4.1.8.7 Competition policy Quiz: AQA Economics, Unit 1

The 20 questions

1. The main purpose of UK competition policy is to:

   • Encourage firms to merge into larger units so that each market contains only one supplier in the long run.
   • Protect domestic firms from all foreign competition by setting tariffs on imported goods and services in every market.
   • Guarantee that every firm in each market earns the same level of profit regardless of its efficiency or its size in the market.
   • Prevent firms from restricting competition, such as through cartels or abuse of a dominant position, in order to protect consumer welfare.

2. Which body is the principal UK competition authority?

   • The Office for Budget Responsibility, which produces forecasts of public borrowing and the performance of the economy.
   • The Bank of England, which sets interest rates and supervises the banks operating in the economy as a whole.
   • The Financial Conduct Authority, which regulates the conduct of firms in the financial services sector and no others.
   • The Competition and Markets Authority, which investigates mergers and anti-competitive practices across the economy.

3. Why is a cartel a target of competition policy?

   • A cartel fixes prices or restricts output among firms, which reduces competition and harms consumers through higher prices.
   • A cartel is a government body that sets maximum prices for goods in regulated industries across the whole economy.
   • A cartel increases competition by sharing information among firms, which lowers prices and raises output in the market.
   • A cartel is a legal agreement to share research, which always raises productivity and lowers costs for consumers in the market.

4. Which practice would most likely fall under the abuse of a dominant position?

   • A firm investing heavily in new equipment to raise its output and lower its unit costs over the long term in the market.
   • A small firm lowering its prices to attract customers from a rival that has a similar market share in the industry.
   • A firm offering a loyalty discount to customers who buy a new product that it has just launched in the market.
   • A dominant firm selling below cost to drive a rival out of the market, then raising prices once the rival has exited.

5. What is the main reason competition authorities scrutinise mergers?

   • A merger always lowers costs and so the authority must approve every merger to raise total output across the economy.
   • A merger may reduce competition and raise prices, so the authority assesses whether it is likely to harm consumers.
   • A merger always creates a monopoly, so the authority must block every merger that involves two firms in any market.
   • A merger reduces the number of firms in a market, so the authority must ensure the merged firm pays a higher rate of tax.

6. Which is a possible cost of competition policy?

   • Competition policy always raises prices, because it prevents firms from competing on price in every market in the economy.
   • Competition policy increases the market power of dominant firms, because it protects their profit margins from rivals in the market.
   • Competition policy reduces consumer choice, because it allows only one firm to supply each good in the economy as a whole.
   • Investigations are costly, and blocking mergers may prevent efficiencies such as economies of scale that would lower costs.

7. Which is a benefit of competition policy?

   • Lower prices and greater choice for consumers, as firms compete more vigorously for their custom in the market.
   • Reduced innovation, because firms that face competition have no incentive to improve their products over time.
   • Higher prices and fewer products, as firms agree to share the market and avoid costly competition with each other.
   • Greater dominance by the largest firms, as the policy protects them from smaller rivals entering the market over time.

8. Which EU rules prohibit anti-competitive agreements and the abuse of a dominant position within member states?

   • The EU's rules on the free movement of workers, which allow citizens to take up employment in other member states.
   • The Common Agricultural Policy rules, which set minimum prices for farm products traded across the member states.
   • The European Central Bank's mandate to maintain price stability across the euro area over the medium term.
   • Articles 101 and 102 of the Treaty on the Functioning of the European Union.

9. Two firms with market shares of 60 per cent and 25 per cent propose to merge. Which concern is most relevant?

   • The combined 85 per cent share may enable the merged firm to raise prices, so the authority would examine the effect on competition.
   • A combined share of 85 per cent always guarantees efficiency, so the authority should approve the merger without any examination.
   • The combined firm must reduce its output to 60 per cent by law, so the merger always lowers total output automatically.
   • The merged firm will have a lower share than before, so no competition concern arises for consumers in this market at all.

10. A dominant firm has a 70 per cent market share. Which action would competition policy most likely examine?

    • Reducing its prices in response to a fall in the cost of raw materials that it buys from its suppliers in the market.
    • Investing in a new factory that increases its capacity and lowers unit costs for all of its customers in the market.
    • Refusing to supply a key input to a rival that competes with it in the downstream market for the final product.
    • Publishing its annual accounts in full so that customers can compare its prices with those of rival firms in the market.

