ECON 120  Regulation and Antitrust Policy
Drake University, Spring 2017
William M. Boal


EXAM 4 ANSWER KEY
Version A
I. Multiple choice
(1)c. (2)a. (3)a. (4)c. (5)c. (6)b. (7)e. (8)c. (9)c. (10)a.
(11)a. (12)b. (13)d. (14)c. (15)a. (16)d. (17)a. (18)b. (19)d. (20)a.
(21)a.
II. Problems
(1) [Theories of regulation: 3 pts]
 $20.
 $10.
 between $10 and $20.
(2) [Multipart tariffs: 26 pts]

(i) Twopart tariff 
(ii) Decliningblock tariff 
a.  100 units  100 units 
b.  60 units  40 units 
c.  $680 million  $620 million 
d.  $680 million  $620 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.
(3) [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.
(4) [Effect of regulation on quality: 14 pts]
 4 thousand.
 5 thousand.
 0 thousand.
 $40 thousand.
 5 thousand.
 $20 thousand.
 $60 thousand.
(5) [Airline deregulation: 8 pts]
 False.
 False.
 False.
 True.
 True.
 False.
 True.
 False.
III. Critical thinking [5 pts]
(1) Classrooms at Drake University:
 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.
(2) Subadditive cost functions:
 A cost function TC(q) is subadditive if dividing total output between two firms causes total cost to rise.
Mathematically, if q_{1} + q_{2} = q,
then a cost function is subadditive if
TC(q_{1}) + TC(q_{2}) > TC(q).
 Given TC(q) = 3 + 2 q, we have:
TC(q_{1}) + TC(q_{2})
= (3 + 2q_{1}) + (3 + 2q_{2})
= 6 + 2 (q_{1}+q_{2})
= 6 + 2 q
> 3 + 2 q = TC(q).
Q.E.D.
Version B
I. Multiple choice
(1)d. (2)b. (3)b. (4)d. (5)c. (6)c. (7)e. (8)b. (9)d. (10)c.
(11)c. (12)d. (13)b. (14)c. (15)b. (16)b. (17)b. (18)c. (19)b. (20)c.
(21)a.
II. Problems
(1) [Theories of regulation: 3 pts]
 $30.
 $20.
 between $20 and $30.
(2) [Multipart tariffs: 26 pts]

(i) Twopart tariff 
(ii) Decliningblock tariff 
a.  100 units  100 units 
b.  0 units  30 units 
c.  $400 million  $490 million 
d.  $400 million  $490 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.
(3) [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.
(4) [Effect of regulation on quality: 14 pts]
 6 thousand.
 5 thousand.
 0 thousand.
 $90 thousand.
 4 thousand.
 $45 thousand.
 $135 thousand.
(5) [Airline deregulation: 8 pts]
 False.
 True.
 False.
 True.
 True.
 False.
 True.
 False.
III. Critical thinking
Same as Version A.
[end of answer key]