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1. (Government and Monopoly* – from previous midterm) Claudia is a monopolist in a market that has demand given by P = 360−0.25Q. She faces total costs given by C(Q) = 1000+10Q +0.5Q2.
(a) Claudia is a profit-maximizer, but the government prevents her from doing any kind of price discrimination, so she has to just set a uniform (linear) price. What is her profit-maximizing price and equilibrium quantity?
(b) What would be the socially efficient quantity to have transacted in this marketplace?
(c) Suppose the government steps in and tells Claudia what price she can charge per-unit. Given that nobody can force Claudia to produce output if she doesn’t want to, what would happen if the government mandated that the price be set to maximize the total surplus, but does not offer Claudia a subsidy?
(d) For political reasons, the government cannot subsidize companies, although they can regulate prices. What is the price they should set to maximize total surplus, given the monopolist’s incentives?
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