ANSWER KEY: INTRODUCTION TO ANTITRUST
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]
- $7 (= marginal cost).
- Marginal revenue curve should be straight line with intercept at $18 and slope = -2 / million.
- 6 million (where MR=MC).
- $12 (on demand curve).
- $32 million.
- $12 million.
(2) [Marginal revenue: 12 pts]
- $0.90 = new price - old quantity × change in price = $2.90 - 20 × $0.10.
- decrease.
- $1.10 = MR - MC.
(3) [Monopoly, markup formula, Lerner index: 8 pts]
- $6.
- 1/3.
(4) [SCP paradigm: 10 pts]
- Conduct.
- Conduct.
- Structure.
- Conduct.
- Structure.
(5) [Monopoly, profit maximization: 28 pts]
- MC = dTC/dQ = 1 + (Q/20).
- AC = TC/Q = 1 + (Q/40).
- Rev = P × Q = 13 Q - (Q^{2}/20), so MR = dRev/dQ = 13 - (Q/10).
- Set MR=MC and solve to get Q_{M}=80.
- Substitute Q* into demand equation to get P_{M}=$9.
- Profit = Rev(80) - TC(80) = $480.
- First, find efficient quantity Q_{E}; set demand = MC and solve to get Q_{E} = 120. Deadweight loss is area between demand and MC, from Q_{M} to Q_{E}, 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.
- P_{A} = MC / (1 + (1/ε)) = 0.05 / (1 + (1/(-10/9))) = $0.50.
- P_{B} = $0.50.
Test 4 Version B
(1) [Monopoly: 24 pts]
- $5 (= marginal cost).
- Marginal revenue curve should be straight line with intercept at $13 and slope = -0.5 / million.
- 6 million (where MR=MC).
- $10 (on demand curve).
- $7 million.
- $3 million.
(2) [Marginal revenue: 12 pts]
- $1.45 = new price - old quantity × change in price = $2.95 - 30 × $0.05.
- increase.
- $0.45 = MR - MC.
(3) [Monopoly, markup formula, Lerner index: 8 pts]
- $12.
- 2/3.
(4) [SCP paradigm: 10 pts]
- Conduct.
- Structure.
- Structure.
- Performance.
(5) [Monopoly, profit maximization: 28 pts]
- MC = dTC/dQ = 3 + (Q/50).
- AC = TC/Q = 3 + (Q/100).
- Rev = P × Q = 9 Q - (Q^{2}/50), so MR = dRev/dQ = 9 - (Q/25).
- Set MR=MC and solve to get Q_{M}=100.
- Substitute Q* into demand equation to get P_{M}=$7.
- Profit = Rev(100) - TC(100) = $300.
- First, find efficient quantity Q_{E}; set demand = MC and solve to get Q_{E} = 150. Deadweight loss is area between demand and MC, from Q_{M} to Q_{E}, which equals $50.
Critical thinking [8 pts]
[end of answer key]