1)A single monopolistic firm provides pick-up of recyclable goods (bottles, cans, paper, etc.) in a city. The demand for this good is given by P = 125 - 2Q. The firm's marginal cost is MC = 5 + 6Q, where Q is the number of tons of recyclables and P is the price per ton. The firm's total cost at any level of output is TC = 5Q + 3Q².

a.[6 points] What are the profit-maximizing price and quantity for this firm?

b.[6 points] At the profit-maximizing point from part (a), find consumer surplus, producer surplus, and deadweight loss.

c.[2 points] How much would the quantity of recycling increase if the monopolist was regulated to charge a price equal to its average cost? (Note: the firm is not required to charge a price equal to its average cost from part (a). Instead, the firm must produce the level of output at which the price is equal to its average cost and demand is satisfied - i.e., the point at which the average cost curve and demand curve intersect.)

[Hint: recall that average cost is total cost divided by the level of output; i.e., ATC = TC/Q. For example, if a firm's total cost function is TC = 25Q + 8Q², then its average cost function is ATC = 25 + 8Q.]

d.[2 points] In general, why is it problematic (from a social perspective) to regulate a monopoly using the average cost of production (i.e., what undesirable effect does this have)?

e.[2 points] In addition to the general issues discussed in part (d), what else makes average cost regulation unattractive (from a social perspective) in this particular case?

[Hint: this is not the sort of situation in which average cost regulation is typically utilized. If you're stuck, you might find it helpful to make a graph showing the regulated outcome (the quantity produced in part c) in additional to the standard elements of the monopoly graph.]