Include correctly labeled diagrams, if useful or required, in explaining your answers. A correctly labeled diagram must have all axes and curves clearly labeled and must show directional changes. If the question prompts you to "Calculate," you must show how you arrived at your final answer.

Electrifide Co. operates as a natural monopoly providing electricity for a particular region of the country. Electrifide has a constant marginal cost of production.

(a) Draw a correctly labeled graph of Electrifide and show each of the following.

(i) The profit-maximizing quantity, labeledQ

M

(ii) The profit-maximizing price, labeledP

M

(iii) The allocatively efficient quantity, labeledQ

A

(iv) The deadweight loss, shaded completely

(b) Suppose the government wants the monopolist to produce the socially optimal quantity of electricity in the market for electricity. Would granting a per-unit subsidy or imposing a per-unit tax on electricity lead the monopolist to produce closer to the socially optimal output? Explain.

(c) Suppose instead of granting a subsidy or imposing a tax, the government is considering regulating the price the monopolist can charge.

(i) If the government's goal is to have the monopolist earn a normal profit, indicate on your graph from part (a) the price that the government would set, labeledP

N

, and the resulting equilibrium quantity, labeledQ

N

.

(ii) If instead the government wants to use price regulation to get the monopolist to produce the socially optimal level of output, what price would the government set?

(iii) Explain what would happen to Electrifide in the long run as a result of the price regulation in part (c)(ii).