The The concentration concentration and and HHI reported in the U.S. Bureau of Census must be interpr with caution since: A. A.they theyare arecalculated calculatedby byexcluding excludingforeign foreignimports, imports,hence hencethey theybias biasupward upwardthe thedegre degr concentration. B. B. they they are are based based on on figures figures for for the the entire entire national national market. market. C. C. the the definition definition of of product product classes classes used used to to define define an an industry affects the the results. results. D. All of the answers are correct. Answer: D Learning Learning Objective: Objective: 07-01 07-01 Topic: Market Structure Blooms: Understand AACSB: AACSB: Knowledge Knowledge Application Application Diffi lt 02 M di

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Chapter 07 - The Nature of Industry

29. When the relevant markets are local, local, the the concentration concentration and and HHI HHI based on figures entire entire United United States States tend tend to: to: A. be biased downward. B. be biased upward. C. give a more precise description description of the the real real situation. situation. D. D. ignore ignore the the presence presence of of import import goods. goods. Answer: A Learning Learning Objective: Objective: 07-01 07-01 Topic: Market Structure Blooms: Understand AACSB: AACSB: Knowledge Knowledge Application Application Difficulty: 02 Medium

30. 30.Suppose Supposeeach eachof ofthe the50 50states stateshad hadonly onlyone onegasoline gasolinestation, station,and andall allstations stationswere weret size. size. The Thefour-firm four-firm concentration concentrationratio, ratio, based based on onnational nationaldata, data, would be: A. 0.08. B. 0.16. C. 0.32. D. 1.0. Answer: A Learning Learning Objective: Objective: 07-01 07-01 Topic: Market Structure Blooms: Apply AACSB: AACSB: Analytical Analytical Thinking Thinking Difficulty: 02 Medium

31. 31.Suppose Supposeeach eachof ofthe the50 50states stateshad hadonly onlyone onegasoline gasolinestation, station,and andall allstations stationswere weret size. size. The The four-firm four-firm concentration concentration ratio ratio for for the the state state of of New New York, York, based based on on the the state state d A. 1.0. B. 0.08. C. 0.32. D. 0.16. Answer: A Learning Learning Objective: Objective: 07-01 07-01 Topic: Market Structure Blooms: Apply AACSB: AACSB: Analytical Analytical Thinking Thinking Difficulty: 02 Medium

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Chapter 07 - The Nature of Industry

32. 32.Suppose Supposeeach eachof ofthe the50 50states stateshad hadonly onlyone onegasoline gasolinestation, station,and andall allstations stationswere weret size. size. The The four-firm four-firm concentration concentration ratio ratio aa consumer consumer would would expe...