Regulation and Antitrust Policy (Econ 180)
Drake University, Spring 2011
William M. Boal

Course page: www.drake.edu/cbpa/econ/boal/180
Blackboard: bb.drake.edu
Email: william.boal@drake.edu

FINAL EXAMINATION ANSWER KEY

Version A

I. Multiple choice [1 pt each: 12 pts total]

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

II. Problems

(1) [Monopoly, markup formula, Lerner index: 4 pts]

  1. $8.
  2. L = 0.25.

(2) [Structure-Conduct-Performance paradigm: 10 pts]

  1. conduct.
  2. conduct.
  3. conduct.
  4. performance.
  5. structure.

(3) [Game theory: 8 pts]

  1. "low price."
  2. "low price."
  3. One Nash equilibrium: both firms play "low price."

(4) [Measuring industry concentration: 18 pts]

  1. Firm 6.
  2. 80.
  3. 90.
  4. Industry B.
  5. 2350.
  6. 2150.
  7. Industry A.
  8. 0.047.
  9. 0.043.

(5) [Statutes: 10 pts]

  1. Sherman Act, Section 2.
  2. Clayton Act, Section 7.
  3. Celler-Kefauver Act.
  4. Hart-Scott-Rodino Act.
  5. Sherman Act, Section 1.

(6) [Successive monopolies with fixed proportions: 26 pts]

  1. MRD = 15 - (Q/50).
  2. PC = 11 - (Q/50).
  3. MRC = 11 - (Q/25).
    Table of Results (i) Successive
    monopolies
    (ii) Vertically
    intetgrated monopoly
    Q = quantity of chips (and devices)200400
    PC = price of chips$7
    Profit of upstream firm$800
    PD = price of devices$13$11
    Profit of downstream firm$400
    Total upstream + downstream profits$1200$1600
  4. The government should not block the merger. The merger makes consumers better off because the price decreases so consumer surplus is larger. The merger makes producers better off because profits are larger. The merger therefore increases social welfare.

(7) [Cases: 10 pts]

  1. Standard Oil v. U.S. (1911).
  2. U.S. v. U.S. Steel (1920).
  3. MCI v. AT&T (1982).
  4. Utah Pie v. Continental Baking (1967).
  5. Berkey Photo v. Kodak (1979).

(8) [Market-segmenting price discrimination: 4 pts]

  1. $60.
  2. $48.

(9) [Theories of regulation: 6 pts]

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

(10) [Pricing with economies of scale: 20 pts]

  1. $2.
  2. loss.
  3. $60 million.
  4. $0 million.
  5. $8.
  6. neither.
  7. $0 million.
  8. $6 million.
  9. $2.
  10. $30.

(11) [Peak-load pricing: 20 pts]

  1. SRMC bends up verticall at 70 thousand kilowatt-hours because the capacity of system is 70 thousand kilowatt-hours.
  2. $0.14 per kWh.
  3. 70 thousand kWh.
  4. $0.04 per kWh.
  5. 60 thousand kWh.
  6. 80 thousand kWh.
  7. 20 thousand kWh.
  8. increase.
  9. 10 thousand kWh.
  10. $1.7 thousand.

(12) [Evaluating bids: 16 pts]

  1. 80 units, 70 units.
  2. $330, $280.
  3. $230, $245.
  4. Alright Services.
  5. Alright Services' bid provides greater consumer surplus.

(13) [Airline deregulation: 16 pts]

  1. true.
  2. false.
  3. false.
  4. false.
  5. false.
  6. true.
  7. true.
  8. false.

(14) [Value of a statistical life: 6 pts]

  1. $4,500,000.
  2. $1,500,000.
  3. yes.

(15) [Optimal stringency of regulation: 10 pts]

  1. MC per life saved = $200,000, $1,200,000, $9,000,000, $44,000,000.
  2. AC per life saved = $200,000, $600,000, $2,000,000, $8,000,000.
  3. Standard B is efficient.

III. Challenge question [4 pts]

With one company, the market outcome is given as monopoly so the quantity is 4 thousand and the price is $40. With two companies, the market outcome is given as price competition, so the quantity is 7 thousand and the price is $25 (marginal cost). Deadweight loss from monopoly pricing is $22.5 thousand, and the cost saving from production by only one company is $20 thousand. Because the cost saving is less than the deadweight loss from monopoly pricing, two companies are better for society than one company.

