Version A

I. Multiple choice [2 pt each: 16 pts total]

(1)c. (2)b. (3)a. (4)b. (5)c. (6)c. (7)b. (8)c.

II. Problems

(1) [Franchise bidding: 10 pts]

1. Firm C;
2. $40 (or perhaps slightly less--maybe $39.99).

(2) [Franchise bidding: 32 pts]

1. Firm A 50 units, Firm B 60 units;
2. Firm A $100, Firm B $120;
3. Firm A $115, Firm B $120;
4. Franchise awarded to Firm B;
5. Firm B's tariff provides greater consumer surplus to a typical resident.

(3) [Effect of franchise fees: 14 pts]

1. $20;
2. 50 thousand;
3. $1000 thousand, or $1 million;
4. Total price including franchise fee = $60;
5. 30 thousand;
6. $900 = net price times quantity;
7. $700 thousand.

(4) [Competition versus natural monopoly: 28 pts]

1. straight line with price intercept = $60, quantity intercept = 6 thousand;
2. $35;
3. 5 thousand;
4. $22.5 thousand;
5. $50 thousand;
6. monopoly;
7. The cost saving from monopoly production exceeds the deadweight loss from monoply pricing.

Version B

I. Multiple choice [2 pt each: 16 pts total]

(1)d. (2)a. (3)d. (4)a. (5)a. (6)a. (7)d. (8)b.

II. Problems

(1) [Franchise bidding: 10 pts]

1. Firm B;
2. $30 (or perhaps slightly less--maybe $29.99).

(2) [Franchise bidding: 32 pts]

1. Firm A 40 units, Firm B 50 units;
2. Firm A $90, Firm B $110;
3. Firm A $70, Firm B $65;
4. Franchise awarded to Firm A;
5. Firm A's tariff provides greater consumer surplus to a typical resident.

(3) [Effect of franchise fees: 14 pts]

1. $10;
2. 50 thousand;
3. $500 thousand;
4. Total price including franchise fee = $30;
5. 30 thousand;
6. $450 = net price times quantity;
7. $350 thousand.

(4) [Competition versus natural monopoly: 28 pts]

1. straight line with price intercept = $100, quantity intercept = 10 thousand;
2. $60;
3. 4 thousand;
4. $45 thousand;
5. $40 thousand;
6. competition;
7. The cost saving from monopoly production is less than the deadweight loss from monoply pricing.

[end of answer key]