11. Which evaluation best assesses the effectiveness of competition policy?

    • Competition policy is unnecessary, because markets always remove market power over time without any intervention at all.
    • Competition policy is never effective, because firms always find ways to avoid competition laws in every market in the economy.
    • Its effectiveness depends on enforcement and on weighing lower prices and innovation against possible losses from scale economies.
    • Competition policy is always effective, because the number of firms in any market is the only factor that matters for welfare.

12. Which is the best description of a cartel?

    • A government-owned firm that provides a public service at a price set below the cost of production each year in the economy.
    • A merger between two firms in different industries that combine to diversify the risks of the products they sell in the market.
    • A group of consumers who agree to buy only from certain firms in order to lower the prices they pay in the market.
    • An agreement between firms to fix prices, share markets or restrict output so that they act together like a single monopolist.

13. In competition terms, what does it mean for a firm to be dominant?

    • It holds a large market share and can influence price and output without facing significant competition from rival firms.
    • It holds a patent for a product, so that no other firm can ever enter the market for any reason at any time in the case described.
    • It is subsidised by the state so that it can sell its products below the cost of production each year in the economy.
    • It is the largest firm by employment, but holds a very small share of the market for its own product in the economy.

14. Four firms have market shares of 40, 30, 20 and 10 per cent. If the two largest firms merge, what is the merged firm's market share?

    • 70 per cent, being the sum of the 40 per cent and 30 per cent shares of the two merging firms.
    • 40 per cent, since the merged firm keeps the share of the larger firm only, and the smaller firm exits the market entirely.
    • 35 per cent, since the combined share is averaged between the two firms that merge in the market over the period.
    • 80 per cent, since the merged firm's share is the sum of the 40, 30 and 10 per cent shares of the three largest firms.

15. Why might a competition authority allow a merger that reduces the number of firms in a market?

    • Authorities must allow every merger, because the law forbids them from examining any merger in the economy at any time.
    • Mergers always increase competition, because the merged firm has more resources to compete against new entrants in the market.
    • Mergers never affect prices, so the authority has no reason to examine their effect on consumers in the market at all.
    • The merger may generate efficiencies, such as lower costs passed on to consumers, which may outweigh the loss of competition.

16. Which statement about the Competition Act 1998 is most accurate?

    • It requires all firms to publish their prices online so that consumers can compare them in every market across the UK.
    • It sets the national minimum wage and regulates the pay of workers in firms with large market shares in the economy.
    • It prohibits anti-competitive agreements and the abuse of a dominant position within the UK economy.
    • It gives the Bank of England power to set interest rates independently of the government's economic policy objectives.

17. Which point weakens the case for strict competition policy in a natural monopoly?

    • In a natural monopoly many firms can supply the good at lower cost than a single firm, so splitting it always helps consumers.
    • In a natural monopoly competition always lowers costs, so no regulation is ever needed in any industry of the economy.
    • In a natural monopoly one firm may be the lowest-cost supplier, so splitting it into rivals could raise costs for consumers.
    • In a natural monopoly entry by rivals is easy, so the monopoly cannot sustain any price above its marginal cost in the market.

18. Competition policy in the UK relies mainly on which approach?

    • Fixed price controls set by the government for every firm in every industry across the whole economy at all times in the case described.
    • Investigating specific cases of anti-competitive behaviour and mergers, judged on their likely effects on competition and consumers.
    • Public ownership of all firms with a market share above 10 per cent, so that competition is replaced by state control.
    • Automatic approval of all mergers, so that firms can grow freely without any examination by the competition authority.

19. A firm is found to have fixed prices jointly with a rival. What is the likely outcome?

    • No penalty, because firms that fix prices always increase total welfare by stabilising the market price for consumers.
    • A fine and an order to stop the anti-competitive conduct, as the authority can impose sanctions on the firms involved.
    • A reward in the form of a subsidy paid by the government to the firms, to encourage stable pricing across the market.
    • Immediate nationalisation of both firms, so that the government sets prices for all the goods they produce in future.

20. When assessing a merger, which reasoning is most accurate?

    • The authority blocks any merger that increases firm size, since bigness is always a sign of anti-competitive behaviour.
    • The authority ignores efficiency gains entirely, because only the number of firms in a market affects consumer welfare.
    • The authority approves any merger that increases the firm's profit, since higher profit always reflects greater efficiency.
    • The authority weighs the likely rise in market power against any efficiency gains, judging whether consumers are harmed overall.

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