1. Consider an example of the Baumol Model concerning the separation of ownership and control in the organisation of the firm.

The firm in question is an oligopoly.

The manager seeks to maximise total revenue (TR) from sales, under the profit constraint imposed by the external owners, G = 500.

The firm faces an inverse demand function of the following form: p = 100 - 2q,

and the total cost function c(q) = 20q.

a) What is the optimal choice of output by the manager? Does it satisfy the profit constraint?

b) If the profit constraint is changed to G =$800, what happens to the manager's choice?

c) Now, the external owners further change the profit constraint to G= $1000. If the manager in fact has control over the cost function, what cost level should be achieved for satisfying the new profit constraint?

d) What else can the manger do in the face of the new profit constraint?