Regulation and Antitrust Policy (Econ 180)
Drake University, Spring 2009
William M. Boal

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

william.boal@drake.edu

QUIZ 11 ANSWER KEY
Franchise Bidding and Government Enterprise

Version A

I. Multiple Choice

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

II. Problems

(1) [Franchise bidding versus ROR regulation: 20 pts]

  1. true, true.
  2. true, false.
  3. true, true.
  4. true, false.
  5. false, true.

(2) [Second-price auctions: 12 pts]

  1. decrease.
  2. remain constant.
  3. Should not raise bid above $10,000. Raising the bid will decrease your the chances of winning without raising your profit if you win, because the price you are paid is not your bid but rather the second price.
  4. increase.
  5. remain constant.
  6. Should not lower your bid below $10,000. Lowering your bid increases your chance of winning only if another firm is bidding below $10,000. But if you win in that situation, you will be paid the second price, which is below $10,000 so you will lose money.

(3) [Franchise bidding: 24 pts]

  1. 40 units, 30 units.
  2. $140, $120.
  3. $100, $90.
  4. Acme Services.
  5. Acme's bid offers greater consumer surplus for the typical resident.

(4) [Effect of franchise fees: 27 pts]

  1. $20.
  2. 8 thousand.
  3. $160 thousand.
  4. New demand curve has same quantity intercept at 9 thousand, but is only 50 percent as high as old demand curve, since 50 percent of revenues must now be given to government.
  5. $60.
  6. $30.
  7. 6 thousand.
  8. $180 thousand.
  9. $100 thousand.

III. Critical thinking

The welfare gain from overbuild is reduction in deadweight loss, because the price is expected to fall from competition between two cable companies. The welfare loss from overbuild is the increase in costs, because of economies of scale from density are lost. [Full credit requires diagram showing triangle of deadweight loss from monopoly and rectangle of cost savings from monopoly. Diagram should resemble figure 7.3 on page 211 of textbook by Viscusi, Harrington, and Vernon, fourth edition.]

Version B

I. Multiple Choice

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

II. Problems

(1) [Franchise bidding versus ROR regulation: 20 pts]

  1. true, false.
  2. true, true.
  3. true, false.
  4. false, true.
  5. true, true.

(2) [Second-price auctions: 12 pts]

  1. increase.
  2. remain constant.
  3. Should not lower your bid below $10,000. Lowering your bid increases your chance of winning only if another firm is bidding below $10,000. But if you win in that situation, you will be paid the second price, which is below $10,000 so you will lose money.
  4. decrease.
  5. remain constant.
  6. Should not raise bid above $10,000. Raising the bid will decrease your the chances of winning without raising your profit if you win, because the price you are paid is not your bid but rather the second price.

(3) [Franchise bidding: 24 pts]

  1. 80 units, 70 units.
  2. $170, $140.
  3. $230, $245
  4. Best Services.
  5. Best's bid offers greater consumer surplus for the typical resident.

(4) [Effect of franchise fees: 27 pts]

  1. $40.
  2. 7 thousand.
  3. $280 thousand.
  4. New demand curve has same quantity intercept at 9 thousand, but is only 50 percent as high as old demand curve, since 50 percent of revenues must now be given to government.
  5. $100.
  6. $50.
  7. 4 thousand.
  8. $200 thousand.
  9. $130 thousand.

III. Critical thinking

Save as version A.

[end of answer key]