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

### Quiz 4 Version A

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

### Quiz 4 Version B

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

### Test 4 Version A

(1) [Monopoly: 24 pts]

1. \$7 (= marginal cost).
2. Marginal revenue curve should be straight line with intercept at \$18 and slope = -2 / million.
3. 6 million (where MR=MC).
4. \$12 (on demand curve).
5. \$32 million.
6. \$12 million.

(2) [Marginal revenue: 12 pts]

1. \$0.90 = new price - old quantity × change in price = \$2.90 - 20 × \$0.10.
2. decrease.
3. \$1.10 = MR - MC.

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

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

1. Conduct.
2. Conduct.
3. Structure.
4. Conduct.
5. Structure.

(5) [Monopoly, profit maximization: 28 pts]

1. MC = dTC/dQ = 1 + (Q/20).
2. AC = TC/Q = 1 + (Q/40).
3. Rev = P × Q = 13 Q - (Q2/20), so MR = dRev/dQ = 13 - (Q/10).
4. Set MR=MC and solve to get QM=80.
5. Substitute Q* into demand equation to get PM=\$9.
6. Profit = Rev(80) - TC(80) = \$480.
7. First, find efficient quantity QE; set demand = MC and solve to get QE = 120. Deadweight loss is area between demand and MC, from QM to QE, which equals \$80.

Critical thinking [8 pts]

• According to the pricing formula, the price depends only on marginal cost and price elasticity of demand. Marginal cost is given as \$0.05 for both songs. Note that price elasticity of demand = (-10/9) for both songs. So the profit-maximizing internet price will be the same for both songs.
1. PA = MC / (1 + (1/ε)) = 0.05 / (1 + (1/(-10/9))) = \$0.50.
2. PB = \$0.50.

### Test 4 Version B

(1) [Monopoly: 24 pts]

1. \$5 (= marginal cost).
2. Marginal revenue curve should be straight line with intercept at \$13 and slope = -0.5 / million.
3. 6 million (where MR=MC).
4. \$10 (on demand curve).
5. \$7 million.
6. \$3 million.

(2) [Marginal revenue: 12 pts]

1. \$1.45 = new price - old quantity × change in price = \$2.95 - 30 × \$0.05.
2. increase.
3. \$0.45 = MR - MC.

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

1. \$12.
2. 2/3.

1. Conduct.
2. Structure.
3. Structure.
4. Performance.

(5) [Monopoly, profit maximization: 28 pts]

1. MC = dTC/dQ = 3 + (Q/50).
2. AC = TC/Q = 3 + (Q/100).
3. Rev = P × Q = 9 Q - (Q2/50), so MR = dRev/dQ = 9 - (Q/25).
4. Set MR=MC and solve to get QM=100.
5. Substitute Q* into demand equation to get PM=\$7.
6. Profit = Rev(100) - TC(100) = \$300.
7. First, find efficient quantity QE; set demand = MC and solve to get QE = 150. Deadweight loss is area between demand and MC, from QM to QE, which equals \$50.

Critical thinking [8 pts]

• Same as Version A.