Consider a monopoly producing a good with the following inverse demand curve:
P (q) = 20 – 2q
Assume that marginal cost is
MC = 4 + 4q
(i) What is the optimal quantity for the monopolist? What is the corre-
(ii) What is the socially optimal quantity?
(iii) Assume now that Congress is debating regulating this monopolistic industry so as to get rid of the monopoly distortions. Some economists object that setting-up aregulatory agency whose operation is costly. Let F denote this cost. What is the maximal value of F beyond which it makes no sense to set up the regulatory agency?