Version A

I. Multiple Choice

(1)b. (2)c. (3)c. (4)b. (5)d. (6)b. (7)b. (8)d. (9)c. (10)b. (11)c. (12)d. (13)a.

II. Problems

(1) [Theories of regulation: 6 pts]

1. Stigler-Peltzman theory.
2. capture theory.
3. Becker theory.

(2) [Pricing with economies of scale: 30 pts]

1. $1.
2. loss.
3. $80 million.
4. $0 million.
5. $11.
6. neither--the firm breaks even.
7. $0 million.
8. $10 million.
9. $1.
10. $16.

(3) [Multipart tariffs: 38 pts]

1. 25.
2. 5.
3. $150 million.
4. $150 million.
5. breaks even.
6. $20 million.
7. 35.
8. 0, because consumer surplus is less than the entry fee.
9. $165 million.
10. $165 million.
11. breaks even.
12. $22.5 million, because the small customer refuses service entirely.
13. 30.
14. 5.
15. $165 million.
16. $165 million.
17. breaks even.
18. $12.5 million.
19. The declining block tariff is best. The regulated firm breaks even in each case here, but the declining block tariff creates the smallest deadweight loss.

Version B

I. Multiple Choice

(1)d. (2)a. (3)d. (4)d. (5)c. (6)a. (7)d. (8)c. (9)b. (10)c. (11)a. (12)c. (13)b.

II. Problems

(1) [Theories of regulation: 6 pts]

1. Becker theory.
2. Stigler-Peltzman theory.
3. normative analysis as positive theory.

(2) [Pricing with economies of scale: 30 pts]

1. $2.
2. loss.
3. $24 million.
4. $0 million.
5. $6.
6. neither--the firm breaks even.
7. $0 million.
8. $4 million.
9. $2.
10. $4.80.

(3) [Multipart tariffs: 38 pts]

1. 30.
2. 5.
3. $140 million.
4. $140 million.
5. breaks even.
6. $20 million.
7. 40.
8. 0, because consumer surplus is less than the entry fee.
9. $150 million.
10. $150 million.
11. breaks even.
12. $22.5 million, because the small customer refuses service entirely.
13. 35.
14. 5.
15. $150 million.
16. $150 million.
17. breaks even.
18. $12.5 million.
19. The declining block tariff is best. The regulated firm breaks even in each case here, but the declining block tariff creates the smallest deadweight loss.

[end of answer key]