Version B

I. Multiple choice [1 pt each: 12 pts total]

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

II. Problems

(1) [Monopoly, markup formula, Lerner index: 4 pts]

  1. $6.
  2. L = 1/3.

(2) [Structure-Conduct-Performance paradigm: 10 pts]

  1. conduct.
  2. performance.
  3. structure.
  4. conduct.
  5. conduct.

(3) [Game theory: 8 pts]

  1. "Standard 2."
  2. "Standard 1."
  3. Two Nash equilibria: both firms play "Standard 1," and both firms play "Standard 2."

(4) [Measuring industry concentration: 18 pts]

  1. Firm 1.
  2. 85.
  3. 80.
  4. Industry A.
  5. 2100.
  6. 3000.
  7. Industry B.
  8. 0.07.
  9. 0.01.

(5) [Statutes: 10 pts]

  1. Hart-Scott-Rodino Act.
  2. Sherman Act, Section 1.
  3. Sherman Act, Section 2.
  4. Clayton Act, Section 7.
  5. Celler-Kefauver Act.

(6) [Successive monopolies with fixed proportions: 26 pts]

  1. MRD = 17 - (Q/50).
  2. PC = 14 - (Q/50).
  3. MRC = 14 - (Q/25).
    Table of Results (i) Successive
    monopolies
    (ii) Vertically
    intetgrated monopoly
    Q = quantity of chips (and devices)300600
    PC = price of chips$8
    Profit of upstream firm$1800
    PD = price of devices$14$11
    Profit of downstream firm$900
    Total upstream + downstream profits$2700$3600
  4. The government should not block the merger. The merger makes consumers better off because the price decreases so consumer surplus is larger. The merger makes producers better off because profits are larger. The merger therefore increases social welfare.

(7) [Cases: 10 pts]

  1. Utah Pie v. Continental Baking (1967).
  2. Berkey Photo v. Kodak (1979).
  3. Standard Oil v. U.S. (1911).
  4. U.S. v. U.S. Steel (1920).
  5. MCI v. AT&T (1982).

(8) [Market-segmenting price discrimination: 4 pts]

  1. $80.
  2. $66.

(9) [Theories of regulation: 6 pts]

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

(10) [Pricing with economies of scale: 20 pts]

  1. $3.
  2. loss.
  3. $30 million.
  4. $0 million.
  5. $9.
  6. neither.
  7. $0 million.
  8. $3 million.
  9. $3.
  10. $15.

(11) [Peak-load pricing: 20 pts]

  1. SRMC bends up verticall at 90 thousand kilowatt-hours because the capacity of system is 90 thousand kilowatt-hours.
  2. $0.14 per kWh.
  3. 90 thousand kWh.
  4. $0.02 per kWh.
  5. 70 thousand kWh.
  6. 100 thousand kWh.
  7. 20 thousand kWh.
  8. increase.
  9. 10 thousand kWh.
  10. $2.6 thousand.

(12) [Evaluating bids: 16 pts]

  1. 50 units, 40 units.
  2. $180, $160.
  3. $170, $160.
  4. OK Services.
  5. OK Services' bid provides greater consumer surplus.

(13) [Airline deregulation: 16 pts]

  1. false.
  2. false.
  3. false.
  4. true.
  5. true.
  6. false.
  7. true.
  8. false.

(14) [Value of a statistical life: 6 pts]

  1. $5,100,000.
  2. $6,000,000.
  3. no.

(15) [Optimal stringency of regulation: 10 pts]

  1. MC per life saved = $100,000, $350,000, $2,000,000, $18,000,000.
  2. AC per life saved = $100,000, $200,000, $500,000, $3,000,000.
  3. Standard C is efficient.

III. Challenge question [4 pts]

With one company, the market outcome is given as monopoly so the quantity is 4 thousand and the price is $40. With two companies, the market outcome is given as price competition, so the quantity is 6 thousand and the price is $30 (marginal cost). Deadweight loss from monopoly pricing is $10 thousand, but the cost saving from production by only one company is $40 thousand. Because the cost saving exceeds the deadweight loss from monopoly pricing, one company is better for society than two companies.

[end of answer key]