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Question 1. Which of the following is NOT a characteristic of a monopolistic market? A) Single seller B) High barriers to entry C) Price taking behavior D) Ability to set price above marginal cost Answer: C Explanation: In a monopoly the firm is a price maker, not a price taker; price‑taking behavior is a feature of perfect competition. Question 2. In monopoly pricing, marginal revenue (MR) is: A) Equal to price B) Greater than price C) Less than price D) Unrelated to price Answer: C Explanation: Because the monopolist must lower price to sell an additional unit, MR lies below the demand (price) curve. Question 3. The dead‑weight loss associated with monopoly arises because: A) Output is higher than the competitive level B) Price equals marginal cost C) Output is lower than the socially optimal level D) Fixed costs are zero Answer: C Explanation: Monopoly restricts output where MR = MC, which is below the competitive equilibrium where P = MC, creating a welfare loss.
Question 4. A natural monopoly is most likely to occur in an industry where: A) Fixed costs are negligible B) Average cost declines over the entire range of output C) There are many small firms D) Technology changes rapidly Answer: B Explanation: When economies of scale are so large that a single firm can supply the market at lower average cost than multiple firms, a natural monopoly arises. Question 5. The SSNIP test is used to: A) Measure a firm’s profit margin B) Define the relevant market by assessing price impact of a small market share increase C) Determine a firm’s cost structure D) Evaluate the fairness of rate‑of‑return regulation Answer: B Explanation: SSNIP (Small but Significant and Non‑Transitory Increase in Price) assesses whether a hypothetical competitor could profitably raise prices, helping to delineate market boundaries. Question 6. Predatory pricing is illegal because it: A) Increases consumer surplus B) Sets price equal to marginal cost C) Intends to eliminate competition by pricing below cost D) Encourages entry of new firms Answer: C
Answer: C Explanation: Unjustified price discrimination can foreclose competition and is prohibited when it is not based on cost differences. Question 10. The “first‑best” regulatory solution for a natural monopoly is: A) Rate‑of‑return regulation B) Average cost pricing C) Marginal cost pricing D) Price‑cap regulation Answer: C Explanation: Marginal cost pricing yields allocative efficiency, but may be financially unsustainable for the monopoly without subsidies. Question 11. Under average‑cost pricing, a regulated monopoly: A) Earns zero economic profit B) Earns a normal return on capital C) Maximizes consumer surplus D) Is forced to break even on variable costs only Answer: B Explanation: AC pricing sets price equal to average total cost, allowing the firm to cover all costs and earn a normal return. Question 12. Rate‑of‑return regulation determines price based on: A) The firm’s marginal cost only B) A predetermined profit margin over the firm’s capital base C) Market‑determined competitive price
D) The inflation rate alone Answer: B Explanation: RoR regulation sets prices to provide a fair return on the firm’s capital, calculated as a percentage above the cost of capital. Question 13. In the RPI‑X price‑cap formula, the “X” factor represents: A) Inflation rate B) Desired profit margin C) Efficiency factor that determines the allowed cost reduction D) Market share of the monopoly Answer: C Explanation: “X” is the efficiency factor (typically 0.6‑0.8) that determines the proportion of inflation that can be passed on, incentivizing cost cuts. Question 14. Yardstick competition is used to: A) Set a universal price cap for all utilities B) Compare performance of similar firms to establish benchmarks C) Determine the exact marginal cost of production D) Allocate subsidies to monopolies Answer: B Explanation: Yardstick competition uses data from comparable firms (often in other regions) to set performance standards and price caps. Question 15. The Herfindahl‑Hirschman Index (HHI) is calculated by: A) Summing the squares of each firm’s market share percentages B) Multiplying the largest firm’s market share by the second largest’s
A) Conduct codes imposed on the merged entity B) Divestiture of assets or businesses C) Price‑cap regulation after the merger D) Mandatory licensing of patents Answer: B Explanation: Structural remedies require the firm to separate parts of its business to restore competition. Question 19. Behavioral remedies aim to: A) Break up the merged firm physically B) Impose conduct obligations such as non‑discriminatory pricing C) Increase the firm’s market share D) Reduce the firm’s capital base Answer: B Explanation: Behavioral remedies regulate the firm’s conduct (e.g., pricing, access) without altering its structure. Question 20. A cartel is most likely to be detected through: A) Public price announcements B) Leniency program applications by a participant C) Routine market surveys D) Advertising expenditures Answer: B Explanation: Leniency programs encourage cartel members to self‑report, providing authorities with insider evidence.
