1. A modest sized city is currently considering ways of providing broad band internet service to its citizens which is not currently available. Based on analyses from other cities, they estimate that market demand in their city is P = 20 - .1Q, where Q is measured in thousands of households served and P is the price of monthly service in 10s of dollars. The marginal cost of supplying the service is P = 1 + .001Q.

A group of city counselors believes the city should own and operate the system for the purpose of maximizing net revenues (i.e., maximizing profits) Thus, the city would be the monopoly provider. The monopoly profits could be used as a stream of municipal revenues instead of property taxation.

1. If these city counselors get their way, what will be the price and quantity of broad band service in the city? Sketch your answer as well as calculate it numerically. What is the city's mark-up over marginal cost? What is the elasticity of demand at this equilibrium?
2. If instead the city instead decides to provide the service at the efficient level, what would be the price and number of household served? What is the price elasticity of demand at this level of service?
3. Compare the monopolist vs. the efficient outcome, what is the DWL involved in allowing the city to act as a monopolist? Again, provide a sketch of your answer in addition to the calculations.
4. If the city counselors who want the city to act as the broad band internet monopoly find that basically no senior citizens are taking advantage of the service but everyone else is, what would be the profit-maximising lower price they could offer to the senior citizens? How many senior citizen households would now also buy the service? What happens to the DWL?