Regulation under a monopoly
The inverse demand for a product is P(Q) = 100 − (1/2)Q. Production is associated with a marginal private cost, MCP(Q) = Q, and a constant marginal external cost, MCE = 25.
(a) Graph inverse demand, marginal revenue, marginal private cost, and marginal social cost on a single graph. Label the axes.
(b) What is the unregulated equilibrium? (Define in terms of price and quantity.)
(c) What is the socially optimal price-quantity pair?
(d) What is the deadweight loss under an unregulated monopoly in this case?
(e) What should the regulator do?