Question 21. “Conscious parallelism” differs from a formal cartel because: A) Firms explicitly agree on prices B) Firms independently arrive at similar conduct without an explicit agreement C) It is always illegal D) It requires a written contract Answer: B Explanation: Conscious parallelism involves firms mimicking each other’s behavior without a direct collusive agreement, making enforcement more challenging. Question 22. Resale price maintenance (RPM) is prohibited when: A) It sets a minimum resale price that restricts competition B) It allows retailers to set any price they wish C) It is recommended by the manufacturer for brand protection D) It only applies to luxury goods Answer: A Explanation: RPM fixes a minimum resale price, limiting price competition among downstream sellers, and is per se illegal in many jurisdictions. Question 23. The Sherman Act primarily addresses: A) Abuse of dominance by a single firm B) Anti‑competitive agreements and monopolization in the United States C) Merger control thresholds D) State‑owned enterprises only Answer: B Explanation: The Sherman Act (1890) targets unreasonable restraints of trade and monopolization.
Explanation: Privatization often involves either creating competition or imposing regulation to curb monopoly power. Question 27. In the context of monopoly regulation, “price‑cap” means: A) The firm can charge any price below a ceiling set by the regulator B) The firm must charge exactly the marginal cost C) The firm receives a subsidy for each unit sold D) The regulator sets a minimum price floor Answer: A Explanation: A price‑cap sets an upper limit on the price a monopoly may charge, allowing it to set lower prices if it wishes. Question 28. Which of the following best describes “economies of scale”? A) Cost per unit rises as output increases B) Fixed costs increase with each additional unit C) Average total cost falls as output expands D) Marginal cost exceeds average cost at all output levels Answer: C Explanation: Economies of scale occur when larger production volumes lower the average cost per unit. Question 29. A firm with market power that sets price above marginal cost is: A) Allocatively efficient B) Generating a consumer surplus C) Engaging in monopoly pricing D) Operating under perfect competition
Answer: C Explanation: Monopoly pricing involves charging a price higher than marginal cost, leading to allocative inefficiency. Question 30. The “efficient frontier” in monopoly regulation refers to: A) The point where price equals average cost B) The set of outcomes where welfare loss is minimized given the firm’s cost structure C) The maximum profit the monopoly can earn D) The lowest possible price the regulator can set Answer: B Explanation: The efficient frontier balances consumer welfare and the firm’s ability to cover costs, often achieved with marginal‑cost pricing plus subsidies. Question 31. Which of the following is a common justification for allowing a natural monopoly to exist? A) To encourage price wars B) To achieve lower average costs than multiple competitors C) To increase market entry barriers D) To promote product differentiation Answer: B Explanation: Natural monopolies arise when a single firm can supply the market at a lower average cost than any set of multiple firms. Question 32. A “price squeeze” occurs when: A) A dominant firm raises its price while a downstream competitor lowers theirs
Question 35. A “market‑sharing” agreement is prohibited because it: A) Increases consumer choice B) Divides markets among competitors, reducing competition C) Encourages price competition D) Is a form of vertical integration Answer: B Explanation: Market sharing allocates customers or territories to firms, eliminating competition in those segments. Question 36. The “minimum efficient scale” (MES) is: A) The smallest output at which average cost is minimized B) The point where marginal revenue equals marginal cost C) The maximum output a firm can produce D) The level of output where price equals average cost Answer: A Explanation: MES is the output level at which a firm achieves the lowest average cost, often relevant for natural monopoly analysis. Question 37. In a regulated monopoly, a “cost‑plus” contract sets price equal to: A) Marginal cost only B) Average cost plus a guaranteed profit margin C) The competitive market price D) The inflation rate Answer: B Explanation: Cost‑plus (or average‑cost) pricing adds a predetermined return to the firm’s total cost.
