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3. A monopoly can use one of two alternative technologies. One technology requires 10 units of capital and 11 units of labor for each unit
3. A monopoly can use one of two alternative technologies. One technology requires 10 units of capital and 11 units of labor for each unit of output. The other technology requires 20 units of capital and 2 units of labor for each unit of output. The prices of capital, r, and of labor, w, are r = w = $1 per time period. Thus, the cost function associated with the first technology is Of (y) = 21y and the cost function corresponding to the second technology is O (y) = 22y. The demand function is given by P(y) = 100 - y. The unregulated monopolist will clearly use the first technology since it is the lower cost technolgoy. (a) Calculate the monopoly's output, price, and profit if it uses the first tech- nology. Consider a rate of return regulation which allows the monopoly to take as profit only $0.1 per each $1 of capital. (b) What would be the output, price and profit under each technology? (c) Calculate the total surplus in the unregulated monopoly situation under the above regulation, and in a situation in which the firm is subject to that regulation but only the first technology is available
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