For questions 3 and 4 assume the service, instead of being provided by the Ministry, is provided by a monopolist. The monopolists knows the true marginal cost of the service, $1. For the demand P = 10 - Q, the marginal revenue of is given by MR = 10 - 2Q.

3. What level of service would the monopolist provide? How much is the monopolist's profit, and what is the deadweight loss created by the monopoly? Also show, in a demand diagram, the area corresponding to the monopolist's profit and the area corresponding to the deadweight loss.

4. Assuming many firms engage in wasteful competition to be appointed as the monopoly provider of this service, what is the deadweight loss caused by rent-seeking behaviour? 5. If the Deputy Minister wishes to maximize her "slack", what is marginal cost she should report to the Minister?