3 Utility regulation A monopolist utility has cost function C(q) = 2vq and operates in a market with aggregate demand curve D(p) = (p/3)-3/2. 1. Plot the demand curve and the firm's marginal revenue and marginal cost curves on a single graph. 2. Calculate the firm's optimal price and output if it acts as a monopolist in the market. Mark both of these numbers on your graph. What are its monopoly profits? 3. Calculate the output level which maximizes social surplus. Mark this number on your graph. What is the deadweight loss of monopoly in this market? Calculate it and shade in the corresponding region on your graph. 2 4. Suppose a regulator imposes a price ceiling p on the market. What is the lowest p the regulator can impose without shutting down the utility? Can the regulator achieve efficiency by imposing a price ceiling