ECON 120 - Regulation and Antitrust Policy
Drake University, Spring 2018
William M. Boal

FINAL EXAM ANSWER KEY

I. Multiple choice

(1)c. (2)d. (3)d. (4)c. (5)d. (6)c. (7)a. (8)d. (9)c. (10)a. (11)d. (12)b. (13)a. (14)d. (15)d. (16)d. (17)e. (18)b. (19)d. (20)c. (21)b. (22)e. (23)d. (24)d. (25)c. (26)a. (27)c. (28)c. (29)a. (30)b. (31)a. (32)b.

II. Problems

(1) [Antitrust statutes: 4 pts] See Viscusi, Harrington, and Vernon textbook, appendix to chapter 3.

  1. Clayton Act Section 7.
  2. Sherman Act Section 2.
  3. FTC Act.
  4. Sherman Act Section 1.

(2) [Cournot duopoly: 14 pts]

  1. TRA = P qA = 15 qA - (qA2/10) - (qA qB/10).
  2. MRA = d TRA / d qA = 15 qA - (2qA/10) - (qB/10).
  3. qA = 60 - (qB/2).
  4. qA* = 40.
  5. Q* = 80, P* = $7.
  6. L = (P-MC)/P = 4/7.
  7. Deadweight loss = $80.

(3) [Joint profit maximization: 10 pts]

  1. MR = 15 - (2Q/10).
  2. Q* = 60.
  3. P* = $9.
  4. L = (P-MC)/P = 2/3.
  5. Deadweight loss = $180.

(4) [HHI and merger guidelines: 12 pts]

  1. 2778.
  2. Highly concentrated, since HHI > 2500.
  3. 3282.
  4. Highly concentrated, since HHI > 2500.
  5. Under the 2010 Guidelines, this merger would be deemed "presumed to be likely to enhance market power," because the postmerger HHI is greater than 2500 and the merger itself would increase the HHI by more than 200 points. (On the date of this exam, T-Mobil and Sprint had notified the antitrust authorities of their intention to merge, but the authorities had not yet responded.)

(5) [Successive monopolies with fixed proportions: 26 pts]

  1. MRP = 15 - 2Q/100.
  2. PS = 12 - 2Q/100.
  3. MRS = 12 - 4Q/100.
    Table of results (i) Successive monopolies (ii) Vertically integrated monopoly
    Q = Quantity of components (and appliances) 250 500
    PC = price of component $7/th>
    Profit of upstream firm $1250
    PA = price of appliances $12.50 $10
    Profit of downstream firm $625
    Total upstream + downstream profits $1875 $2500

  4. The government should not try to block this merger. The merger will lower price and increase profit, so both consumers and producers benefit (a Pareto improvement!). The merger increases social welfare.

(6) [Tying: 28 pts]

  1. $350.
  2. $200.
  3. $250.
  4. $1000.
  5. $400.
  6. $1200.
  7. As a package.

(7) [Ramsey pricing: 4 pts]

  1. Product (iii) should have the highest markup under Ramsey pricing, because it has the least elastic demand.
  2. The markup for product (ii) should be 10 percent, because under Ramsey pricing, markups are inversely proportional to elasticities of demand. Letting M denote markup, Ramsey pricing requires
    Mi /M ii = εii / εi.
    Substitute 15 percent = Mi, -4.5 = εii, -3.0 = εi, and solve to get Mii = 10 percent.

(8) [Pricing with economies of scale: 20 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, because it was shown in part (b) and (c) that the firm would suffer a $60 million loss without a fixed charge, and this loss must be spread over the firm's 2 million customers: $60 million / 2 million = $30.

(9) [Peak-load pricing: 22 pts]

  1. 70 thousand kWh is the capacity of the generating system.
  2. $0.14 per kWh.
  3. 70 thousand kWh.
  4. $0.04 per kWh.
  5. 60 thousand kWh.
  6. 80 thousand kWh.
  7. 20 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 20 thousand kWh; and another "upside down" triangle bounded by LRMC, peak demand, and a vertical line at 80 million kWh.
  11. $1.7 thousand, the total area of the two triangles.

(10) [Cross-subsidization: 12 pts]

  1. $200 thousand.
  2. $800 thousand.
  3. $200.
  4. $50 thousand.
  5. $250 thousand.

III. Critical thinking

(1) Economists would not agree with Mr O'Malley. Economists believe the purpose of antitrust policy is to maximize economic efficiency, not to protect "fair" markets or to ensure that "small businesses...thrive." To economists, maximizing economic efficiency means maximizing social welfare, the sum of consumer and producer surplus. Social welfare is maximized when prices reflect marginal cost and output is produced by the least-cost firms, regardless of whether those firms are big or small. Economists do not worry about "bigger and bigger" firms unless firms are big compared to their market--that is, the market is highly concentrated. So economists see the purpose of antitrust law differently from Mr O'Malley.

(2) City parking garages:

  1. Garage construction is a joint cost because both weekday parking and weekend parking can use the same garages without a tradeoff.
  2. To set price equal to marginal cost, the weekday parking fee should include the cost of construction, but the weekend fee should not since garages are only lightly used on weekends. A diagram should show a backwards-L shape for short-run marginal cost (SRMC) with weekday demand intersecting SMC on its vertical branch and weekend demand intersecting SRMC on its horizontal branch, similar to problem (9) above.

[end of answer key]