Version A

I. Multiple choice [1 pt each: 20 pts total]

(1)a. (2)b. (3)a. (4)b. (5)a. (6)c. (7)c. (8)a. (9)d. (10)c.
(11)b. (12)a. (13)b. (14)a. (15)a. (16)d. (17)d. (18)b. (19)f. (20)b.
(21)b.

II. Problems

(1) [Game theory: 6 pts]

1. downtown;
2. uptown;
3. Chain A plays uptown and Chain B plays downtown,
   or Chain A plays downtown and Chain B plays uptown.

(2) [HHI and merger guidlines: 12 pts]

1. 950;
2. unconcentrated;
3. 1150;
4. moderately concentrated;
5. yes;
6. The merger raised the HHI by more than 100 points and the postmerger concentration is moderate.

(3) [Entry barriers and contestable markets: 26 pts]

1. $2;
2. 6 thousand;
3. 0.667;
4. $3;
5. $4;
6. loss;
7. $3 thousand;
8. 7 thousand;
9. $2;
10. profit;
11. $21 thousand;
12. $2;
13. L = 0.

(4) [Double marginalization with fixed proportions: 26 pts]
a. MR_P = 15 - (Q/50);
b. P_S = 12 - (Q/50);
c. MR_S = 12 - (Q/25);

Table of Results [18 pts]	(i) Successive monopolies	(ii) Vertically integrated monopoly
Q = quantity of sauce (and pizzas)	250	500
PS = price of sauce	$7
Profit of upstream firm	$1250
PP = price of pizzas	$12.50	$10
Profit of downstream firm	$625
Total upstream + downstream profits	$1875	$2500

d. The government should not try to block the merger because price will be lower after the merger and consumers will be better off.

(5) [Pricing with economies of scale: 20 pts]

1. $2;
2. loss;
3. $60 million;
4. $0 million;
5. $8;
6. neither;
7. $0 million;
8. $6 million;
9. $2;
10. $12.

(6) [Multipart tariffs: 38 pts]

1. 30 units;
2. 10 units;
3. $160 million;
4. $160 million;
5. break even;
6. $20 million;
7. 40;
8. 0 (because after subtracting entry fee, consumer surplus is negative);
9. $160 million;
10. $160 million;
11. break even;
12. $40 million;
13. 40;
14. 10;
15. $180 million;
16. $180 million;
17. break even;
18. $10 million;
19. The declining-block tariff is best. The firm breaks even under every tariff, but the declining-block tariff creates the least deadweight loss.

(7) [Peak-load pricing: 18 pts]

1. $0.10 per kWh;
2. 80 thousand kWh;
3. $0.02 per kWh;
4. 60 thousand kWh;
5. 90 thousand kWh;
6. 30 thousand kWh;
7. increase;
8. 10 thousand kWh;
9. $1 thousand.

(8) [Competition versus natural monopoly: 12 pts]

1. $35;
2. 5 thousand;
3. $22.5 thousand;
4. $50 thousand;
5. monopoly;
6. The cost savings from monopoly exceed the deadweight loss from monopoly pricing.

Version B

I. Multiple choice [1 pt each: 20 pts total]

(1)a. (2)e. (3)d. (4)d. (5)c. (6)b. (7)d. (8)b. (9)c. (10)d.
(11)d. (12)b. (13)d. (14)c. (15)c. (16)a. (17)b. (18)b. (19)e. (20)c.
(21)c.

II. Problems

(1) [Game theory: 6 pts]

1. low price;
2. low price;
3. Firm A plays low price and Firm B plays low price.

(2) [HHI and merger guidlines: 12 pts]

1. 1568;
2. moderately concentrated;
3. 1600;
4. moderately concentrated;
5. no;
6. The merger raised the HHI by fewer than 100 points and the postmerger concentration is moderate.

(3) [Entry barriers and contestable markets: 26 pts]

1. $3;
2. 4 thousand;
3. 0.5;
4. $3;
5. $4;
6. loss;
7. $3 thousand;
8. 7 thousand;
9. $3;
10. profit;
11. $14 thousand;
12. $3;
13. L = 0.

(4) [Double marginalization with fixed proportions: 26 pts]
a. MR_P = 12 - (Q/50);
b. P_S = 9 - (Q/50);
c. MR_S = 9 - (Q/25);

Table of Results [36 pts]	(i) Successive monopolies	(ii) Vertically integrated monopoly
Q = quantity of sauce (and pizzas)	200	400
PS = price of sauce	$5
Profit of upstream firm	$200
PP = price of pizzas	$10	$8
Profit of downstream firm	$400
Total upstream + downstream profits	$1200	$1600

d. The government should not try to block the merger because price will be lower after the merger and consumers will be better off.

(5) [Pricing with economies of scale: 20 pts]

1. $1;
2. loss;
3. $60 million;
4. $0 million;
5. $5;
6. neither;
7. $0 million;
8. $10 million;
9. $1;
10. $12.

(6) [Multipart tariffs: 38 pts]

1. 25 units;
2. 5 units;
3. $150 million;
4. $150 million;
5. break even;
6. $45 million;
7. 40;
8. 0 (because after subtracting entry fee, consumer surplus is negative);
9. $170 million;
10. $170 million;
11. break even;
12. $40 million;
13. 40;
14. 5;
15. $180 million;
16. $180 million;
17. break even;
18. $22.5 million;
19. The declining-block tariff is best. The firm breaks even under every tariff, but the declining-block tariff creates the least deadweight loss.

(7) [Peak-load pricing: 18 pts]

1. $0.12 per kWh;
2. 70 thousand kWh;
3. $0.02 per kWh;
4. 60 thousand kWh;
5. 80 thousand kWh;
6. 20 thousand kWh;
7. increase;
8. 10 thousand kWh;
9. $1.7 thousand.

(8) [Competition versus natural monopoly: 12 pts]

1. $60;
2. 4 thousand;
3. $45 thousand;
4. $40 thousand;
5. overbuild;
6. The deadweight loss from monopoly pricing exceeds the cost savings.

[end of answer key]