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A monopolist has total costs T C(q) = 32 + 2.5q and faces a linear market demand q = α - βp . The firm's marketing department knows that if they were to charge a price of p = 5 then the public would demand a quantity qD = 30 with an elasticity of demand of ε = -3.33. In addition, the production of this good relies on a heavily pollutant method, leading to a negative externality of $5 per unit produced.
(a) Derive the functional form of the demand Solve for monopolist's output, price, profits, consumer surplus and total surplus (don't forget to consider the producer surplus) when:
(b) Price is unregulated
(c) Price is set such that the monopolist produces the competitive output.
(d) From the point of view of CBA, does it make sense for a politician to endorse a policy whose objective is to bring more competitiveness into this market? Why?
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