First, you will be a data analyst for the paper straw company making pricing and production decisions under imperfect competition. Then, you will be a state regulator determining what (if any) regulations should be imposed on the production of paper straws. The purpose of this homework is to help you better understand how imperfect competition affects market outcomes, what regulation or policy can correct for imperfect competition, and how a firm responds to this corrective regulation/policy. Problems 1. You again work as a data analyst for Strawble, a paper straw company in Western Massachusetts. Your firm has discovered that its unique paper design means its paper straws do not get soggy in beverages. This unique technology gives your firm a major advantage in the marketplace, and Strawble now wants to operate as a monopolist. Your boss would again like you to determine how many paper straws to produce in a year and what price to charge for them. Follow these steps to determine your firms optimal production and pricing decisions as a monopolist. (Assume there is no Pigouvian tax.) (a) [1 point] First, determine the marginal revenue for your product when you operate as a monopolist. Remember that we estimated Strawbles demand function in Homework 1. (Check the solutions to make sure you are using the correct demand function.) Use this demand function to a calculate a function for marginal revenue of the form M R = a + bQ. (b) [1 point] Remember that your firm can produce a box of paper straws at a constant marginal cost of $3 per box. If your firm operates as a monopolistthat is, it accounts for how its production decision affects the pricehow many boxes of paper straws should your firm produce to maximize profits? (c) [1 point] What price should your firm charge for a box of straws to maximize profit at this level of production? (d) [1 point] How does your firms optimal price and quantity as a monopolist compare to the com- petitive price and quantity, which we found in Homework 1? (e) [1 point] How much profit does your firm earn at this privately optimal price and quantity under monopolistic decision making?

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