Consider a market where aggregate demand is given by

=100

There is a monopoly firm in the market with costs of production

()=500+20

(a) Suppose that the firm is regulated to break even using a linear price. What price will it choose? What is total welfare? Compare this to the case where the firm can profit maximize using a linear price.

(b) Suppose that the market demand is made up of 6 "rich" consumers each of whom has inverse demand

=1006.3

And 4 "poor" consumers each with inverse demand

=10080

Find the profit maximizing (single) two-part tariff if the same two-part tariff is offered to all consumers

(c) Find the optimal group two-part tariffs (if the firm can identify rich and poor)

(d) Find the incentive compatible two-part tariffs (second degree price discrimination)