Answer the following statements true (T) or false (F)
1. The purpose of using the four-firm concentration ratio is to calculate how much market share would change in the case of a merger between two of the firms.
2. A minimum price contract is illegal because it would restrict competition.
3. One regulatory option for dealing with natural monopolies is to leave them alone.
4. The purpose of the Dodd-Frank Act was to address numerous accounting scandals involving prominent corporations such as Enron, Tyco International, and WorldCom that occurred as a result of deregulation.
5. If firms were required to pay the social costs of pollution, they would create less pollution but produce less of the product and charge a higher price.
1. True
This statement is true. The concentration ratio approach can help to clarify some of the fuzziness over deciding when a merger might affect competition. For instance, if two of the smallest firms in the market merged, the four-firm concentration ratio would not change much—which implies that the degree of competition in the market would not be notably diminished. However, if the top two firms merged, then the four-firm concentration ratio would be higher, so such a proposed merger might raise eyebrows among antitrust regulators.
2. True
This statement is true. A minimum price contract is illegal because it would restrict competition. If a product manufacturer is selling to a group of dealers who then sell to the general public, it is illegal for the manufacturer to demand a minimum resale price maintenance agreement, which would require the dealers to sell for at least a certain minimum price.
3. True
This statement is true. One regulatory possibility is to leave the natural monopoly alone. In this case, the monopoly will follow its normal approach to maximizing profits.
4. False
This statement is false. A number of major accounting scandals involving prominent corporations such as Enron, Tyco International, and WorldCom led to passage of the Sarbanes-Oxley Act in 2002. One response to the financial crisis in 2007 was the Dodd-Frank Act, which attempted major reforms of the financial system.
5. True
This statement is true. If firms were required to pay the social costs of pollution, they would create less pollution but produce less of the product and charge a higher price.
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Moral hazard typically occurs because
A) people are dishonest. B) agreements sometimes create incentives that are costly to monitor. C) workers possess diminishing marginal productivity. D) workers possess adverse selection.
Suppose an investment bank has a leverage ratio of 10 and the value of its securities decline by 10%. What happens to its return on equity investment?
A) declines by 1% B) increases by 1% C) declines by 100% D) increases by 100%
With only two goods, x and y, if x and y are gross substitutes, a rise in px must necessarily:
a. increase spending in x. b. reduce spending in x. c. increase spending in y. d. reduce spending in y.
Suppose Jack and Kate are at the town fair and are choosing which game to play. The first game has a bag with four marbles in it-1 red marble and 3 blue ones. The player draws one marble from the bag; if it is red, they win $20 and if it is blue, they win $1. The second game has a bag with 10 marbles in it-1 red, 4 blue, and 5 green. The player draws one marble from the bag; if it is red, they win $20; if it is blue, they win $5; and if it is green, they win $1. Both games cost $5 to play. Kate decides to play the second game. Kate's expected value of payoff is:
A. $5.00. B. $5.75. C. $4.50. D. $4.00.