A monopolist faces a demand curve P = 64-2Q and MR = 64-4Q. His marginal cost is MC = 16.
(a) Graph the three functions and compute the profit maximizing output and price.
(b) Compute the efficient level of output (where MC=demand), and compute the DWL associated with producing the profit maximizing output rather than the efficient output.
(c) Suppose the government gave the monopolist a subsidy of $4 per unit produced. The MC would be reduced accordingly to $12 from $16. Compute the profit maximizing output level and the deadweight loss associated with this new output. Explain intuitively why the DWL has changed.