Midterm

Question 1

Who developed structure-conduct-performance paradigm?

Answer 1

Edward Mason and Joe Bain in the 1940s and 1950s

Question 2

What did Mason and Bain hypothesize?

Answer 2

there is a direct relationship between market structure, market conduct, and market performance.

Question 3

With a monopolistic market structure, economic performance is poor:

Answer 3

Price exceeds marginal cost,

inefficient firms can survive in the long run, and economic profits are greater than zero.

Question 4

What historical circumstances resulted in the passage of the Sherman Act in 1890?

Answer 4

Before the Civil War, the United States was mainly an agrarian society in which high transportation
costs kept the geographic size of most industrial markets small.
 After the Civil War, the organization of American industry changed dramatically. The rapid growth
of national markets in many products developed from a combination of
a. mass production, introduced by the Industrial Revolution, which resulted in significant
economies of scale
b. a national railroad system, which greatly increased the size of the geographic market for
many products;
c. the development of modern capital markets
d. the liberalization of the laws of incorporation in many states
 With the growth of national markets, many small regional manufacturers faced competition for the
first time.

Question 5

In a world in which managers have some discretion over costs, costs may also be higher due
to X-inefficiency:

Answer 5

a. If managers are interested in living a quiet, peaceful life, they may not continually strive
to find the least costly way of organizing production, handling materials, and, in general,
doing business. As a result, costs are higher than necessary
b. Managers may care most about protecting their jobs.
c. Because of organizational size and complexity, managers may opt for “satisficing”
instead of profit maximizing.
d. The satisficer sets a minimum acceptable level of performance below which he or she
does not want to fall.

Question 6

Constraints on Managers:

Answer 6

• The possibility of stockholder revolt
• Threat of take over
• Product market may constrain manager

Question 7

Short Run Cost Curves:

Answer 7

MC=∆TC/∆q
 AFC=FC/q
 AVC=TVC/q
 AC= TC/q = AFV+AVC
 P=MC --> profit max = min AC (zero econ profit)

Question 8

involve firms that are direct competitors prior to the merger. The firms compete in
both the same product market and the same geographic market: buyers regard the firms’ products as
substitutes.

Answer 8

Horizontal Merger

Question 9

involve firms that produce at different stages of production in the same industry. A
vertical merger combines a previous customer with its supplier.

Answer 9

Vertical Merger

Question 10

involve companies that operate in either different product markets or the same
product market but different geographic markets.

Answer 10

Conglomerate Merger

Question 11

Anecdotal evidence, usually from antitrust cases about industries in which established firms are at
an advantage because of their ownership of the best resources

Answer 11

Absolute Cost Advantages as barrier to entry

Question 12

If new firms have to pay a higher interest rate on borrowed funds than established firms, then they
face a barrier to entry.

Answer 12

Capital Costs as barrier to entry