Question 38. The “Lerner Index” measures monopoly power as: A) (P‑MC)/P B) (AR‑MR)/AR C) (P‑AC)/P D) (MC‑AC)/MC Answer: A Explanation: The Lerner Index = (Price – Marginal Cost) / Price; higher values indicate greater market power. Question 39. Which of the following is a typical feature of a “price‑cap” regulation scheme? A) Prices are set equal to marginal cost each year B) The cap is adjusted for inflation minus an efficiency factor C) The firm receives a fixed subsidy regardless of output D) The regulator sets a minimum price floor Answer: B Explanation: RPI‑X price‑cap regulation adjusts the ceiling by the inflation rate (RPI) less a productivity factor (X). Question 40. “Exclusive dealing” can be anti‑competitive when: A) It is offered voluntarily to all retailers B) It forecloses a substantial portion of the market to competitors C) It includes a discount for bulk purchases D) It is short‑term and low‑volume Answer: B
Answer: C Explanation: Regulators commonly choose X between 0.6 and 0.8 to balance incentive for cost reduction against price stability. Question 44. The “margin squeeze” test evaluates whether: A) The upstream price is set above the downstream price B) The downstream firm can cover its costs after paying the upstream price C) The merger creates a new market D) The firm’s profit margin exceeds industry average Answer: B Explanation: A margin squeeze occurs when the upstream price leaves the downstream firm with insufficient margin to compete. Question 45. “Horizontal market foreclosure” refers to: A) Blocking rivals from accessing a necessary input B) Preventing competitors from entering a downstream market through exclusive dealing C) Reducing the number of firms in a vertical supply chain D) Encouraging new entrants via subsidies Answer: B Explanation: Horizontal foreclosure occurs when a firm’s conduct (e.g., exclusive contracts) prevents rivals from accessing the market at the same level of the supply chain. Question 46. Under the “efficient‑scale” hypothesis, a regulator may allow a monopoly if: A) The firm can produce at a lower average cost than any competitive alternative B) The firm has a dominant brand C) The market is small and unprofitable for multiple firms
D) The firm requests a price increase Answer: A Explanation: The efficient‑scale argument justifies monopoly when a single firm can supply the market at the lowest average cost. Question 47. The “captive market” problem arises when: A) Consumers have many substitutes B) A dominant firm sells a product that is required to use a complementary good it also controls C) Prices are set by market forces D) The government subsidizes the product Answer: B Explanation: Captive markets occur when customers must purchase a dominant firm’s essential product to use another product the same firm controls, potentially leading to abuse. Question 48. In merger analysis, a “post‑merger HHI” above 2500 generally indicates: A) A highly competitive market B) A potentially problematic level of concentration C) No need for regulatory review D) That the merger will create efficiencies automatically Answer: B Explanation: An HHI above 2500 signals a concentrated market; regulators scrutinize such mergers closely. Question 49. Which of the following is a “behavioral remedy” often imposed after a merger? A) Divesting a subsidiary B) Imposing a price‑cap on the merged entity
B) Predatory pricing aims to eliminate competition, loss‑leader pricing aims to attract customers without intent to drive rivals out C) Loss‑leader pricing is illegal, predatory pricing is not D) Both are the same concept under different names Answer: B Explanation: Predatory pricing seeks to force competitors out, whereas loss‑leader pricing is a short‑term strategy to boost sales without anticompetitive intent. Question 53. The “efficient‑cost‑plus” pricing model adds a return on capital equal to: A) The firm’s historical profit margin B) The cost of capital determined by market rates C) A fixed 5% markup D) The average industry profit rate Answer: B Explanation: Efficient‑cost‑plus sets price = total cost + a fair return based on the cost of capital, reflecting opportunity cost of investment. Question 54. The “price‑cap” regulation mechanism is most appropriate when: A) The regulator can accurately observe marginal cost B) The firm’s costs are highly volatile and unpredictable C) The market is perfectly competitive D) The firm has no fixed costs Answer: B Explanation: Price‑caps provide stability when marginal cost is hard to measure, allowing the firm to retain surplus from cost reductions.
Question 55. In the context of “vertical price‑fixing,” a manufacturer that sets a minimum resale price for retailers is engaging in: A) Resale price maintenance (RPM) B) Predatory pricing C) Price discrimination D) Cost‑plus pricing Answer: A Explanation: RPM involves a supplier imposing a minimum resale price, which is a form of vertical price‑fixing. Question 56. A “cartel” can be broken up by authorities through: A) Imposing a price ceiling B) Offering immunity or reduced penalties to the first whistle‑blower (leniency) C) Requiring firms to merge D) Providing subsidies to all members Answer: B Explanation: Leniency programs incentivize cartel members to report the agreement, facilitating detection and prosecution. Question 57. The “Kinked Demand Curve” model explains price rigidity in oligopolies because: A) Marginal cost is constant B) Firms believe rivals will match price cuts but not price increases C) Demand is perfectly elastic D) There are no barriers to entry Answer: B
