Electricity supply in a geographical area depends on a monopolist. The cost function of the monopolist is C(Q) = F + 2Q. The fixed costs are due to the cost of the distribution grid and marginal cost is a production cost. The demand function is Q = 10 p. The monopolist will earn zero economic profit when it charges a price of 3.

a. What is the value of the fixed cost?

b. Calculate the profit-maximizing monopoly price and quantity and compute the price elasticity of demand. Check that is consistent with the Lerner index.

c. How much profit does the monopolist firm earn when it changes the price that maximizes profits?

d. What would the monopolist say if the area regulator asks it to produce and sell at price equal to marginal cost? Illustrate the problem with a diagram

e. By charging a price of 3 is welfare maximized? Justify your answer with the help of a diagram.

f. Government of the area decides now to take in charge distribution with a state owned firm and have two competing firms producing electricity so we will have Q = q1 +q2. Firms cost functions are Ci= 4+qi for i = 1,2 and they compete as Cournot players. Compute and represent in a diagram the reaction functions of both oligopolists. Explain the meaning of the intercepts. Solve for the Cournot-Nash equilibrium and represent it in the same diagram . Compute the firm's profits.