Consider a monopolist facing a demand curve from an individual consumer of P = 120 - q, where P is per-unit price and q is the quantity demanded. The monopolist has a fixed cost of $100 and a constant marginal cost of $30 per unit.

(a) Assume that the monopolist can engage in first-degree price discrimination using a two-part tariff. Determine the two-part tariff the monopolist sets, its profit, the resulting deadweight loss and consumer surplus. Use a diagram to explain your answer. (4 marks)

(b) Now assume that the monopolist can only set a single price (it cannot price discriminate). Further, assume that there is a production externality in the market of e = q, where q is the quantity produced. Determine the price, quantity sold, the monopolist's profit and the deadweight loss from the monopolist's choice. What is the appropriate government response to the externality in this example? Use a diagram to help explain your answer.