Regulation and Antitrust Policy (Econ 180)

Course page:
www.drake.edu/cbpa/econ/boal/180

I. Multiple choice [2 pts each: 20 pts total]
(1)a. (2)d. (3)c. (4)c. (5)a. (6)d. (7)c. (8)b. (9)c. (10)a.
II. Problems
(1) [Theories of regulation: 6 pts]
(2) [Pricing with economies of scale: 30 pts]
(3) [Multipart tariffs: 39 pts]
(i)Twopart tariff  (ii) Decliningblock tariff  

a. How much would a typical big customer buy?  100 units  100 units 
b. How much would a typical small customer buy?  0 units  10 units 
c. Compute the firm's total revenue.  $600 million  $620 million. 
d. Compute the firm's total cost (including the "fixed" cost).  $600 million  $620 million. 
e. Does the firm make a profit, a loss, or just break even?  break even  break even 
f. Compute the deadweight loss from this pricing policy.  $45 million  $20 million 
g. Which of these tariffs do you favor? Why?  Favor tariff (ii) "Decliningblock." Both tariffs ensure that the regulated firm breaks even, but the decliningblock tariff causes less deadweight loss. 
III. Challenge question
"Ramsey pricing" implies that pricecost margins (or "markups") are inversely proportional to price elasticities of demand. Let M_{i} denote the pricecost margin for product i, which by definition equals (P_{i}MC_{i})/P_{i}. Let ε_{i} denote the price elasticity of demand for product i. Then Ramsey pricing implies that M_{i}/M_{j} = ε_{j}/ε_{i}.
From the data given in the problem,
M_{A}/M_{B} = 3 = ε_{B}/ε_{A},
M_{B}/M_{C} = 5/6 ≠ ε_{C}/ε_{B} = 2/3,
M_{C}/M_{A} = 2/5 ≠ ε_{A}/ε_{C} = 1/2.
Therefore products A and B, considered alone, have "Ramsey prices." However, when product C is included, one cannot claim that all three products have "Ramsey prices."
I. Multiple choice [2 pts each: 20 pts total]
(1)c. (2)a. (3)b. (4)b. (5)b. (6)c. (7)b. (8)d. (9)d. (10)a.
II. Problems
(1) [Theories of regulation: 6 pts]
(2) [Pricing with economies of scale: 30 pts]
(3) [Multipart tariffs: 39 pts]
(i)Twopart tariff  (ii) Decliningblock tariff  

a. How much would a typical big customer buy?  60 units  70 units 
b. How much would a typical small customer buy?  0 units  10 units 
c. Compute the firm's total revenue.  $620 million  $590 million. 
d. Compute the firm's total cost (including the "fixed" cost).  $500 million  $590 million. 
e. Does the firm make a profit, a loss, or just break even?  profit  break even 
f. Compute the deadweight loss from this pricing policy.  $55 million  $20 million 
g. Which of these tariffs do you favor? Why?  Favor tariff (ii) "Decliningblock." Both tariffs ensure that the regulated firm at least breaks even, but the decliningblock tariff causes less deadweight loss. 
III. Challenge question
Same as Version A.
[end of answer key]