ECON 120  Regulation and Antitrust Policy
Drake University, Spring 2019
William M. Boal


FINAL EXAM ANSWER KEY
Version A
I. Multiple choice
(1)b. (2)b. (3)a. (4)c. (5)b. (6)b. (7)a. (8)b. (9)a. (10)a.
(11)c. (12)c. (13)a. (14)b. (15)b. (16)b.
II. Problems
(1) [Antitrust statutes: 4 pts] See Viscusi, Harrington, and Sappington textbook, appendix to chapter 3.
 Sherman Act Section 2.
 Federal Trade Commission Act.
 Clayton Act Section 7.
 Sherman Act Section 1.
(2) [Cournot duopoly: 14 pts]
 TR_{A} = P q_{A}
= 10 q_{A}  (q_{A}^{2}/100)
 (q_{A} q_{B}/100).
 MR_{A} = d TR_{A} / d q_{A}
= 10  (2q_{A}/100)
 (q_{B}/100).
 q_{A} = 300  (q_{B}/2).
 q_{A}* = 200.
 Q* = 400, P* = $6.
 L = (PMC)/P = 1/3.
 Deadweight loss = $200. (Note that competitive supply curve is horizontal at $4, and intersects demand at Q=600.)
(3) [Pricesetting (Bertrand) duopoly with differentiated products: 15 pts]
 TR_{A} = 300 P q_{A}  20 P_{A}^{2}
+ 10 P_{A} P_{B}.
 Set 0 = dTR_{A}/dP_{A}
= 300  40 P_{A} + 10 P_{B},
and solve for P_{A} to get
P_{A} = (30 + P_{B}) / 4.
 Substitute P_{A} for P_{B}
in the best reply function and solve to get
P_{A}* = $10 = P_{B}*.
 Subsitute $10 for P_{A} and P_{B} in
Firm A's demand function to get
Q_{A}* = 200 = Q_{B}*.
 TR_{A}* = P_{A}* × Q_{A}*
= $2000 = TR_{B}*.
(4) [Entry barriers and contestable markets: 26 pts]
 Min AC = $4.
 Min efficient scale = 5 million.
 L = (PMC)/P = 1/3 .
 P = $4.
 AC = $5.
 Loss, because P < AC.
 $4 million.
 Q = 10 million.
 AC = $4.
 Profit, because entrant's P > AC.
 $10 million.
 $4, to prevent profitable entry.
 L = (PMC)/P = 0, since P=AC=MC.
(5) [HHI and merger guidelines: 12 pts]
 1250.
 Unconcentrated.
 1300.
 Unconcentrated.
 This merger would be deemed "unlikely to have adverse competitive effects" because the postmerger HHI is less than 1500, and because the change in the HHI is less than 100.
(6) [Upward pricing pressure: 8 pts]
 D_{AB} = 20/(10050) = 2/5 .
 D_{BA} = 50/(10020) = 5/8.
 UPP_{A} = D_{AB} (P_{B}MC_{B})  ΔMC_{A}
= 2/5 (2015)  (1716) = $1.
 D_{AB} (P_{B}MC_{B}) = $2.
(7) [Monopoly extension with fixed proportions: 17 pts]
 MR_{A} = 14  (2Q/50).
 P_{C} = P_{A}  4 = 10  (Q/50).
 MR_{C} = 10  (2Q/50).
Table of results 
(i) Upstream monopoly, downstream competition 
(ii) Vertically integrated monopoly 
Q = Quantity of components (and appliances) 
200 
200 
P_{C} = price of component 
$6 
NA 
Profit of upstream firm 
$800 
NA 
P_{A} = price of appliances 
$10 
$10 
Profit of downstream firm 
zero 
NA 
Total upstream + downstream profits 
$800 
$800 
 This merger would not be profitable, because total profits would remain the same. This merger would not harm social welfare because the price of appliances would not change.
(8) [Price discrimination: 6 pts]
 To maximize profit, segment A should get the higher price because its demand is less elastic.
 $18.
 $9.
(9) [Positive theories of regulation: 6 pts]
 $15.
 $35.
 $25.
(10) [Twosided platforms: 8 pts]
Substituting into the demand equations,
q_{1} = 1300 and q_{2} = 400.
MR_{2} = 16  2q_{2}/50 = 16  2(400/50) = $0,
ignoring revenue from the other group.
MR_{2} = 16  2q_{2}/50 + 1.0(p_{1} = $0 + 1.0($10) = $10, including additional revenue from group 1.
Recommend lowering p_{2} in order to increase q_{2},
because marginal revenue (including impact on group 1) > MC_{2}.
(11) [Multipart tariffs: 26 pts]

