Delhi School of Economics Course # 608: Economics of Regulation Make up Mid-Term, 2010-11 Instruction: Answer all 3 questions in 1 hour

and 10 minutes. Total marks 30=3x10. 1. In a certain city where all parking is controlled by the city, it is possible to provide parking facilities in the downtown area at a constant marginal capitalinvestment of $10,000 per space. Costs of operation can be neglected. There arethree equal periods during the day of eight hours each, and spaces are rented only for complete eight-hour periods. During the peak period of each of 250 days peryear, the demand for parking is given by P = a bQ, where P is the price perperiod for a parking space. During the other two o-peak periods of those 250 days, the spaces demanded are half that in the peak period, for each possible price. On other days demand is zero. Assume that the interest rate is 10 percent and the facilities do not depreciate. (a) If a = $16, b = 0.08, and existing spaces are 120, what would be the sociallyoptimal prices during the three periods? (b) What is the optimal number of spaces and what are the corresponding prices? (c) The above case is a so-called rm peak case, with peak demanders payingall capital costs. Now suppose that a = $5 and b = 0.08. If peak demanders payall capital costs, what quantity is demanded by peak demanders? If o-peak demanders pay zero, what is their quantity demanded? (Fractions of spaces arelegitimate.) This is the shifting-peak case. (d) For the demand curves in (c), nd the optimal number of spaces and thecorresponding prices. 2. A breakfast cereal product, Cheers, has demand Q = 5 P=2 and constantaverage cost of $1. Under existing conditions, the supplier of Cheers charges $5:50. Now, a new product, Kips, is introduced by a rival supplier. Afterequilibrium is reached, Cheers price is unchanged at $5:50 and Kips price is also $5:50. Cheersdemand has shifted leftward and can be described as Q = 4:25 P=2. Kipsdemand can be described as q = 4:25p=2 and its constant average cost is $1. (a) What is the social benet resulting from the introduction of Kips? (Ignore R&D cost for now.) (b) What is the private benet of Kips introduction?

(c) If the R&D cost of introducing Kips is $6, what is the net social benet?That is, subtract $6 from your answer to part (a). Compare this with the netprivate benet. (d) Discuss the ndings above from the perspective of welfare economics. Inthis instance, Kips would be introduced even though it is not socially benecial. Is this nding true in general? Explain. 3. (a) Is there a multiproduct natural monopoly with respect to products X and Y if therm cost function is C (QX ; QY ) = 100 + 20QX + 10QY QX QY ? Assume that QX 10 and QY 10. (b) Suppose the local government decides to issue thefranchise to the rm that oers the biggest fee where market demand is 100 - P. Suppose there are just two rms competing for this franchise. One rm s cost function is C1 (q ) = 100 + q while the other rm s cost functionis C2 (q ) = 12q . An English auction is used wherethe rm oering the biggest payment to the local government wins the franchise.The franchise owner is free to charge any price that it likes. i) Who will win the franchise? ii) What will the winning franchise fee be? iii) What will price be?