Version A

I. Multiple choice [3 pts each: 18 pts total]

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

II. Problems

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

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

(2) [Second-price sealed-bid auctions: 18 pts]

1. decrease, constant.
2. constant, constant.
3. constant (zero), increase.
4. n/a (because you cannot win), loss.
5. yes, take your accountant's suggestion.
6. Raising your bid above $50,000 might decrease your chances of winning, but it will not affect your profit. Lowering your bid below $50,000 might increase your chances of winning, but if you win, the auction you will suffer a loss because your revenue will be less than your cost.

(3) [Franchise bidding: 16 pts]

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

(4) [Effect of franchise fee: 18 pts]

1. $20.
2. 8 thousand.
3. $160 thousand.
4. Supplier's demand curve has vertical intercept at $60 and horizontal intercept at 10 thousand units.
5. $50.
6. $30.
7. 5 thousand.
8. $150 thousand.
9. $95 thousand.

III. Challenge question [10 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.

Version B

I. Multiple choice [3 pts each: 18 pts total]

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

II. Problems

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

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

(2) [Second-price sealed-bid auctions: 18 pts]

1. constant (zero), increase.
2. n/a (because you cannot win), loss.
3. decrease, constant.
4. constant, constant.
5. yes, take your accountant's suggestion.
6. Raising your bid above $20,000 might decrease your chances of winning, but it will not affect your profit. Lowering your bid below $20,000 might increase your chances of winning, but if you win, the auction you will suffer a loss because your revenue will be less than your cost.

(3) [Franchise bidding: 16 pts]

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

(4) [Effect of franchise fee: 18 pts]

1. $20.
2. 8 thousand.
3. $160 thousand.
4. Supplier's demand curve has vertical intercept at $50 and horizontal intercept at 10 thousand units.
5. $60.
6. $30.
7. 4 thousand.
8. $120 thousand.
9. $120 thousand.

III. Challenge question [10 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.

[end of answer key]