ECON 120 - Regulation and Antitrust Policy
Drake University, Spring 2026
William M. Boal

EXAM 3 ANSWER KEY

Version A

I. Multiple choice

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

II. Problems

(1) [Welfare tradeoffs: 14 pts] Marginal revenue curve is a straight line with vertical intercept at $13, slope = -2/10, and horizontal intercept at 65 units.

  1. $8.
  2. $280.
  3. $200.
  4. $80.
  5. $50.
  6. decrease.
  7. $30.

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

  1. 1200.
  2. No, not highly concentrated.
  3. 1600.
  4. No, not highly concentrated.
  5. This merger would not be presumed to be illegal under the 2023 Guidelines because, although the increase in the HHI is greater than 100, the postmerger HHI is not greater than 1800 and the postmerger share of the merged firm is only 30 percent.

(3) [Upward pricing pressure: 8 pts]

  1. DAB = 30/(100-40) = 1/2 = 0.5 .
  2. DBA = 40/(100-30) = 4/7 = 0.571 .
  3. UPPA = DAB (PB-MCB) - ΔMCA = (1/2) (20-14) - (17-15) = $1.
  4. DAB (PB-MCB) = $3.

(4) [Successive monopolies with fixed proportions: 18 pts]

  1. MRA = 15 - (Q/5).
  2. PC = 13 - (Q/5).
  3. MRC = 13 - (2Q/5).
    Table of results (i) Successive monopolies (ii) Vertically integrated
    monopoly
    Q = Quantity of components (and appliances) 30 60
    PC = price of component $7
    Profit of upstream firm $180
    PA = price of appliances $12 $9
    Profit of downstream firm $90
    Total upstream + downstream profits $270 $360

  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.

(5) [Tying: 14 pts]

  1. $35 (bringing revenue of $70).
  2. $30 (bringing revenue of $30).
  3. $100.
  4. $40.
  5. $120.

(6) [Price discrimination: 6 pts] Pricing formula: P = MC / (1 + [1/ε]). Note that if MC > zero and ε < -1, then P will be greater than MC.

  1. To maximize profit, Green customers should get the higher price because their demand is less elastic.
  2. $15.
  3. $24.

(7) [Network effects: 8 pts]

  1. The more users on the network, the more each user is willing to pay for access.
  2. $0 < P < infinity.
  3. $15 < P < $30.
  4. $0 < P < $25.

III. Critical thinking [5 pts]

(1) The government argues for a narrow definition of the relevant market because that increases the shares of the merging firms and increases the value of the HHI, strengthening the argument that the merger would enhance market power and lessen competition. The merging firms argue for a broad definition of the market because that decreases the shares of the merging firms and decreases the value of the HHI, weakening the argument against the merger.

(2) The Areeda-Turner rule states that predatory pricing has occurred if price is less than average variable cost (AVC). Acme's variable costs are $60,000 + $10,000 + $20,000 = $90,000. Therefore, Acme's AVC = $90,000/10,000 = $9. We are given that the price is $10, so by the Areeda-Turner rule, Acme is not engaged in predatory pricing, even though its total cost is greater than its total revenue.

Version B

I. Multiple choice

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

II. Problems

(1) [Welfare tradeoffs: 14 pts] Marginal revenue curve is a straight line with vertical intercept at $11, slope = -2/10, and horizontal intercept at 55 units.

  1. $7.
  2. $100.
  3. $80.
  4. $20.
  5. $80.
  6. increase.
  7. $60.

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

  1. 1350.
  2. No, not highly concentrated.
  3. 2150.
  4. Yes, highly concentrated.
  5. This merger would be presumed to be illegal under the 2023 Guidelines because the postmerger HHI is greater than 1800 (and the market share of the merged firm is greater than 30%) and the increase in the HHI is greater than 100.

(3) [Upward pricing pressure: 8 pts]

  1. DAB = 20/(100-40) = 1/3 .
  2. DBA = 40/(100-80) = 1/2.
  3. UPPA = DAB (PB-MCB) - ΔMCA = (1/3) (23-14) - (17-16) = $2.
  4. DAB (PB-MCB) = $3.

(4) [Successive monopolies with fixed proportions: 18 pts]

  1. MRA = 7 - (Q/5).
  2. PC = 5 - (Q/5).
  3. MRC = 5 - (2Q/5).
    Table of results (i) Successive monopolies (ii) Vertically integrated
    monopoly
    Q = Quantity of components (and appliances) 10 20
    PC = price of component $3
    Profit of upstream firm $20
    PA = price of appliances $6 $5
    Profit of downstream firm $10
    Total upstream + downstream profits $30 $40

  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.

(5) [Tying: 14 pts]

  1. $25 (bringing revenue of $25).
  2. $25 (bringing revenue of $50).
  3. $75.
  4. $30.
  5. $90.

(6) [Price discrimination: 6 pts] Pricing formula: P = MC / (1 + [1/ε]). Note that if MC > zero and ε < -1, then P will be greater than MC.

  1. To maximize profit, Blue customers should get the higher price because their demand is less elastic.
  2. $12.
  3. $15.

(7) [Network effects: 8 pts]

  1. The more users on the network, the more each user is willing to pay for access.
  2. $0 < P < infinity.
  3. $15 < P < $25.
  4. $0 < P < $20.

III. Critical thinking

(1) [Same as version A.]

[end of answer key]