If the monopoly municipal water utility in Technical Problem 5 does not face any kind of government regulation of price or output:a. The water utility will charge $___________ per 1,000-gallon unit, sell___________ units of water per month, and earn monthly profit of $ ___________.b. The water market in this community will experience allocative inefficiency because there is a dead weight loss of $___________ per month.c. To maximize social surplus, the price of water must be $ ___________, which results in monthly social surplus of $ ___________.d. If the public service commission decides to impose the price on the water utility in part c that maximizes social surplus, the utility will earn___________ (profits, losses) equal to $ ___________. The utility will require a subsidy of $ ___________ to remain financially viable under this regulatory plan.e. If the public service commission decides to employ second-best pricing, it will impose a water price equal to $___________ per 1,000-gallon unit, which results in a dead weight loss equal to $ ___________.f. If the public service commission decides to design an optimal two-part pricing plan for the water utility, it will set the usage fee equal to $___________ per 1,000-gallon unit and set the monthly access charge for each of the 10,000 households equal to $___________ per month. The dead weight loss under this plan is $ ___________.

Data From Problem 5

Suppose a municipal water utility must pay $250,000 per month for its quasi-fixed capital inputs, the water treatment plant and distribution lines to homes. The figure below shows the cost structure of this utility for various levels of water service. Quantity of water consumption is measured in 1,000-gallon units per month. AQFC is the average quasi-fixed cost curve, and LAC is long-run average cost. Long-run marginal cost, LMC, is constant and equal to $2 per 1,000-gallon unit. The inverse demand equation is P = 26 - 0.00048Q_d.

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14 10 9.10 6.25 LAC AQFC LMC MR D | 40,000 35,206 25,000 50,000 Quantity (1,000-gallon units per month) Pri ce and cost (dalars per 1,000-gallon unit) of