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Commonwealth Edison has a monopoly on delivery of electricity in Illinois. The demand facing ComEd is QD = 200 -4P. The resulting marginal revenue function is MR(Q) =50 – 0.5Q. ComEd’s marginal cost of delivering electricity is MC(Q) = 5 + 0.5Q and total cost equals 5Q + (Q^2)/4 .
a. Calculate ComEd’s profit maximizing output as well as profits.
b. Calculate the deadweight loss that results from ComEd’s monopoly power.
c. Explain how the government could use price regulation in the presence of ComEd’s monopoly power to restore efficiency. Then, explain whether there is any price regulation that would increase deadweight loss (relative to the monopoly equilibrium) or whether price regulation will always increase total surplus.
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