Version A

I. Multiple choice

(1)d. (2)b. (3)c. (4)b. (5)c. (6)a. (7)d. (8)b. (9)c. (10)b. (11)b. (12)a. (13)a. (14)f. (15)c. (16)a.

II. Problems

(1) [Monopoly, markup formula, Lerner index: 4 pts]

1. P = $10
2. L = 1/5 = 0.2.

(2) [Antitrust statutes: 8 pts]

1. Clayton Act Section 7.
2. Serman Act Section 1.
3. Federal Trade Commission Act Section 5.
4. Sherman Act Section 2.

(3) [Measures of concentration: 4 pts] Data are for Nov 2024-Oct 2025.

1. 4CR = 68 percent.
2. HHI = 1264.

(4) [Cournot duopoly: 14 pts]

1. TR_A = P q_A = 15 q_A - (q_A²/5) - (q_A q_B/50).
2. MR_A = d TR_A / d q_A = 15 - (2q_A/5) - (q_B/5).
3. q_A = 30 - (q_B/2).
4. q_A* = 20.
5. Q* = 40, P* = $7.
6. L = (P-MC)/P = 4/7 = 0.571.
7. Deadweight loss = $40. This is the triangle bounded by the demand curve, the horizontal line at MC, and the vertical line at Q*. Note that competitive supply curve is horizontal at $3, and intersects demand at Q=60.

(5) [Joint profit maximization: 10 pts]

1. MR = 15 - (2Q/5). Find this by multiplying demand equation by Q and taking derivative with respect to Q, or by using rule "same intercept, twice the slope as demand."
2. Set MR = MC and solve to get Q* = 30.
3. Substitute into demand equation to get P* = $9.
4. L = (P-MC)/P = 2/3 = 0.667.
5. Deadweight loss = $90. This is the triangle bounded by the demand curve, the horizontal line at MC, and the vertical line at Q*. Note that competitive supply curve is horizontal at $3, and intersects demand at Q=60.

(6) [Equilibrium entry: 14 pts]

Number of firms	Equilibrium market quantity	Equilibrium market price	Quantity per firm	Annual profit per firm	PDV profit per firm
1	30	$40	30	$900	$9000
2	40	$30	20	$400	$4000
3	45	$25	15	$225	$2250
4	48	$22	12	$144	$1440
5	50	$20	10	$100	$1000

3. 2 firms.
4. 4 firms.

(7) [Entry barriers and contestable markets: 26 pts]

1. Min AC = $2.
2. Min efficient scale = 8 thousand.
3. L = (P-MC)/P = 3/5 = 0.6 .
4. P = $3.
5. AC = $4.
6. Loss, because P < AC.
7. $4 thousand.
8. Q = 12 thousand.
9. AC = $2.
10. Profit, because entrant's P > AC.
11. $24 thousand.
12. $2, to prevent profitable entry.
13. L = (P-MC)/P = 0, since P=AC=MC.

III. Critical thinking [4 pts]

(1) On the inelastic part of the demand curve (|ε|<1), MR is negative, because MR = P (1 + (1/ε)). But marginal cost cannot be negative. So MR is always less than MC on this part of the demand curve. Since MR < MC, the firm can increase profit by decreasing output. So a monopolist would never set price and quantity on the inelastic part of its demand curve.

Alternative explanation: When demand is inelastic, then a decrease in output quantity causes price to rise even faster than quantity decreases, and revenue increases. At the same time, a decrease in output quantity always causes total cost to decrease. Since revenue increases and cost decreases, profit increases. Evidently, if the monopolist has chosen price and quantity on the inelastic part of its demand curve, that monopolist has not yet maximized profit.

(2)

1. A credible threat is one that a firm has an incentive actually to carry out.
2. This particular threat by Firm A is not credible, because if Firm B were to enter the market, Firm A would have no incentive to lower below its average cost, because in doing so, Firm A would make losses. Since Firm B has the same costs as Firm A, there is no reason to believe that a price war would induce Firm B to exit the market any sooner than Firm A.

Version B

I. Multiple choice

(1)b. (2)b. (3)c. (4)d. (5)a. (6)b. (7)d. (8)d. (9)b. (10)a. (11)a. (12)a. (13)b. (14)d. (15)a. (16)b.

II. Problems

(1) [Monopoly, markup formula, Lerner index: 4 pts]

1. P = $5
2. L = 2/5 = 0.4.

(2) [Antitrust statutes: 8 pts]

1. Serman Act Section 1.
2. Federal Trade Commission Act Section 5.
3. Sherman Act Section 2.
4. Clayton Act Section 7.

(3) [Measures of concentration: 4 pts] Data are for 2024.

1. 4CR = 75 percent.
2. HHI = 1534.

(4) [Cournot duopoly: 14 pts]

1. TR_A = P q_A = 20 q_A - (q_A²/10) - (q_A q_B/10).
2. MR_A = d TR_A / d q_A = 20 - (2q_A/10) - (q_B/10).
3. q_A = 90 - (q_B/2).
4. q_A* = 60.
5. Q* = 120, P* = $8.
6. L = (P-MC)/P = 3/4 = 0.75.
7. Deadweight loss = $180. This is the triangle bounded by the demand curve, the horizontal line at MC, and the vertical line at Q*. Note that competitive supply curve is horizontal at $2, and intersects demand at Q=180.

(5) [Joint profit maximization: 10 pts]

1. MR = 20 - (Q/5). Find this by multiplying demand equation by Q and taking derivative with respect to Q, or by using rule "same intercept, twice the slope as demand."
2. Set MR = MC and solve to get Q* = 90.
3. Substitute into demand equation to get P* = $11.
4. L = (P-MC)/P = 9/11 = 0.818.
5. Deadweight loss = $405. This is the triangle bounded by the demand curve, the horizontal line at MC, and the vertical line at Q*. Note that competitive supply curve is horizontal at $2, and intersects demand at Q=180.

(6) [Equilibrium entry: 14 pts]

Number of firms	Equilibrium market quantity	Equilibrium market price	Quantity per firm	Annual profit per firm	PDV profit per firm
1	60	$90	60	$3600	$36,000
2	80	$70	40	$1600	$16,000
3	90	$60	30	$900	$9000
4	96	$54	24	$576	$5760
5	100	$50	20	$400	$4000

3. 1 firm.
4. 2 firms.

(7) [Entry barriers and contestable markets: 26 pts]

1. Min AC = $3.
2. Min efficient scale = 8 thousand.
3. L = (P-MC)/P = 2/5 = 0.4 .
4. P = $2.
5. AC = $4.
6. Loss, because P < AC.
7. $12 thousand.
8. Q = 12 thousand.
9. AC = $3.
10. Profit, because entrant's P > AC.
11. $12 thousand.
12. $3, to prevent profitable entry.
13. L = (P-MC)/P = 0, since P=AC=MC.

III. Critical thinking [4 pts]

Same as version A.

[end of answer key]