3) Suppose a natural monopoly faces the market demand curve: P = 122 - Qd, has fixed costs of $2000 and constant marginal cost of $2 on all units of output. A) What is profit maximizing output level and price? B) What are profits? C) Suppose the government imposes zero economic profit regulation. What is the zero-profit regulated price and quantity? D) Suppose the government imposes zero markup regulation (markup=price-marginal cost). What is the zero-markup regulated price and quantity? What are zero-markup regulation profits? Will the monopoly stay in business in the long-run with this type of regulation? Is there a government policy that will keep the monopoly in business in the long-run? How much does this policy cost taxpayers? E) Which policy C) or D) results in the greatest net gain for consumers in terms of consumer surplus after paying taxes for the policies expense?
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The demand curve is P = 122 - Qa, so the total revenue (TR) is P*Qa = (122 - Qa)*Qa = 122Qa - Qa^2. The marginal revenue (MR) is the derivative of TR with respect to Qa, which is 122 - 2Qa. Setting MR equal to the marginal cost (MC) of $2, we get 122 - 2Qa = 2, Show more…
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