(i) Twopart tariff 
(ii) Decliningblock tariff 
a.  100 units  100 units 
b.  60 units  40 units 
c.  $520 million  $480 million 
d.  $520 million  $480 million 
e.  break even  break even 
f.  $0  $20 million 
 Favor the twopart tariff. Both tariffs break even,
but the twopart tariff has no social deadweight loss.
(12) [Peakload pricing: 22 pts]
 80 thousand kWh is the capacity of the generating system.
 $0.12 per kWh.
 80 thousand kWh.
 $0.04 per kWh.
 60 thousand kWh.
 90 thousand kWh.
 30 thousand kWh.
 increase.
 10 thousand kWh.
 DWL is represented by two areas: a triangle bounded by SRMC, offpeak 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.
 $1 thousand, the total area of the two triangles.
III. Critical thinking [4 pts]
(1) Average quality would increase. If both lowquality and highquality meals had the same price, no one would buy lowquality meals. Nevertheless, consumers would be worse off because some of consumers clearly preferred lowquality, lowprice meals which are now unavailable.
(2) Classrooms.
 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 "regularterm courses" and the other "summerterm courses.")
 If Drake wants to set tuition so as to price courses at marginal cost, then the cost of classrooms should be included in the regularterm tuition because capacity is fully used. The cost of classrooms should not be included in summerterm tuition because capacity is not fully used in summer.
Version B
I. Multiple choice
(1)a. (2)a. (3)c. (4)d. (5)d. (6)c. (7)c. (8)c. (9)d. (10)b.
(11)a. (12)a. (13)b. (14)a. (15)d. (16)d.
II. Problems
(1) [Antitrust statutes: 4 pts] See Viscusi, Harrington, and Sappington textbook, appendix to chapter 3.
 Clayton Act Section 7.
 Sherman Act Section 1.
 Sherman Act Section 2.
 Federal Trade Commission Act.
(2) [Cournot duopoly: 14 pts]
 TR_{A} = P q_{A}
= 15 q_{A}  (q_{A}^{2}/10)
 (q_{A} q_{B}/10).
 MR_{A} = d TR_{A} / d q_{A}
= 15 q_{A}  (2q_{A}/10)
 (q_{B}/10).
 q_{A} = 60  (q_{B}/2).
 q_{A}* = 40.
 Q* = 80, P* = $7.
 L = (PMC)/P = 4/7.
 Deadweight loss = $80. (Note that competitive supply curve is horizontal at $3, and intersects demand at Q=120.)
(3) [Pricesetting (Bertrand) duopoly with differentiated products: 15 pts]
 TR_{A} = 200 P q_{A}  30 P_{A}^{2}
+ 10 P_{A} P_{B}.
 Set 0 = dTR_{A}/dP_{A}
= 200  60 P_{A} + 10 P_{B},
and solve for P_{A} to get
P_{A} = (20 + P_{B}) / 6.
 Substitute P_{A} for P_{B}
in the best reply function and solve to get
P_{A}* = $4 = P_{B}*.
 Subsitute $4 for P_{A} and P_{B} in
Firm A's demand function to get
Q_{A}* = 120 = Q_{B}*.
 TR_{A}* = P_{A}* × Q_{A}*
= $480 = TR_{B}*.
(4) [Entry barriers and contestable markets: 26 pts]
 Min AC = $2.
 Min efficient scale = 8 million.
 L = (PMC)/P = 3/5 = 0.6 .
 P = $3.
 AC = $4.
 Loss, because P < AC.
 $4 million.
 Q = 12 million.
 AC = $2.
 Profit, because entrant's P > AC.
 $24 million.
 $2, to prevent profitable entry.
 L = (PMC)/P = 0, since P=AC=MC.
(5) [HHI and merger guidelines: 12 pts]
 1250.
 Unconcentrated.
 1650.
 Moderately concentrated.
 This merger would be deemed to "raise significant competitive concerns," because the postmerger HHI is greater than 1500 and the change in the HHI due to the merger is greater than 100.
(6) [Upward pricing pressure: 8 pts]
 D_{AB} = 20/(10040) = 1/3 .
 D_{BA} = 40/(10020) = 1/2.
 UPP_{A} = D_{AB} (P_{B}MC_{B})  ΔMC_{A}
= 1/3 (208)  (2019) = $3.
 D_{AB} (P_{B}MC_{B}) = $4.
(7) [Monopoly extension with fixed proportions: 17 pts]
 MR_{A} = 14  (2Q/50).
 P_{C} = P_{A}  4 = 10  (Q/50).
 MR_{C} = 10  (2Q/50).
Table of results 
(i) Upstream monopoly, downstream competition 
(ii) Vertically integrated monopoly 
Q = Quantity of components (and appliances) 
50 
50 
P_{C} = price of component 
$11 
NA 
Profit of upstream firm 
$250 
NA 
P_{A} = price of appliances 
$15 
$15 
Profit of downstream firm 
zero 
NA 
Total upstream + downstream profits 
$250 
$250 
 This merger would not be profitable, because total profits would remain the same. This merger would not harm social welfare because the price of appliances would not change.
(8) [Price discrimination: 6 pts]
 To maximize profit, segment A should get the higher price because its demand is less elastic.
 $12.
 $8.
(9) [Positive theories of regulation: 6 pts]
 $30.
 $5.
 $15.
(10) [Twosided platforms: 8 pts]
Substituting into the demand equations,
q_{1} = 1600 and q_{2} = 300.
MR_{2} = 16  2q_{2}/50 = 16  2(300/50) = $4,
ignoring revenue from the other group.
MR_{2} = 16  2q_{2}/50 + 1.0(p_{1} = $4 + 1.0($20) = $24, including additional revenue from group 1.
Recommend lowering p_{2} in order to increase q_{2},
because marginal revenue (including impact on group 1) > MC_{2}.
(11) [Multipart tariffs: 26 pts]

(i) Twopart tariff 
(ii) Decliningblock tariff 
a.  100 units  100 units 
b.  0 units  40 units 
c.  $300 million  $360 million 
d.  $300 million  $360 million 
e.  break even  break even 
f.  $80  $5 million 
 Favor the decliningblock tariff. Both tariffs break even,
but the decliningblock tariff has less social deadweight loss.
(12) [Peakload pricing: 22 pts]
 90 thousand kWh is the capacity of the generating system.
 $0.14 per kWh.
 90 thousand kWh.
 $0.02 per kWh.
 70 thousand kWh.
 100 thousand kWh.
 50 thousand kWh.
 increase.
 10 thousand kWh.
 DWL is represented by two areas: a triangle bounded by SRMC, offpeak 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.
 $1 thousand, the total area of the two triangles.
III. Critical thinking [4 pts]
Same as Version A.
[end of answer key]