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 12 ANSWER KEY
Telecommunications

Version A

I. Multiple Choice

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

II. Problems

(1) [Long-distance telecommunications technology: 8 pts]

(2) [Transformation of natural monopoly pts]

  1. 8 million.
  2. Yes, this industry is a natural monopoly. The minimum efficient scale is greater than half the quantity demanded where AC intersects demand. So it is cheaper to supply this industry with one firm than with two.
  3. 6 million.
  4. No.
  5. $5.
  6. 18 million.
  7. 3 firms.

(3) [Multiproduct cost functions: 36 pts]

  1. $164.
  2. $179.
  3. $294.
  4. Yes, Acme enjoys economies of scope because C(30,0) + C(0,20) > C(30,20).
  5. IC(QY) = $92, $130, $159, $184.
  6. AIC(QY) = $9.20, $6.50, $5.30, $4.60.
  7. Yes, Acme enjoys product specific economies of scale for product Y because AIC(QY) decreases as QY increases.

III. Critical thinking

The "essential facilities doctrine" holds that a monopolist who controls an essential facility must provide access to competing firms, if those firms cannot construct their own facility. Otherwise, the monopolist is guilty under Section 2 ("monopolization") of the Sherman Act. Like railroads in the past, today's telecommunications companies depend on interconnection with other companies. For example, wireless compannies depend on interconnection with local landline telecommunications companies. So the "essential facilities doctrine" would surely require major telecommunications companies, especially local landline companies, to allow other companies to connect with their network. [See Viscusi, Harrington, and Vernon (2005) pp. 323-324 for a discussion of important cases.]

Version B

I. Multiple Choice

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

II. Problems

(1) [Long-distance telecommunications technology: 8 pts]

(2) [Transformation of natural monopoly pts]

  1. 10 million.
  2. Yes, this industry is a natural monopoly. The minimum efficient scale is greater than half the quantity demanded where AC intersects demand. So it is cheaper to supply this industry with one firm than with two.
  3. 5 million.
  4. No.
  5. $3.
  6. 20 million.
  7. 4 firms.

(3) [Multiproduct cost functions: 36 pts]

  1. $296.
  2. $109.
  3. $356.
  4. Yes, Acme enjoys economies of scope because C(30,0) + C(0,20) > C(30,20).
  5. IC(QY) = $13, $60, $118, $182.
  6. AIC(QY) = $1.30, $3.00, $3.93, $4.55.
  7. No, Acme does not enjoy product specific economies of scale for product Y because AIC(QY) increases as QY increases.

III. Critical thinking

Save as version A.

[end of answer key]