Regulation and Antitrust Policy (Econ 180)
Drake University, Spring 2007
William M. Boal

www.drake.edu/cbpa/econ/boal/180

william.boal@drake.edu

QUIZ 6 ANSWER KEY
Vertical Mergers and Vertical Restraints

Version A

I. Multiple choice [2 pt each: 20 pts total]

(1)b. (2)b. (3)c. (4)e. (5)a. (6)a. (7)b. (8)d. (9)b. (10)b.

II. Problems

(1) [Tying: 28 pts]

  1. $300;
  2. $150;
  3. $200;
  4. $800;
  5. $300;
  6. $900;
  7. As a package.

(2) [Double marginalization with fixed proportions: 52 pts]
a. MRP = 12 - (Q/50);
b. PS = 9 - (Q/50);
c. MRS = 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.

Version B

I. Multiple choice [2 pt each: 20 pts total]

(1)b. (2)c. (3)a. (4)e. (5)b. (6)b. (7)a. (8)b. (9)d. (10)a.

II. Problems

(1) [Tying: 28 pts]

  1. $150;
  2. $150;
  3. $250;
  4. $1000;
  5. $400;
  6. $1200;
  7. As a package.

(2) [Double marginalization with fixed proportions: 52 pts]
a. MRP = 15 - (Q/50);
b. PS = 12 - (Q/50);
c. MRS = 12 - (Q/25);
Table of Results [36 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.

[end of answer key]