Let the inverse demand curve for a monopoly firm be:

P = 50

– 0.01 Q and let the marginal cost curve of the firm be:

MC = 10

+ 0.02 Q

(a) Calculate the equilibrium price and output level of the monopolist.

(b) Suppose government regulators decide to use marginal cost pricing to induce the monopolist to produce the socially optimal output level.

Calculate the socially optimal output level. Calculate the price that government regulators will have to set under the marginal cost pricing rule in order to induce the monopolist to produce the socially optimal output level.

(c) Make a rough sketch of the demand curve and the marginal cost curve of the monopolist. Indicate on the diagram: (i) the output level produced by the unregulated monopolist, (ii) the socially optimal output level and (iii) the efficiency loss associated with the output level produced by the unregulated monopolist.