ECON 180 - Regulation and Antitrust Policy Drake University, Spring 2015 William M. Boal Course page: www.cbpa.drake.edu/econ/boal/180 Blackboard: bb.drake.edu Email: william.boal@drake.edu

ANSWER KEY: INTRODUCTION TO ECONOMIC REGULATION

### Quiz 10 Version A

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

### Quiz 10 Version B

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

### Test 10 Version A

(1) [Theories of regulation: 12 pts]

1. \$10.
2. \$5.
3. between \$5 and \$10.

(2) [Ramsey pricing: 10 pts]

1. product (iii).
2. 10 percent.

(3) [Pricing with economies of scale: 30 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.

(3) [Multipart tariffs: 39 pts]
(i)Two-part tariff (ii) Declining-block tariff a. How much would a typical big customer buy? b. How much would a typical small customer buy? c. Compute the firm's total revenue. d. Compute the firm's total cost (including the "fixed" cost). e. Does the firm make a profit, a loss, or just break even? f. Compute the deadweight loss from this pricing policy. g. Which of these tariffs do you favor? Why? Favor tariff (ii) "Declining-block." Both tariffs ensure that the regulated firm breaks even, but the declining-block tariff causes less deadweight loss.

Critical thinking [9 pts]

• Let q1 + q2 = q*, where q* is a positive number.
Now C(q1) + C(q2)
= (100 + 10 q1) + (100 + 10 q2)
= 200 + 10 (q1 + q2)
= 200 + 10 q*
> 100 + 10 q*
= C(q*).
Therefore this product does indeed have subadditive costs.

### Test 10 Version B

(1) [Theories of regulation: 12 pts]

1. \$30.
2. \$20.
3. between \$20 and \$30.

(2) [Ramsey pricing: 10 pts]

1. product (i).
2. 8 percent.

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

1. \$1.
2. loss.
3. \$60 million.
4. \$0 million.
5. \$5.
6. neither.
7. \$0 million.
8. \$10 million.
9. \$1.
10. \$12.

(3) [Multipart tariffs: 39 pts]

(i)Two-part tariff (ii) Declining-block tariff a. How much would a typical big customer buy? b. How much would a typical small customer buy? c. Compute the firm's total revenue. d. Compute the firm's total cost (including the "fixed" cost). e. Does the firm make a profit, a loss, or just break even? f. Compute the deadweight loss from this pricing policy. g. Which of these tariffs do you favor? Why? Favor tariff (ii) "Declining-block." Both tariffs ensure that the regulated firm breaks even, but the declining-block tariff causes less deadweight loss.

Critical thinking [9 pts]

• Same as Version A.