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

QUIZ 4 ANSWER KEY
Introduction to Antitrust

### Version A

I. Multiple choice [2 pt each: 14 pts total]

(1)d. (2)c. (3)b. (4)b. (5)c. (6)b. (7)d.

II. Problems

(1) [Marginal revenue, monopoly pricing: 22 pts]
PriceQuantityRevenue Marginal revenue
per mug
\$1010\$100
\$8
\$920\$180
\$6
\$830\$240
\$4
\$740\$280
\$2
\$650\$300

1. 30 mugs.
2. \$8.

(2) [marginal revenue, monopoly pricing, welfare analysis: 24 pts]

1. \$12.
2. \$3.
3. MR curve is straight line with P-intercept at \$16, Q-intercept at 80, and slope = -2/10. MR curve intersects MC curve at Q=60.
4. 60 toys.
5. \$10.
6. \$120.

(3) [Marginal revenue, monopoly pricing: 16 pts]

1. MR = 15 - (Q/50).
2. 500.
3. \$10.
4. \$2500.

(4) [Monopoly, markup formula, Lerner index: 8 pts]

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

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

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

III. Challenge question

1. Social deadweight loss = (1/2)(10-5)(1000-500) = 1250.
2. The maximum amount that Bunny Hill is willing to pay is its daily profit, which equals \$2500.
3. Whether such payments should be considered an additional loss of economic efficiency depends on what the payments are for. If the payments are for lobbyists and lawyers, then real resources are used up and the payments represent an additional loss. If the payments are simply bribes to legislators and regulators, then payments represent simply a transfer from Bunny Hill to legislators and regulators and real resources are not used up. (See Viscusi, Harrington, and Vernon, 2005, pp. 89-90.)

### Version B

I. Multiple choice [2 pt each: 14 pts total]

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

II. Problems

(1) [Marginal revenue, monopoly pricing: 22 pts]
PriceQuantityRevenue Marginal revenue
per mug
\$820\$160
\$6
\$740\$280
\$4
\$660\$360
\$2
\$580\$400
\$0
\$4100\$400

1. 40 mugs.
2. \$7.

(2) [marginal revenue, monopoly pricing, welfare analysis: 24 pts]

1. \$11.
2. \$5.
3. MR curve is straight line with P-intercept at \$14, Q-intercept at 70, and slope = -2/10. MR curve intersects MC curve at Q=40.
4. 40 toys.
5. \$10.
6. \$40.

(3) [Marginal revenue, monopoly pricing: 16 pts]

1. MR = 20 - (Q/50).
2. 800.
3. \$12.
4. \$6400.

(4) [Monopoly, markup formula, Lerner index: 8 pts]

1. \$8.
2. L = 1/4.

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

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

III. Challenge question

1. Social deadweight loss = (1/2)(12-4)(1600-800) = 3200.
2. The maximum amount that Bunny Hill is willing to pay is its daily profit, which equals \$6400.
3. Whether such payments should be considered an additional loss of economic efficiency depends on what the payments are for. If the payments are for lobbyists and lawyers, then real resources are used up and the payments represent an additional loss. If the payments are simply bribes to legislators and regulators, then payments represent simply a transfer from Bunny Hill to legislators and regulators and real resources are not used up. (See Viscusi, Harrington, and Vernon, 2005, pp. 89-90.)

[end of answer key]