FINAL EXAM ANSWER KEY
Version A
I. Multiple Choice
(1)c. (2)d. (3)b. (4)a. (5)d. (6)d. (7)d. (8)c. (9)b. (10)d.
(11)b. (12)b.
II. Problems
(1) [Monopoly, markup formula, Lerner index: 4 pts]
- $60.
- L = 2/3 = 0.667.
(2) [Structure-Conduct-Performance paradigm: 5 pts]
- structure.
- conduct.
- performance.
- structure.
- conduct.
(3) [Collusion/joint profit maximization: 16 pts]
- MR = 16 - 2Q.
- plot MR curve: price intercept = $16, slope = $2/thousand,
quantity intercept = 8 thousand.
- $10.
- 6 thousand.
- $12 thousand.
- $6.
- 10 thousand.
- $0.
(4) [Cournot duopoly: 10 pts]
- P = (11-(qA/400)) - (qB/400).
- MRB = (11-(qA/400)) - (qB/200).
- qB = 1800 - (qA/2).
- qA = qB = 1200.
- P = $5.
(5) [Entry barriers and contestable markets: 26 pts]
- $2.
- 6 million.
- L = 2/3 = 0.667.
- $3.
- $4.
- loss.
- $3 million.
- 9 million.
- $2.
- profit.
- $27 million.
- $2.
- L = 0.
(6) [HHI and merger guidelines: 12 pts]
- 2350.
- highly concentrated.
- 2450.
- highly concentrated.
- yes, will likely oppose.
- Market is highly concentrated and merger causes HHI to increase by more than 50 points.
(7) [Welfare tradeoffs of mergers: 24 pts]
- $3.
- 14 million.
- $6.
- 8 million.
- L = 2/3 = 0.667.
- $33 million.
- $24 million.
- $9 million.
- $8 million.
- decrease.
- $1 million.
(8) [Motivations for vertical mergers: 8 pts]
- two separate firms.
- single vertically-integrated firm.
- single vertically-integrated firm.
- single vertically-integrated firm.
(9) [Cases: 10 pts]
- MCI v. AT&T (1982).
- Utah Pie v. Continental Baking (1967).
- Berkey Photo v. Kodak (1979).
- Standard Oil v. U.S. (1911).
- U.S. v. U.S. Steel (1920).
(10) [Value of a statistical live: 6 pts]
- $8.1 million.
- $2.5 million.
- yes, because cost < VSL.
(11) [Peak-load pricing: 20 pts]
- 90 thousand kWh is the capacity of the generating plant.
- $0.10 per kWh.
- 90 thousand kWh.
- $0.04 per kWh.
- 70 thousand kWh.
- 100 thousand kWh.
- 50 thousand kWh.
- increase.
- by 10 thousand kWh.
- $0.5 thousand.
(12) [Franchise bidding: 16 pts]
- Acme: 40 units, Best: 30 units.
- Acme: $140, Best: $120.
- Acme: $100, Best: $90.
- Acme should receive the franchise.
- Acme's tariff offers greater consumer surplus.
(13) [Motivations for vertical mergers: 8 pts]
- 10 million.
- Yes, it is a natural monopoly. It is not possible to divide 12 million units of output between two firms without raising total cost.
- 5 million.
- No, it is no longer a natural monopoly.
- $3.
- 20 million.
- 4 firms.
(14) [Maximum prices and exit restrictions: 10 pts]
- $2 million.
- $16 million.
- $6.
- $8 million.
- $10 million.
III. Critical thinking
Arguments for a merger include the following. Fiat, which sells autos in Europe, currently has zero market share in the U.S. Also, Chrysler appears to be a failing firm, and would likely disappear from the market if the merger were disallowed.
Arguments against a merger of Fiat and Chrysler include the following. The auto industry in the United States is already highly concentrated. [By production (value of shipments) the HHI ranges from 1900 to 2600, depending on the definition of the industry.] Also, Fiat, which sells autos in Europe, is a potential entrant into the U.S. market.
The overall conclusion is that the merger should be permitted. The "failing firm" issue is the most important one.
Version B
I. Multiple Choice
(1)b. (2)c. (3)d. (4)e. (5)b. (6)a. (7)e. (8)b. (9)d. (10)c.
(11)a. (12)d.
II. Problems
(1) [Monopoly, markup formula, Lerner index: 4 pts]
- $25.
- L = 1/5 = 0.2.
(2) [Structure-Conduct-Performance paradigm: 5 pts]
- performance.
- structure.
- conduct.
- structure.
- conduct.
(3) [Collusion/joint profit maximization: 16 pts]
- MR = 16 - 2Q.
- plot MR curve: price intercept = $16, slope = $2/thousand,
quantity intercept = 8 thousand.
- $11.
- 5 thousand.
- $10 thousand.
- $7.
- 9 thousand.
- $0.
(4) [Cournot duopoly: 10 pts]
- P = (14-(qA/200)) - (qB/200).
- MRB = (14-(qA/200)) - (qB/100).
- qB = 1200 - (qA/2).
- qA = qB = 800.
- P = $6.
(5) [Entry barriers and contestable markets: 26 pts]
- $3.
- 7 million.
- L = 2/3 = 0.5714.
- $4.
- $7.
- loss.
- $9 million.
- 8 million.
- $3.
- profit.
- $24 million.
- $3.
- L = 0.
(6) [HHI and merger guidelines: 12 pts]
- 1350.
- moderately concentrated.
- 1400.
- moderately concentrated.
- no, will not likely oppose.
- Market is only moderately concentrated and merger causes HHI to increase by less than 100 points.
(7) [Welfare tradeoffs of mergers: 24 pts]
- $6.
- 10 million.
- $10.
- 6 million.
- L = 3/5 = 0.6.
- $32 million.
- $24 million.
- $8 million.
- $12 million.
- increase.
- $4 million.
(8) [Motivations for vertical mergers: 8 pts]
- single vertically-integrated firm.
- two separate firms.
- single vertically-integrated firm.
- single vertically-integrated firm.
(9) [Cases: 10 pts]
- Standard Oil v. U.S. (1911).
- U.S. v. U.S. Steel (1920).
- MCI v. AT&T (1982).
- Utah Pie v. Continental Baking (1967).
- Berkey Photo v. Kodak (1979).
(10) [Value of a statistical live: 6 pts]
- $4.8 million.
- $6.25 million.
- no, because cost > VSL.
(11) [Peak-load pricing: 20 pts]
- 80 thousand kWh is the capacity of the generating plant.
- $0.12 per kWh.
- 80 thousand kWh.
- $0.04 per kWh.
- 60 thousand kWh.
- 90 thousand kWh.
- 30 thousand kWh.
- increase.
- by 10 thousand kWh.
- $1 thousand.
(12) [Franchise bidding: 16 pts]
- Acme: 80 units, Best: 70 units.
- Acme: $170, Best: $140.
- Acme: $230, Best: $245.
- Best should receive the franchise.
- Best's tariff offers greater consumer surplus.
(13) [Motivations for vertical mergers: 8 pts]
- 8 million.
- Yes, it is a natural monopoly. It is not possible to divide 10 million units of output between two firms without raising total cost.
- 6 million.
- No, it is no longer a natural monopoly.
- $5.
- 18 million.
- 3 firms.
(14) [Maximum prices and exit restrictions: 10 pts]
- $0.5 million.
- $8 million.
- $6.
- $2 million.
- $2.5 million.
III. Critical thinking
Save as version A.
[end of answer key]