A monopoly electricity producer serves two types of customers, business (B) and household (H). The demand function of business customers is given by QB = 100PB and the demand function of household customers is given by QH = 50PH. We assume there is no marginal cost, yet the monopolist has the xed cost F = 2000. So far, the monopolist is unregulated.

Give a brief denition of second-best outcome and state the quantity reduction rule, which is the necessary condition for Ramsey Prices, and economic insights.

The quantity for the business customers is QR H = 40 at the Ramsey Prices (R). Derive the Ramsey Prices for both consumers (PR B and PR H). Briey explain why PR B is higher than PR H.