Version A

I. Multiple choice [2 pt each: 24 pts total]

(1)c. (2)d. (3)a. (4)b. (5)c. (6)b. (7)d. (8)b. (9)b. (10)d.
(11)c. (12)a.

II. Problems

(1) [Multipart tariffs: 59 pts]

1. 25;
2. 5;
3. $150 million;
4. $150 million;
5. break even;
6. $45 million;
7. 40;
8. 0;
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. Should favor the declining block tariff because it produces the smallest deadweight loss. Note that all three tariffs produce zero profit for the regulated firm.

(2) [Joint costs: 17 pts]

1. $40;
2. $90;
3. $6.525 million;
4. More hotels in the future;
5. Revenues are greater than cost, so hotels are making positive economic profit. This will attract entry of new hotels.

Version B

I. Multiple choice [2 pt each: 24 pts total]

(1)a. (2)c. (3)b. (4)d. (5)d. (6)a. (7)b. (8)c. (9)d. (10)b.
(11)a. (12)c.

II. Problems

(1) [Multipart tariffs: 59 pts]

1. 30;
2. 10;
3. $160 million;
4. $160 million;
5. break even;
6. $20 million;
7. 40;
8. 0;
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. Should favor the declining block tariff because it produces the smallest deadweight loss. Note that all three tariffs produce zero profit for the regulated firm.

(2) [Joint costs: 17 pts]

1. $30;
2. $80;
3. $6.72 million;
4. More hotels in the future;
5. Revenues are greater than cost, so hotels are making positive economic profit. This will attract entry of new hotels.

[end of answer key]