ECON 120 - Regulation and Antitrust Policy Drake University, Spring 2017 William M. Boal

Version A

I. Multiple choice

(1)c. (2)a. (3)a. (4)c. (5)c. (6)b. (7)e. (8)c. (9)c. (10)a. (11)a. (12)b. (13)d. (14)c. (15)a. (16)d. (17)a. (18)b. (19)d. (20)a. (21)a.

II. Problems

(1) [Theories of regulation: 3 pts]

1. \$20.
2. \$10.
3. between \$10 and \$20.

(2) [Multipart tariffs: 26 pts]

(i) Two-part tariff (ii) Declining-block tariff
a.100 units100 units
b.60 units40 units
c.\$680 million\$620 million
d.\$680 million\$620 million
e.break evenbreak even
f.\$0\$20 million
1. Favor the two-part tariff. Both tariffs break even, but the two-part tariff has no social deadweight loss.

1. 90 thousand kWh is the capacity of the generating system.
2. \$0.14 per kWh.
3. 90 thousand kWh.
4. \$0.02 per kWh.
5. 70 thousand kWh.
6. 100 thousand kWh.
7. 50 thousand kWh.
8. increase.
9. 10 thousand kWh.
10. DWL is represented by two areas: a triangle bounded by SRMC, off-peak demand, and a vertical line at 50 thousand kWh; and another "upside down" triangle bounded by LRMC, peak demand, and a vertical line at 100 million kWh.
11. \$1 thousand, the total area of the two triangles.

(4) [Effect of regulation on quality: 14 pts]

1. 4 thousand.
2. 5 thousand.
3. 0 thousand.
4. \$40 thousand.
5. 5 thousand.
6. \$20 thousand.
7. \$60 thousand.

(5) [Airline deregulation: 8 pts]

1. False.
2. False.
3. False.
4. True.
5. True.
6. False.
7. True.
8. False.

III. Critical thinking [5 pts]

(1) Classrooms at Drake University:

1. Classrooms are a joint cost because there is no tradeoff in production. Increased use in the summer term does not displace courses in the regular term. The production possibility curve is rectangular. [Full credit requires a graph of a rectangular production possibility curve. One axis should be labeled "regular-term courses" and the other "summer-term courses."]
2. If Drake wants to set tuition so as to price courses at marginal cost, then the cost of classrooms should be included in the regular-term tuition because capacity is fully used. The cost of classrooms should not be included in summer-term tuition because capacity is not fully used in summer.

1. A cost function TC(q) is subadditive if dividing total output between two firms causes total cost to rise. Mathematically, if q1 + q2 = q, then a cost function is subadditive if
TC(q1) + TC(q2) > TC(q).
2. Given TC(q) = 3 + 2 q, we have:
TC(q1) + TC(q2)
= (3 + 2q1) + (3 + 2q2)
= 6 + 2 (q1+q2)
= 6 + 2 q
> 3 + 2 q = TC(q).
Q.E.D.

Version B

I. Multiple choice

(1)d. (2)b. (3)b. (4)d. (5)c. (6)c. (7)e. (8)b. (9)d. (10)c. (11)c. (12)d. (13)b. (14)c. (15)b. (16)b. (17)b. (18)c. (19)b. (20)c. (21)a.

II. Problems

(1) [Theories of regulation: 3 pts]

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

(2) [Multipart tariffs: 26 pts]

(i) Two-part tariff (ii) Declining-block tariff
a.100 units100 units
b.0 units30 units
c.\$400 million\$490 million
d.\$400 million\$490 million
e.break evenbreak even
f.\$80\$5 million
1. Favor the declining-block tariff. Both tariffs break even, but the declining-block tariff has less social deadweight loss.

1. 80 thousand kWh is the capacity of the generating system.
2. \$0.12 per kWh.
3. 80 thousand kWh.
4. \$0.04 per kWh.
5. 60 thousand kWh.
6. 90 thousand kWh.
7. 30 thousand kWh.
8. increase.
9. 10 thousand kWh.
10. DWL is represented by two areas: a triangle bounded by SRMC, off-peak demand, and a vertical line at 30 thousand kWh; and another "upside down" triangle bounded by LRMC, peak demand, and a vertical line at 90 million kWh.
11. \$1 thousand, the total area of the two triangles.

(4) [Effect of regulation on quality: 14 pts]

1. 6 thousand.
2. 5 thousand.
3. 0 thousand.
4. \$90 thousand.
5. 4 thousand.
6. \$45 thousand.
7. \$135 thousand.

(5) [Airline deregulation: 8 pts]

1. False.
2. True.
3. False.
4. True.
5. True.
6. False.
7. True.
8. False.

III. Critical thinking

Same as Version A.