Boal's Econ

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

FINAL EXAM ANSWER KEY

Version A

I. Multiple choice

(1)a. (2)b. (3)b. (4)c. (5)e. (6)b. (7)b. (8)b. (9)a. (10)a.
(11)c. (12)d. (13)b. (14)d. (15)b. (16)b. (17)c. (18)a. (19)a. (20)c.
(21)d. (22)b.

II. Problems

(1) [Using price elasticity of demand: 10 pts]

inelastic, because the elasticity is less than one in absolute value.
increase, because quantity decreased.
5 percent, using formula: elasticity = percent change Q / percent change P.
increase, because the increase in price is greater than the decrease in quantity.
1 percent, using formula: percent change revenue = percent change Q + percent change P.

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

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

(3) [Cournot duopoly: 14 pts]

TR_A = P q_A = 15 q_A - (q_A²/5) - (q_A q_B/50).
MR_A = d TR_A / d q_A = 15 - (2q_A/5) - (q_B/5).
q_A = 30 - (q_B/2).
q_A* = 20.
Q* = 40, P* = $7.
L = (P-MC)/P = 4/7 = 0.571.
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.

(4) [Joint profit maximization: 10 pts]

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."
Set MR = MC and solve to get Q* = 30.
Substitute into demand equation to get P* = $9.
L = (P-MC)/P = 2/3 = 0.667.
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.

(5) [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

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

1 firm.
2 firms.

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

1200.
No, not highly concentrated.
1600.
No, not highly concentrated.
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.

(7) [Upward pricing pressure: 8 pts]

D_AB = 20/(100-40) = 1/3 .
D_BA = 40/(100-80) = 1/2.
UPP_A = D_AB (P_B-MC_B) - ΔMC_A = (1/3) (23-14) - (17-16) = $2.
D_AB (P_B-MC_B) = $3.

(8) [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.

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

(9) [Network effects: 8 pts]

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

(10) [Positive theories of regulation: 6 pts]

$30, where economic profit is maximized.
$5, where economic profit is zero and therefore price=AC=MC.
$15, where the regulator's utility is maximized subject to the profit function.

(11) [Multipart tariffs: 26 pts]

	(i) Two-part tariff	(ii) Declining-block tariff
a.	100 units	100 units
b.	60 units	40 units
c.	$360 million	$340 million
d.	$360 million	$340 million
e.	break even	break even
f.	$0	$20 million

Favor the two-part tariff. Both tariffs break even as required, but the two-part tariff has no social deadweight loss.

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

80 thousand kWh is the capacity of the generating system.
$0.14 per kWh.
80 thousand kWh.
$0.06 per kWh.
60 thousand kWh.
90 thousand kWh.
30 thousand kWh.
increase.
1 thousand kWh.
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 80 million kWh.
$1 thousand, the total area of the two triangles.

(13) [Cross-subsidization: 12 pts]

DWL = $200 thousand, the area of an "upside-down" triangle bounded by the demand curve, the average cost curve, and a vertical line at 3 thousand.
$600 thousand.
$200 is the lowest price in the Chicago-St. Louis market that would allow the airline to recover its loss in the Des Moines-Madison market.
DWL = $50 thousand, the area of a triangle bounded by the demand curve, the average cost curve, and a vertical line at 6 thousand.
Must shade both triangles in the graph.
$250 thousand, the sum of parts (a) and (d).

III. Critical thinking

(1) Vertical merger in competitive markets for gasoline

If both markets are competitive before and after the vertical merger, the merger will have little or no effect on profit or social welfare. In the market for wholesale gasoline, the demand will shift left because the merging distributor will no longer buy wholesale gasoline on the open market. Meanwhile, the supply will shift left by exactly the same amount because the merging producer will no longer sell gasoline on the open market. So the equilibrium price of wholesale gasoline will not change and there will be no effect on profit or consumer surplus. (Full credit requires a graph showing demand and supply shifting left by exactly the same amount.)

(2) Classrooms in regular and January terms

Classrooms are a joint cost because there is no tradeoff in production. Increased use in the January 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 "January-term 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 regular-term tuition because capacity is fully used. The cost of classrooms should not be included in January-term tuition because capacity is not fully used in January.

Version B